Copyright 2001

[ November 8th 2001 ]

Video gamers have been waiting all year - or longer - for the showdown that's set to kick off next week. First, on Nov. 15, Microsoft will launch its Xbox, its debut in the console market, and then Nintendo's GameCube will go on sale three days later.

That's enough by itself to keep gamers abuzz, but both consoles are going up against Sony, which has already sold 5 million PlayStation 2 systems in the North American market. The video game industry is one of the few still-promising areas for the bruised technology sector. Stock prices for major game publishers have taken off the last few weeks in anticipation of consumers going shopping for their new consoles.

But the rewards will not be shared equally. Game developers are the sure winners in this fray, while console manufacturers will have to eat years of losses on the hardware -- and that's if things go well. If not, they could follow the example of Sega: The one-time industry leader dropped its Dreamcast console earlier this year to focus on creating software for other platforms.

The risk for console makers isn't that they will fail to sell enough hardware at the start. Both Microsoft and Nintendo can count on buyers for every one of the 1 million to 1.5 million units each company can ship to U.S. retailers this holiday season. Each company could probably sell even more, were it not for production delays that led them to quietly move their launches back several days.

Most of these customers, however, will be the same quasi-obsessed game fans who waited in long lines to pick up a PlayStation 2 last year. "The question for Microsoft," as GartnerG2 analyst P.J. McNealy puts it, "is how rapidly they can grow the market beyond hardcore gamers."

Without them, a console won't graduate to profitability. Merrill Lynch analyst Henry Blodget estimated earlier this year that Microsoft will lose about $75 on each console it ships, for a total of $2 billion, before it reaches the break-even point in 2005. Morgan Stanley analyst Mary Meeker offered a more optimistic forecast this week, saying Microsoft could lose $1 billion on the product before breaking even in 2004.

This almost dot-com-esque logic is nothing new to the video game industry, where manufacturers underprice their hardware to build market share as quickly as possible. At $299.99, Microsoft's Xbox may not be cheap, but when it goes on sale Thursday it will arguably represent the most sophisticated game platform yet seen. The Xbox contains fast chips and graphics processors, as well as a hard drive and modem that will allow users to compete online and work through complex games without having to wait for a slower CD-ROM drive to load each level.

Three days after Xbox's Nov. 15 release, Nintendo -- the company synonymous with such kid-pleasing creations as Pokemon and Mario -- will release its GameCube. At $199.95, it's about $100 cheaper than either the Microsoft or Sony machines. The console may also benefit from what Nintendo calls its "Trojan horse" -- the Game Boy Advance handheld, which can plug into a GameCube to become a controller for it.

Sony's PlayStation 2 has a few advantages of its own. For one thing, the company has that one-year head start. For another, analysts say, many gamers who haven't been inclined to buy a new console yet will probably favor the PlayStation 2 when they do because it also plays older games written for the 88 million PlayStations sold so far worldwide.

Considering these advantages, analyst McNealy described this year's three-way console game battle as "a race for second place" behind Sony. He asked: "Can Microsoft morph its brand beyond Bill Gates and an operating system to a consumer-facing, fun entertainment brand in the living room?"

The company insists that the console industry is where it belongs. "When you think about the breadth of coverage, the number of people [video games] reach and the way software is involved, it's really hard to find a better place for us," Robbie Bach, Microsoft's chief Xbox officer, said in a recent interview. "We think about this as a long-term investment."

The company has already won over some earlier skeptics. "A few months ago we would've said [Microsoft] didn't have a chance in hell," judging from the company's showing at E3, the video game industry's main conference, said John Davison, editorial director of half a dozen game magazines for publisher Ziff Davis. But the editors of one of the company's main gaming magazines, Electronic Gaming Monthly, recently voted 6 to 5 to rank Xbox above GameCube. To get its message across, Microsoft plans to spend $500 million to market the Xbox.

Just as importantly, the company has enlisted the support of major game developers such as Activision, Electronic Arts, Eidos, Midway and THQ. As video game industry veterans never tire of observing, it's the games that ultimately make or break a console. For instance, while No. 1 publisher Electronic Arts' decision not to support Sega's Dreamcast didn't kill that platform, it almost certainly hastened its demise.

The first batch of games available for each console reveal that each machine is targeting a slightly different audience. The first title out of the gate for the Xbox will be Halo, a shooter game originally designed for PCs. It's a complex, flashy-looking adventure about Marines fighting aliens, a timeless theme among 18-and-up gamers.

Nintendo's GameCube launch titles will be more kid-oriented, featuring the company's longest-running characters - for instance, Luigi's Mansion, a cartoony ghost-hunting game that extends the Mario franchise, and Super Smash Bros. Melee, which incorporates such celebrity characters as Zelda and Pikachu.

For Microsoft, keeping the attention of game developers will be as important as attracting consumers to the Xbox. Just as consumers want to buy the consoles with the most and best games, gamemakers want to develop software for the consoles with the biggest audience.

The next several weeks will set the first stage of this console war. But all sides agree that the winner won't be determined in a single holiday season. "Microsoft is not trying to be a pop culture icon yet," said Davison at Ziff Davis. "They're going after the early-adopter crowd with some disposable income and time to play...If they hook that crowd, they can grow from there."

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