Wedbush Morgan Securities' interactive entertainment industry analyst Michael Pachter recently mentioned that he believes the current generation won't really end until Sony launches the PS3. We discuss this with him as well as the impact the expected Xbox 360 launch will have this year.

In his Interactive Entertainment Industry Earnings Preview for the current calendar year, Wedbush Morgan Securities analyst Michael Pachter made some interesting comments regarding the current console life cycle and how the upcoming next-gen consoles will affect the market.

Sales growth to start with PS3
According to Pachter, the introduction of the Xbox 360 by Microsoft will not have as great an impact as one might think. He believes that the launch of the next-gen PlayStation sometime in 2006 will be the true end of the current console cycle. "With an expected late 2005 launch date for the Xbox 360, we have seen selling pressure for the publishers, as many investors perceive the first next generation console launch as the 'end' of the current console cycle. In our view, the current cycle will continue long past the launch of the Xbox 360, and we do not view that Microsoft's pending announcement will have significant near-term impact on the U.S. publishers," he said.

He added, "We think that many investors have misinterpreted the launch of the Xbox 360 as the beginning of the next generation, and expect rapid sales growth in 2006. In contrast, we expect the launch of Sony's PS3 (expected in late 2006) to mark the beginning of the next cycle, and think that rapid sales growth will not materialize until 2007."

[ "I think... in 2010, Sony's going to have 55%, Microsoft's going to have 35% and Nintendo 10%, with all three of those having +/- 5%," Michael Pachter, Wedbush Morgan on next-gen market share ]


Pachter clarified his position with GameDAILY BIZ. He said that some media outlets took his statements to mean that Xbox 360 doesn't mark the beginning of the next generation, but he admitted that he probably wasn't as artful with his report as he intended. "I guess the first one to launch is the beginning of the cycle," he told us. "It's just that most people think that the first one to launch marks the end of the current cycle and the beginning of the transition. I actually don't think the Xbox 360 launching is any different than the PSP launching. It's not going to cause PS2 owners to buy less software."

First out of the gate
Many in the industry have questioned Microsoft's timing. Is launching a next-gen console later this year too soon? Will their coming out first strategy backfire? Pachter doesn't foresee a problem, though. "If the [Xbox 360 and PS3] launch side-by-side then I think Microsoft would have 30% penetration, Sony would have 50-55% and Nintendo would have 15-20%. If Microsoft launches first, they're going to get sales for a year 'for free.' So, if they get 30% market from the day of the PS3 launch on plus whatever they sell the first year, they're going to do better than 30%," he explained to GameDAILY BIZ.

Pachter believes that purchasers of the Xbox 360 this year will largely consist of hardcore gamers that own multiple consoles and current Xbox owners that want to upgrade. "I think [Microsoft] is doing the right thing. It's just that I think the impact on current consumer behavior is limited to 30% of all consumers. Among pure PS2 owners (not those who own an Xbox and PS2), no one is sitting around saying, 'Oooh I can't wait for the Xbox 360!' ... 35% of the existing consumer base is going to slow its purchases in anticipation of the Xbox 360 launch. Next year, 50% of the consumer base will slow its purchases in anticipation of the PS3."

He continued, "So all I'm really saying is most people think this is a 0 [percent] year and next year is +20 because the transition occurs this year, but I've got this year +10 and next year +10. So we end up in the same place at the end of '06... and what does it mean for '07? That's where you get the ramp -- the PS3, and the Xbox 360, and the Nintendo Revolution and PSP all out and starting to mature."

Even with the expected head start that Microsoft will have with its Xbox 360, Pachter doesn't think the breakdown in market share will be all that different from the current generation of consoles, meaning Sony will continue to be the market leader, MS will follow closely in second place and Nintendo will take the third spot. "I think when we have this talk in 2010, Sony's going to have 55%, Microsoft's going to have 35% and Nintendo 10%, with all three of those having +/- 5%," he predicted.

Dealing with backwards compatibility
One topic that has been widely discussed when it comes to next-gen consoles is backwards compatibility. The PS3 is expected to include this feature just as the PS2 does, and Nintendo has even confirmed that its Revolution will indeed be compatible with GameCube games. That leaves Microsoft. Part of the problem is that MS switched GPU suppliers. The current Xbox utilizes an NVIDIA processor while the Xbox 360 will incorporate a GPU from ATI. It will take a significant investment from MS to include backwards compatibility, but Pachter is fairly sure it will happen, even if it means including the old NVIDIA chip alongside the ATI chip.

"NVIDIA will be very happy to sell Microsoft 5 million or 10 million graphics cards," said Pachter. He added that backwards compatibility is far too important in the mind of the consumer to leave out. "If you're told by Microsoft that your entire Xbox library is worthless, including Halo 2, you're not very happy about that. If they decide not to be backward compatible I question their judgment."

Hopefully, this will be made clear one way or another during the MTV unveiling on May 12.

Among pure PS2 owners (not those who own an Xbox and PS2), no one is sitting around saying, 'Oooh I can't wait for the Xbox 360!'

It will take a significant investment from MS to include backwards compatibility, but Pachter is fairly sure it will happen, even if it means including the old NVIDIA chip alongside the ATI chip.

Microsoft angles to be lord of the game consoles
By Byron Acohido, USA TODAY
SEATTLE — Microsoft (MSFT) this week instigates Round 2 in its drive to elevate the Xbox ahead of Sony's (SNE) PlayStation 2 in the video-game console business.

Actor Elijah Wood at an L.A. event for the unveiling of Microsoft's new Xbox console.
AP

To muscle Xbox into contention, Microsoft has absorbed about $2 billion in losses the past four years. Now the software giant is making a bold move to jump ahead of Sony by initiating the next cycle of gaming consoles.

