May 22, 2003
Another year, another E3. Trying to get a handle on the E3 show is always difficult. We are constantly asked “what do you think was the theme of this year’s E3,” “what was the biggest news from E3,” “what were the most exciting new products.” To be honest we are still attempting to recover and digest all the information from the show. Nevertheless, this month we wanted to share some of our initial impressions from the 2003 E3 show.
When it comes to E3, it is probably best to start at the top, and in the game industry that means Sony. Many people we talked to were disappointed with Sony’s performance claiming, “they played it too safe.” We disagree. While Sony may not have announced any new blockbuster titles they did have plenty of announcements that show they intend to aggressively defend their leadership position. On top of that, the PlayStation 2 has an extremely diverse lineup of products, with something for all tastes.
The biggest announcement from Sony was a new portable system scheduled for launch in late 2004, the PSP. In anticipation of such a new system, DFC Intelligence had included forecasts for a new portable device in our new report, Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry. Because many details are still unknown, our forecasts must be considered very preliminary. Nevertheless, we forecast worldwide portable game software to go from $1.7 billion in 2002 to $3.4 billion in 2005. We stress that this forecast is on the conservative side until more details about the PSP are known.
As a side note, we are very aware that there are other pretenders to the portable game crown out there. At E3, Nokia announced details about its new N-Gage system. Unfortunately, the Nokia launch of the N-Gage was probably the worst E3 hardware introduction since the Apple Pippin (trivia tidbit: at the 1996 E3, Apple hired Sheryl Crow to play at the Beverly Hills Hotel for the Pippin launch party). DFC Intelligence’s short-term portable market forecasts are primarily driven by the Game Boy Advance SP, and now, the Sony PSP.
Sony’s other big initiative was a determination not to let Microsoft get too big a lead in the online game area. Starting this summer, the PlayStation 2 will be bundled with a network adaptor. This aggressive announcement forced Microsoft to drop the price of the Xbox to $179, 36 hours after they declared there would be no price drop. Perhaps more important was the announcement that Electronic Arts’ games would be online exclusive to the PlayStation 2. Electronic Arts has been very vocal in its opposition to the Microsoft Xbox Live business model where Microsoft keeps 100% of subscription revenue and owns the customer relationship. This could be the harbinger of a major battle in the online console game market (the DFC Intelligence report The Online Game Market discusses these issues in great detail).
The other big Sony push was to counter Microsoft in the digital entertainment lifestyles area. For years, Sony and Microsoft have been making noise about taking their respective systems beyond the game market. This tends to play well in the mass media press, but doesn’t gain a great deal of traction with the hard-core game market. Thus the gaming press tended to ignore the PlayStation 2 USB camera, the Eye Toy. However, we think the Eye Toy is a real indicator of how the PlayStation brand has become the true mass-market video game platform.
Microsoft also made a major push into digital entertainment lifestyles at this year’s E3. This was lead by the compelling Music Mixer product, as well as the announcement of the XSN Sports brand. While these announcements were important for Microsoft’s long-term strategic position in the interactive entertainment marketplace, they are unlikely to do a great deal for short sales. Luckily Microsoft had a very solid showing of products for the Xbox. The top Xbox titles included Halo 2, Doom III, Project Gotham Racing 2 and several new Rare titles. Perhaps the Xbox’s greatest strength is that there is now a clear graphic superiority between Xbox games and similar titles for the PlayStation 2. All in all, it was a solid show for Microsoft and the Xbox.
Unfortunately it was a slightly different story for Nintendo. Almost everyone we talked to thought Nintendo had a poor E3 showing. Nintendo spent substantial time talking about how they realized they had made some strategic errors and were working hard to correct their mistakes. However, Nintendo then preceded to make it unclear whether they truly realize why they are struggling in the marketplace.
The big mantra from Nintendo was “connectivity” between the Game Boy Advance and the GameCube. DFC believes that connectivity between these two systems is a strong selling point for Nintendo. However, we also question whether this is a cure for Nintendo’s market share problems. In our view, one of Nintendo’s main problems is that they have lost sight of the mass market, casual video game consumer and have instead been focusing on what is increasingly becoming a niche of Nintendo game enthusiasts (see the DFC Intelligence brief on Nintendo). Nintendo seems to think that they are still the kings of the mass market and that connectivity is their crown. We disagree. The problem with connectivity is that it requires multiple Nintendo game systems, in some cases several Game Boy Advance systems, a GameCube, several versions of software, connection cables etc. In other words, this is something really designed to appeal to the pre-existing Nintendo enthusiast, not the more casual, time-starved gamer that the
Nintendo presentation seemed to allude to.
