Xbox 360 Rollout From Microsoft Rattles Industry
By NICK WINGFIELD
Staff Reporter of THE WALL STREET JOURNAL
December 24, 2005; Page A1
The new Xbox 360 has been a big hit for Microsoft Corp. this season -- but for now, it's also contributing to pain in the games industry.
The reason: Supplies of the new videogame console have been short, and many consumers have held off buying games for it until they can get one next year. Some also have stopped purchasing games for their existing systems -- because they may soon be obsolete.
In November, the month the new Xbox hit stores -- and in many places quickly sold out -- videogame sales were down 18% from a year ago, according to NPD Group Inc., a research firm that tracks retail sales figures of consumer electronics. Two of the biggest game publishers, Electronic Arts Inc. and Activision Inc., have warned they will miss financial forecasts for the current and upcoming quarters.
Their stumbles underscore the volatile nature of the $25 billion games industry, which is generally shaken up by changes in popular games consoles every five years or so. When makers of games systems such as Microsoft or Sony Corp. introduce new, more powerful consoles, consumer demand often lurches in their direction. The writers of games suddenly see demand for existing products plummet, at the same time they must race to satisfy hunger for games for the new devices.
The current shift is likely to be accelerated next year when Sony is expected to roll out its PlayStation 3 and Nintendo Co. plans to introduce a new console called Revolution. "We have no reason to believe this abrupt shiftin demand for current generation software will reverse itself," warned Warren Jenson, the chief financial officer at Electronic Arts, in a conference call with analysts this week.
Such volatility is frustrating to executives in the games industry, which has grown quickly from being a fringe market to an entertainment force that will soon rival the $38 billion music industry in size. As games makers have grown, led by several that have become publicly traded companies, they have sought ways to reduce the unstable revenue streams that investors so dislike.
The frequent transitions to new generations of consoles also can be wrenching when it comes to strategic planning and production.
"If you manage a country through war once, do you know how to do it a second time?" asks William "Bing" Gordon, chief creative officer for Electronic Arts, of Redwood City, Calif., the world's largest games publisher. "People say, 'Yeah, yeah, yeah,' but wars are never the same."
Past transitions have strengthened some publishers and weakened others that were unable to make the hefty investments required to develop sophisticated games for new hardware. One victim during the last big shift in the industry, when Sony introduced the PlayStation 2 in 2000, was Acclaim Entertainment Inc., which fumbled after the transition and filed for Chapter 7 bankruptcy last year.
"Every time there's a transition, the industry hits a reset button," says John Taylor, a games analyst at Arcadia Investment Corp. in Portland, Oregon. "There's no question there's an opportunity for some to dramatically enhance or lose their position."
For most, odds are that the Xbox-induced slump, while painful, won't last too long. Sales for the industry may be down in the short term -- analysts foresee an industry sales drop of as much as 5% in 2005 -- but the new consoles eventually should stimulate sales.
Videogames next year are expected to keep growing faster than other entertainment forms such as movies and music -- and take a bigger leap in 2007 once the new consoles are more prevalent.
Game sales typically accelerate a year or two after new consoles hit the market. According to NPD and Arcadia Investment, U.S. game sales declined 1% to $4.12 billion in 2000 after Sony introduced the PlayStation 2. Like Xbox, that console at first was in short supply. But the next year, game sales rose 11% to $4.57 billion, and in 2002 they jumped 20% to $5.51 billion.
The Xbox 360, which boasts better graphics and online game capabilities than earlier versions, could have a similar impact in coming years. Retailers sold more than 325,000 consoles in November, even though the product was released on Nov. 22, according to NPD. Microsoft says it remains on track to ship 2.75 million to 3 million new consoles world-wide in the first 90 days after launch.
Still, many big game makers had hoped this transition would go more smoothly than it has. They saw the emergence of a new market for smaller, portable games, stemming from recent consoles released by Sony and Nintendo, as potentially limiting their dependence on bigger systems for the living-room-scale Xbox.
But sales of portable consoles haven't met expectations, particularly for Sony's PlayStation Portable. With a price starting at $249, the game may be too expensive for some consumers, analysts say, though Sony and Nintendo say they are happy with sales. Each portable system -- Nintendo's is called the Nintendo DS -- has sold about three million units in North America.
Some executives blame poor games. A pillar of the industry's efforts to generate a more stable revenue flow, for instance, is game "franchises" that chug out a series of sequels, such as Electronic Arts's series of James Bond games and Activision's Tony Hawk skateboard series. But some executives say publishers may have become too reliant on sequels at the expense of making big bets on original games.
"Consumers are starting to recognize a lot of sameness in titles," says George Harrison, senior vice president of marketing at Nintendo's U.S. unit. "For big public publishers, the bigger you get, the more risk-averse you get."
Game sequels can still be huge money makers. Last Christmas, the two biggest-selling games were the smash hits Halo 2 from Microsoft and Grand Theft Auto: San Andreas from Take-Two Interactive Software Inc., both sequels. But the sequels jamming shelves this holiday season aren't captivating gamers.
"The lineup this year is arguably not as compelling," Electronic Arts Chief Executive Larry Probst told analysts this week.
Analysts point out that games also are competing in an increasingly crowded entertainment arena against such products as Apple Computer Inc.'s iPod. iPods, which range from $99 to $399, are flying off shelves this year.
Whatever their challenges, the Xbox problem has shown games makers remain at the mercy of console makers like Microsoft and Sony. At the outset, they can only make their new systems so quickly, because shortages of key components and manufacturing glitches are common. Over time, hardware makers are able to pump out bigger volumes.
In response to questions about how shortages affect games makers, Microsoft said it's making the machines as fast as it can. "We are working around the clock with our manufacturing partners to deliver as many consoles as possible to meet the high consumer demand for Xbox 360 this holiday," the company said in a statement.
Not all big publishers were caught off-guard by weak sales this holiday season. THQ Inc. of Agoura Hills, Calif., has said it expects to meet its quarterly forecast -- which still calls for a 20% decline in revenue to $320 million from $400 million a year ago.
"I will take one flat-to-down year every five years," says CEO Brian Farrell, "if we can get to 1% to 20% growth for four or five years in between." |