On Thursday night, actor Elijah Wood of Lord of the Rings fame will host a celebrity-packed MTV special at which Wood is expected to unveil the all-new Xbox. Widely expected to be called the Xbox 360, it should hit store shelves in time for Christmas.

But much more than dominance of the game-console business is at stake. Whoever sells the most consoles in this cycle could also lock up prime access to the burgeoning digital entertainment market.

Microsoft has been on a three-year mission to ingrain Windows Media Center PCs as the nerve center for digital entertainment. And it is maneuvering the new Xbox to be a linchpin in helping consumers manage music and movie files stored on a PC in the den.

Meanwhile, Sony, in partnership with IBM and Toshiba, is developing something called the Cell processor — expected to be an all-purpose "brain" for video games and consumer electronic devices, much as Intel's Pentium processor is for PCs.

"The Cell processor could be the silver bullet for Sony's convergence play," says Eric Bratcher, senior editor of PSM, an independent PlayStation 2 magazine.

The Cell won't be ready until next year. So Sony and Nintendo, maker of the No. 3 GameCube, are adhering to plans to introduce their own new consoles in North America in time for Christmas 2006.

"To rush something to market purely with the idea of getting to market first is shortsighted," says Sony spokeswoman Molly Smith.

Successful gaming systems are usually sold for at least five years to give consumers time to amass game libraries and publishers a chance to nurture hit games.

Will old games work?

Microsoft hasn't said yet whether the new Xbox will be able to play games purchased for the original unit. That could get tricky because the new Xbox will use a different processing chip and graphics card from the original.

Backward compatibility — or lack of it — could emerge as a major selling point.

"A lot of kids scrape up money for months to go buy a $60 game, so it's not fair to them if they can't play all their old games on the new console," says Jeffrey Carey, a 26-year-old home inspector from Edmonds, Wash., who owns 22 Xbox games.

Jupiter Research gaming-industry analyst Jay Horwitz, for one, believes Microsoft's first-mover strategy is well conceived. In a Jupiter study released exclusively to USA TODAY, Horwitz forecasts that by 2010, Xboxes will make up 38% of the consoles found in U.S. homes, topping PlayStation's 32% share.

Today, PlayStation 2 leads Xbox in installed base share, 43% to 19%, with GameCube at 14%.

Nintendo will stay in the hunt on the strength of its popular Game Boy and Nintendo DS portable gaming devices, Horwitz says. Its next full-fledged console, code-named Nintendo Revolution, will make it easier to do wireless links among gamers using different Nintendo products, says Perrin Kaplan, Nintendo's marketing vice president.

"Our strategy is to stay true to all the different ways gamers can experience pure gaming," she says.

Xbox on offense

Yet Sony and Nintendo are feeling the heat stoked by Xbox, which Microsoft launched partly as a defensive maneuver in fall 2001, gaming-industry analysts say.

At the time, Microsoft feared Sony might figure out a way to use its popular PlayStation as an Internet device capable of sending e-mail and working with digital media, says Matt Rosoff, analyst at research firm Directions on Microsoft.

So it sold Xboxes at a loss and poured a small fortune into establishing Xbox Live, which allows Xbox players to compete against each other over the Internet.

As Xbox and Xbox Live gained popularity, Microsoft switched to offense. In 2003, it released a wireless network card that allows an Xbox to tap into a PC's Internet connection. Another add-on gadget made it possible for the user to transfer music files and digital photographs from PC to Xbox.

The idea: supply hooks between the Xbox and the pricey Windows Media Center PCs that Microsoft has been aggressively promoting.

Speaking to a national convention of business editors and writers in Seattle earlier this month, Microsoft Chairman Bill Gates revealed that the new Xbox (which he referred to by its code name, Xenon) will share a common user interface with Media Center PCs.

"If you're used to that menu, when you use this Xenon, you'll see a menu a lot like that, that lets you get photos, TV, music and all those different things," Gates said. He also confirmed Microsoft's intent to bring Xenon to market this year and said the new Xbox will include features intended to broaden its appeal beyond hard-core gamers.

Being first is no guarantee of success. Game-console history is rife with cycle-starters that flopped. Remember Sega's Dreamcast, or Panasonic's 3DO or Atari's Jaguar? It remains to be seen whether tying the Xbox more closely to Windows Media Center PCs, which are prone to glitches and security breaches, will spark synergy.

"They've lost billions on the first-generation Xbox, and at some point they've presumably got to reverse that to make this an interesting business," analyst Rosoff says.

Meanwhile, Sony is maneuvering to go much deeper with its convergence strategy — into the computer processing chip. Sony has said the Cell processor can run video games 15 times faster than Intel's Pentium 4 chip, meaning game developers should be able to dramatically boost the cinematic look and feel of games.

Communicating appliances

What's more, the chip is being designed to run everything from cell phones to home networks to high-definition TVs. It has a unique capacity to network Cells embedded in various appliances so that the devices act like a single computer.

"It could give them a lot more flexibility," Bratcher says. "Imagine your PlayStation 3, your cell phone, your portable MP3 player, your home theater and your toaster all using the same processor, all speaking the same language, all communicating with each other very easily and wirelessly."

Still, Sony has struggled at times getting its disparate media and manufacturing divisions to collaborate on a central strategy. It has been unable, for instance, to keep Apple's iPod music player and iTunes store from moving in to dominate the portable music player business once ruled by Sony's Walkman.

"If any company is exposed right now, it's Sony," says James Governor, tech-industry analyst at research firm RedMonk.