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No wrong moves: Makers of game consoles in perilous transition
(Dallas Morning News, The (KRT) Via Thomson Dialog NewsEdge) May 6--The Electronic Entertainment Expo in Los Angeles next week will be a feast for video gamers, as new software and hardware will be unveiled.
But while game players will bask in an extravaganza that often feels like the Super Bowl, Christmas Day and the Battle of Wake Island rolled into one, game companies such as Microsoft Corp. and Grapevine-based GameStop Corp. will be quietly calculating revenue projections, console launch dates and hardware allocations.
That's because 2006 is a delicate year for game companies, with Microsoft's Xbox 360 possibly finding its balance and new consoles from Nintendo Co. and Sony Corp. hitting the market this fall.
As older Xbox, GameCube and PlayStation 2 systems move into basements, into closets and to the back of TV cabinets, the industry is hoping there won't be a major sales slide as gamers pinch their pennies for the new technology.
"Whenever we go through these transition periods -- there's a pretty well-documented history of this -- it tends to freeze the market," said Doug Lowenstein, president of the Entertainment Software Association, which organizes E3, as the convention is commonly called.
Michael Pachter, an analyst with Wedbush Morgan Securities, issued a report this week projecting that game software sales, after falling 5 percent last year, will slip an additional 4 percent this year.
The good news is that software sales are predicted to rocket up 18 percent in 2007, once Microsoft, Nintendo and Sony have released their new game players.
But it's clear that the industry is slogging through the transition right now, said David Zucker, chief executive of Chicago-based game publisher Midway Home Entertainment Inc.
"There always was going to be one, it came, it's here, and we're in it," he said. "We can see the Xbox really starting to tail off."
Midway reported a first-quarter loss this week of $22.6 million, due partly to its focus on games for the new consoles, and expects to lose $66 million overall this year.
Part of dealing with a transition is managing pent-up demand for the new consoles.
When the Xbox 360 launched last fall, the shortages were so severe that GameStop, the largest game seller in the country, was still shipping systems in March to customers who had pre-ordered their consoles last summer.
"I don't want to be in a position where we take that many costumer pre-orders and come up that short again," said Dan DeMatteo, vice chairman and chief operating officer at GameStop.
Surprise for Microsoft
Microsoft also seems to have been surprised with the reception its console got, even though it spent millions of dollars searing the 360 into the cultural landscape.
Two weeks ago, after negative reaction to the company's latest earnings report resulted in a drop in Microsoft's stock price, chief executive Steve Ballmer sent an e-mail to employees.
While noting that Microsoft is on track to sell 5 million 360 consoles by July, Mr. Ballmer acknowledged that "the cost of producing Xbox 360 consoles was higher than expected."
Indeed, for the three months ending March 31, Microsoft's Home and Entertainment division, which includes the Xbox and Xbox 360, generated a little over $1 billion in revenue but a net loss of $388 million.
Both those numbers were each roughly double those from the same quarter a year earlier.
While Microsoft may be past the bumpy Xbox 360 release, Sony has its own birthing pains to endure still for the PS3.
As a result, GameStop is rethinking its pre-order system for the launch of PlayStation 3, which uses technology even more exotic than that found in the 360 and therefore is expected to be in even shorter supply when it launches in November.
Mr. DeMatteo said that, unlike with the 360, his company won't start taking orders on the PS3 until it gets a firm sense from Sony how many systems will be available at launch.
He doesn't expect to hear that information next week at the E3 convention, though.
$500 PS3?
Nor does Mr. DeMatteo expect to get confirmation on a topic that gamers are equally curious about: the PS3's price tag.
"I would be happy with $499," he said. "With the Blu-ray drive built in and being a high-definition movie player, I don't think $499 would be out of reach at all. My fear would be $599 or something. I think that is getting high."
While many parents and gamers may have a hard time feeling too thrilled about spending $500, Nintendo is expected to make its renamed Wii console an affordable alternative.
That system -- originally titled Revolution -- is not expected to have the graphical prowess of the Xbox 360 and PS3 when it goes on sale this fall.
But it does boast one of the most intriguing controllers ever: a remote control-style wand that reacts to movement.
You can swing the controller through the air during swordfights or aim it at targets on the screen during shooting games.
Midway recently revealed that Blitz, its irreverent football franchise, will be released for the Wii, and other developers have cautiously begun committing resources to the compact console.
Lacking the deep pockets of Microsoft and Sony to develop a technological dynamo, Nintendo has emphasized that its user-friendly system will appeal to part-time players and lapsed gamers.
While it's a risky strategy, the Wii could also appeal to a whole new audience, Mr. DeMatteo said.
And that could soften the blow of the transition.
"I got a chance to use the controller a few months ago, and it was extremely intuitive and easy to use," he said. "Just point and click, point and shoot. You move the controller in your hand, and you move the character on the screen."
"I think it could draw in a bigger group of users, a group that's not into gaming right now," he said.
E-mail vgodinez@dallasnews.com
Electronic Entertainment Expo, or E3
What: The video and computer game industry's annual tradeshow
Where: Los Angeles
When: Press conferences Monday and Tuesday, and the show floor opens Wednesday
Public access: The event itself is closed to the public, but the show's official Web site www.e3insider.com will offer up news announcements, video clips from the show floor and numerous E3 blogs all week.
SONY CORP.
E3 news conference: Monday
What to expect: Actual gameplay footage from upcoming PlayStation 3 games, rather than the Pixar-like computer-generated movies shown last year. Don't expect an official price or exact launch date, though.
MICROSOFT CORP.
E3 news conference: Tuesday
What to expect: Halo 3? Everyone expects the first confirmation and video from Microsoft that the top franchise on the Xbox will soon make its way to the Xbox 360. Microsoft is also expected to talk about the HD-DVD high-definition movie player add-on for the 360 coming out this year.
NINTENDO CO.
E3 news conference: Tuesday
What to expect: Actual gameplay footage showing the Wii's wireless controller in action. While the DVD remote-style controller has gamers excited, there's also a lot of skepticism that it can be more than a gimmick. As with the PS3, an exact price and official launch date are not expected.
SOURCE: Dallas Morning News research
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