Gaming war faces fresh battles

Fri, May 25, 2001, 01:00

Mr Goto Kitao, dressed in a white linen jacket, punches the buttons of his PlayStation 2 console. Behind him is a huge screen, almost entirely dark apart from the beam of his character's torch. Every so often, the light startles a zombie who appears to be dragging dismembered human body parts. Mr Kitao hits the buttons frenetically as his character slashes and stabs the zombie, attempting to retrieve the human remains.

Mr Kitao is clearly proud of the horror title, Silent Hill 2, which he has spent 18 months developing for Sony's PlayStation 2 games console. "It's really scary," he giggles to an enthralled and appalled audience of several thousand at the Electronic Entertainment Expo (€3) in Los Angeles, the video game industry's annual trade show.

Not all the games on display this week at €3 were as grotesque as Silent Hill 2. Nintendo, for example, unveiled an ecologically-oriented game, Pikmin, for its new console, the GameCube. The game requires the nurturing of small, cuddly, plant-like creatures for the player to win. Microsoft showed off its Xbox machine with Oddworld: Munch's Oddysee, which obliges its characters to meditate and chant before confronting their tasks.

But if the games were mostly fun, the gaming business is becoming increasingly serious. During the first week of November, an epic struggle will break out for the critical Christmas season when Nintendo and Microsoft plan to introduce their games consoles, the GameCube and the Xbox, in North America.

The costs of such launches are colossal. Although Nintendo declines to detail its marketing costs, Microsoft says it will spend more than $500 million (€574 million) on worldwide marketing over the next 18 months. Sony will probably spend more than $750 million next year protecting its huge PlayStation franchise. "This is not a business for the faint of heart," says Mr Chris Deering, president of Sony Computer Entertainment. Last year, Sony's games division racked up huge losses as it launched its PlayStation 2 console. Microsoft's Xbox business will also lose heavily this financial year - about $900 million, according to Merrill Lynch - as it tries to form a customer base. And the broker estimates that Nintendo's pre-tax profits this year will fall 27 per cent as it introduces the GameCube and Game Boy Advance, a pocket system. The price of failure in the game wars can be high. Sega, which introduced its Dreamcast console two years ago, was forced to stop hardware manufacturing this year when losses became too great for its understrength balance sheet.

Nevertheless, the rewards can be huge. Electronic gaming is already big business. In the US, about 60 per cent of Americans - about 165 million people - regularly play computer games. Last year they spent more on gaming than on going to the cinema. Globally, electronic gaming is a $20-billion industry.

Sony, with more than 50 per cent global market share, is confident it can continue to dominate the sector. The battle for 2002 is already over and Sony is the winner. The struggle is for the number two spot between Nintendo and Microsoft, says Mr Kazuo Hirai, president and chief operating officer of Sony Computer Entertainment America. His confidence seems well placed. In the US, Sony expects to sell seven million PlayStation 2 consoles before Nintendo and Microsoft even unveil their rival machines. World-wide, Sony hopes to have sold 20 million units by the end of the year. The most ambitious dream of Mr Robert Bach, chief Xbox officer at Microsoft, is to sell 1.5 million machines by the end of the year. Nintendo is due to announce its targets this week. Microsoft's engineers have created the most impressive machine on the market. Its specifications are well ahead of the PlayStation 2 and the GameCube. But the key to success in the gaming industry is not hardware but software. The boxes sell only if there are cool games to be played on them, says Mr Hirai.

The problem for Microsoft is that its rivals have lots of cool games. Sony boasts that there are 300 developers working for the US market alone. By the end of the year it should have 200 titles available, compared with just 15 to 20 for the Xbox.

Nintendo, led by Mr Hiroshi Yamauchi, is also well placed, says Mr Larry Probst, chairman and chief executive of Electronic Arts, the US's largest independent games developer. "Nintendo has such a strong franchise, with characters such as Mario and Star Fox, and its in-house developers are so good that, even with only five or six games, they will all be system sellers," he explains.

The company has also targeted a younger age group - eightto12-year-olds - which it dominates.

Microsoft has attracted about 200 developers, including a few Japanese. But as a new entrant, the company does not have franchises such as Nintendo's Mario or Sony's Twisted Metal series that would guarantee gamers. And in Japan, which accounts for about one-third of the world's market, the US group is likely to struggle to make inroads.

Microsoft is betting heavily that it can counter its late entry into the market with the Xbox's online capability. The Xbox comes out of its packaging with built-in broadband connection, allowing players to compete remotely over the Internet. It also has a hard drive on which to download new characters, levels and even entire games. Sony announced accessories this week such as a hard drive and broadband connector, but few console owners buy such add-ons.

"Online gaming is a revolution. It is like when sound and colour were added to cinema," claims Mr J. Allard, general manager for the Xbox and one of the team that persuaded Mr Bill Gates, Microsoft's founder and chairman, to enter the games console market. Online gaming is compelling because it removes the predictability of a computer's artificial intelligence, says Mr Allard. Suddenly you are competing against other individuals, which is much more interesting. He insists that during the life cycle of the Xbox, online gaming will move from being a novelty into a necessity. Microsoft is well placed because of its worldwide investments in cable television companies.

Others are sceptical. "The revenue model for online gaming is still uncertain," argues Mr Atsushi Asada, executive vice-president at Nintendo. "It may have some potential in the future but it will take time. The infrastructure simply does not exist."

None of Nintendo's games in development will have online components.

Some believe that the success or failure of online gaming and even the scale of Microsoft's losses on the Xbox are largely academic.

"Bill Gates knows he will not win in this generation of console," says Mr Probst at Electronic Arts. "But he wants to be in a position to win in the next round. He told me he will spend as much as it takes.

"In any case, the Xbox is a Trojan horse," he adds. "This is not about games consoles but set-top boxes. Sony and Microsoft are battling it out to control all forms of entertainment in the family room."

Mr Bach of Xbox firmly denies that Microsoft does not care about losses. "Microsoft does not go into businesses that make losses for five years. I have my own profit-and-loss account," he insists. Mr Bach is convinced the combination of Sony, Nintendo and Microsoft putting so much money into marketing will help to expand demand so there is room for three competitors.

With many in the industry predicting excellent sales until at least 2004, retailers such as Electronic Boutique, the US's biggest chain of games stores, are euphoric. "I don't care who wins. It's like betting on a three-horse race and having the winning ticket for each one," says Mr Joe Firestone, chief executive.

Mr Allard agrees. "The first week in November will be the best week ever for gamers," he says. "Nintendo and Microsoft will sell every box we have. There will be no losers from this and the ultimate winners - well, they are the gamers."