Gamers Push Pause
Delays and shortages put console sales on hold, leading major software makers to lay off workers
Perhaps it was with a sense of irony that Nintendo booked the Black Eyed Peas to perform at the video game company's reception this week at the Electronic Entertainment Expo in Los Angeles. The band's best-known hit, the tension-building "Let's Get It Started," pretty much sums up the anticipation that lurks over the video game industry at this moment.
After setting a new high score in U.S. sales last year--$10.5 billion, which rivals the motion picture industry's box office numbers--the games business is pressing the reset button this year, as new hardware from Sony and Nintendo will join Microsoft's Xbox 360 on store shelves. That's if you can find an Xbox 360 for sale--and there's the problem. Each hardware shortage or delay means software makers can't sell their products, which in turn means lost profits and layoffs. And, as the pursuit of the most awesome playing experience drives the consoles and the games to become more sophisticated and expensive to produce, the stakes for companies climb higher than ever. "It's a year of an uncertain market and a shift in platforms, which makes for extremely uncomfortable times for manufacturers and developers and gamers," says Paul Jackson, an analyst with Forrester Research.
Pacesetter. Sony's showcase probably will be the main attraction at this year's E3 convention. Having sold more than 101 million of its PlayStation 2 consoles worldwide, the Japanese corporation is the runaway industry leader. The success of that device's heir, the PlayStation 3, will have a deep impact on the fortunes of Sony and the overall industry. Earnings for the PlayStation division of Sony dropped 62 percent last year, as gamers squirreled away money in anticipation of the PS3.
The device was originally expected to arrive in Japanese stores in June. But that launch date has been pushed back to November--when it is also slated to launch in the United States--because of production concerns related to the console's new technologies. For example, to deliver the fast action that game players want, the PS3 will be powered by an innovative chip called the Cell processor, jointly developed by Sony, IBM, and Toshiba. And, just as the PS2 also doubles as a player for DVD movie disks, the PS3 will be able to play feature films stored on the new Blu-ray disks, one of the two formats competing to become the standard for watching movies on high-definition television.
Sony already has spent $445 million developing the PS3. "It's incorporating a lot of radically new technology, which also means Sony's looking at a higher production price per unit," says Jackson. Sony has not announced the retail price yet and is not expected to do so at E3 this week. One Merrill Lynch report estimates it will cost the company nearly $900 to make each PS3. But it's generally thought that the most customers will pay for a video game console is around $500.
These devices typically start off as loss leaders. But at a gap of $400 per PS3, it could take several years of successful hardware, software, and online game service subscription sales to offset the production costs. Sony President Ken Kutaragi says the company intends for the PS3 to have a 10-year life span on store shelves, double the typical five-year turnover between generations of video game consoles. Analysts still question the economics. "By the time that this thing becomes obsolete, you might break even," says tech analyst Rob Enderle.
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