Copyright 2001

[ November 14th 2001 ]

The billion-dollar clash of the video game titans opens Thursday, with Microsoft's retail launch of its new console, the Xbox. But in the gospel according to Redmond, this won't be a three-way living-room slugfest, pitting it against consumer electronics giant Sony and Pokemon-master, Nintendo.

Microsoft views its true competition as NBC's smash TV show "Friends," bestselling author Jonathan Franzen's novel, "The Corrections," or the box-office hit, "Monsters Inc." Its challenge: to develop a form of entertainment that's simply more compelling than anything else vying for a consumer's leisure time. "We've been very successful in changing the way people work from 9 to 5,"said J Allard, general manager for the Microsoft's Xbox platform. "Now we have the way to change the way people play from 5 to 9."

The $300 Xbox is the manifestation of Microsoft chairman Bill Gates' ambition to put the company at ground zero of the coming digital revolution: the living room. It will spend a half-billion dollars on marketing to sear the Xbox name and green X-marks-the-spot logo into consumers' consciousness.

The software giant faces formidable competition from dominant console-maker Sony, whose PlayStation and PlayStation2 game systems are in 33 million American households, and a video-game veteran whose name is synonymous with gaming -- Nintendo -- which unveils its new system, the $200 GameCube, on Sunday.

Most analysts predict PlayStation2 will win handily this holiday season, with sales reaching 10 million consoles in North America since its launch 13 months ago. Microsoft and Nintendo each promise to ship about 1 million game systems before the end of the year.

Microsoft's decision to enter the video game market is evidence that the business has matured beyond its toy-industry roots. Sales figures provide the details. Respected industry analysts, such as Gerard Klauer & Mattison, expect sales to reach a record $8.1 billion this year - pulling even with theater box office receipts, which are on track to break $8 billion for the first time this year.

Indeed, total receipts for hardware, software and accessories are up 35 percent from last year, according to NPDFunworld, the Port Washington, N.Y., group that tracks retail sales. And most industry analysts expect the sector to continue to defy economic gravity and climb at a 25 to 30 percent annual rate over the next five years.

The demographics of game play are broadening, expanding beyond the traditional audience of adolescent boys to include a growing number of girl gamers and adults. One survey conducted for the Interactive Digital Software Association, the industry's trade group, found that 60 percent of Americans play computer or console games - and more of them are over 18.

"It's not just for the pimply kids. It's become mainstream entertainment, just like watching movies or listening to music," said Kazuo Hirai, President of Sony Computer Entertainment. "Just walk into a Blockbuster. Along with motion picture DVDs and VHS cassettes, you've got mostly PlayStation games there for rental. Those guys from Blockbuster wouldn't get into that business unless they thought that business was there."

Even larger sociological forces are at work, contributing to the popularity of video games. Trend forecaster Faith Popcorn has dubbed it "cocooning." Americans are staying closer to home. That's especially evident now, after the Sept. 11 attacks. And for a generation of kids, for whom the Internet and computers are an unconscious part of their daily lives, video games have taken the place of other low-tech pursuits, like playing Monopoly or Scrabble on a rainy day.

These factors lead industry forecasters, such as Deutsche Banc Alex. Brown, to predict interactive entertainment will grow faster than any from of entertainment over the next four years - eclipsing box office, home video rentals and music sales. Post estimates 60 to 70 percent of American households will own one of the next-generation game systems - as many as currently own PCs.

Indeed, this new breed of more-robust game console - some of which can also play DVD movies and audio CDs or provide high-speed Internet connectivity - could be positioned as the centerpiece of living room entertainment. That's what attracted Microsoft's interest. Allard said the confluence of digital devices - from portable MP3 music players, to personal video recorders like TiVo, to direct broadcast satellite TV and digital photography - suggested a business opportunity.

"You don't have to squint too hard to see technology is going to change entertainment forever," Allard said. "We are on the verge of a digital entertainment revolution. That opportunity needs a leader. Who better to do it?"

Microsoft's Xbox - with its DVD player, Ethernet port, 733-MHz processor and powerful Nvidia graphics chip - is poised to become the centerpiece of a home entertainment system. It's arguably more powerful than PlayStation2 or GameCube. And has bigger ambitions, too.

While Nintendo and Sony view online console gaming as a far-off feature, Microsoft is building Xbox's identity around what Allard describes as "broadcast gaming." He's betting that mainstream players won't be satisfied with the kind of game play that's restricted to the living room.

They'll want to form their own basketball team with friends from all over the country and play in virtual competition. They'll pay to download a new mission for an episodic game like "Tomb Raider." Or game-show fans will become contestants on "The Weakest Link." "I want an Xbox next to every television. To put an Xbox next to every TV means your experience has to be better than the competition. More compelling than ``Friends,' ``ER' or ``Third Rock from the Sun,' " Allard said.

Competitors like Nintendo are gambling on a simpler formula. It says the technical differences between the game systems are invisible to most consumers. Its new console, the GameCube will succeed on the strength of its exclusive game franchises, like Pokemon, Mario and Zelda.

"We believe they're making a mistake," said George Harrison, Nintendo's senior vice president of marketing. "If you're making the best game machine you can, at the most attractive price, consumers are willing to pay for the benefits they see right now, vs. the future potential of modems."

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