Despite the problems, one should not get the impression that Nintendo’s E3 show was a complete failure. For one, many companies have recovered from a poor E3 to have very strong fall sales (and vice versa). We think that the GameCube could have surprisingly strong sales in the second half of 2003. The biggest positive news out of Nintendo is that the major Japanese publishers (Square, Capcom, Konami, Namco) are back on board with Nintendo after years of lackluster support. Finally we would note that, contrary to the impression of many, Nintendo is not losing money. For the year ended fiscal 3/31/03. Nintendo did report a decline in net income. However, this decline was from 106 billion yen to 67 billion yen. In other words, Nintendo is still making plenty of money.
While it is clear that the PlayStation 2 will be the market leader of the 128-bit generation, DFC Intelligence is always quick to point out that there is a lot of room for growth among all companies. By the end of 2002, DFC Intelligence estimates that slightly over 60 million 128-bit hardware systems had been sold worldwide. However, we are predicting that before this current lifecycle is over, the current 128-bit systems will have sold over 160 million units worldwide. In other words, there are still over 100 million 128-bit systems to be sold.
The big beneficiary of market growth will be stronger sales for interactive entertainment software. As always there was no shortage of software at the 2003 E3 show. However, we did hear numerous complaints that many of the titles looked the same and there were too many sequels and license-based products. Once again, we disagree with this assessment, to a point.
Yes numerous games were sequels. However, this is not necessarily a bad thing. First, we think it is important to distinguish between sequels and licenses. The top products we saw at E3 2003 were generally titles with numbers in their names like Half-Life 2, Halo 2, Doom III, Gran Turismo 4, The Sims 2, Final Fantasy…ahhhh, we lost count, Metal Gear Solid 3, Spiderman-2, SSX 3, Homeworld 2, Railroad Tycoon 3, Dino Crisis 3, Ratchet & Clank 2, Everquest II, Lineage II, Pikmin 2, and so on. One of the saving graces of the game industry business model is that sequels can usually offer a significant improvement on the game experience for consumers, while also being substantially more profitable for the developer. Indeed, Electronic Arts, the clear powerhouse publisher, had a stellar lineup and business model that is almost all sequel driven.
On the other hand the rush to licenses is a more dubious strategy. It seems that every few years the interactive entertainment industry goes on a binge where it feels every product must be backed by a license from another media form. EA’s success with the Harry Potter and Lord of the Rings products seems to have launched another licensing binge. Unfortunately, usually the long-term effects for the industry are extremely negative. The number of C grade licenses at this year’s E3 was almost too numerous to mention. However, perhaps even worse than C grade licenses, was the licensing of triple A big name products for online games. One example is the announcement of the Warner Brothers/UbiSoft massively multiplayer online game (MMOG) The Matrix Online. As discussed in our report, The Online Game Market, the MMOG market is still very much in the early adaptor stage. As best shown by tepid sales for The Sims Online, big names and large marketing budgets often do little to drive early adaptor sales.
While on the subject of the Matrix, it is worth noting that E3 seemed to have very little impact on the stock prices of interactive entertainment companies. One major exception is Infogrames. Actually, Infogrames no longer exists, as the entire company was renamed Atari (NASDAQ: ATAR) on May 7th. From our perspective, this name change seemed rather dubious. While some may associate the Atari name with the start of video gaming, we tend to associate it with outdated games and investors losing vast sums of money. The stock market may not have agreed, as on May 7th Atari stock closed near a 52-week high at $6.50 (up from $1.91 on April 8th).
However, we expect that investors were not reacting so much to the name change, as the announcement on May 6th that advance orders for the Enter the Matrix game had surpassed 4 million units. The day before the game was released on May 15th, Atari stock was trading at $6.59. Unfortunately, reviews for Enter the Matrix were only lukewarm and by May 21st, Atari’s stock had declined to $4.15.
Thus we conclude this issue on a somewhat ambiguous note. Enter the Matrix will probably have huge sales but that is not necessarily a long-term positive for either Atari/Infogrames or the industry. Enter the Matrix might end up going down as the most expensive game ever (by the time development costs, marketing costs, licensing fees and the investment in developer Shiny Entertainment are factored in). It took a level of 4 million unit sales for investors to feel comfortable that the game would not ruin its publisher. Now it remains unclear whether Atari can turn this title into a long-term, stable revenue generator. Right now it is looking more like a one-time cash infusion. In today’s environment, the market wants to be assured that a license will guarantee a full-fledged product line. In other words, sequels.
As part of our ongoing research efforts DFC Intelligence is delivering free monthly briefs on hot topics in the interactive entertainment and video game industry. You (or a colleague of yours) have signed up to receive these briefs.
DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry. Reports on the video game, online game and PC game market include:
Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Released April 2003, this 500+ page report contains complete forecasts for all individual console and portable game platforms by region (Asia, Europe/PAL, U.S.) through 2007. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as new portable game systems.
Market Leaders in the Video Game and Interactive Entertainment Industry This 600+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 15-40 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company.
The Online Game Market This 350+ page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles.
Other DFC reports include The Business of Video and Computer Games, The State of Game Technology, The Video Game and PC Game Consumer and The Executive Interview Series.
