Next-gen consoles take center stage

In the game industry, there are two significant months in the year--May and December--and they have nothing to do with the weather.

In mid-May, a key conference takes place--the Electronic Entertainment Expo, or E3, where trends, and in some cases bets, are set. During the holidays, companies watch to see if their bets paid off and if they successfully steered new directions.

At this year's E3, slated for May 16 to May 20 in Los Angeles, all bets will be on new gaming consoles from the big three players--Microsoft, Sony and Nintendo.

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What's new:
The video game industry is about to hit Los Angeles for the annual E3 trade show, which last year drew some 65,000 attendees.

Bottom line:
This year's E3 will be all about consoles, with the three biggest players jostling to talk up their latest offerings and tighten their grip on the competitive market.

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"The major console makers are going to lay...the groundwork for the next generation, and all the developers and publishers are going to get, in some cases, their first looks at the new features," said Schelley Olhava, game analyst with research firm IDC.

Microsoft will kick off the console frenzy several days before the start of E3 with a Thursday MTV special launching the Xbox 360. The taping of "MTV Presents: The Next Generation Xbox Revealed," occurred last week and--surprise, surprise--supposedly leaked images of the new console have already flooded the Internet.

A mainstream television network dedicating a broadcast to a new gaming console indicates just how pervasive gaming has become, but for all of the attention and fanfare, the game industry hasn't been able to grow its share beyond an audience of loyal enthusiasts. The major players are aiming to build up the market and their stakes in the coming months, when the industry is expected to go through the cyclical transition that occurs roughly every five years when new consoles are introduced.

"The gaming population hasn't changed that much over the years," said Olhava. "Household penetration has remained in the same 40-to-45 percent range, and the industry has replaced older people who quit gaming with new ones...The industry may be digging deeper into that stratum, meaning those gamers may be buying more games, but not necessarily attracting new gamers."

Olhava added that the round of new consoles would likely be more evolutionary than revolutionary for the industry.

"It won't be a problem selling 1 to 2 million units for these guys, but the tricky part is getting beyond that and growing the market," she said.

Microsoft, for one, is aiming for higher returns on its console efforts after a decent showing with its first Xbox.

Getting their game on
"Our goal in the last generation was to be in the game," Microsoft chairman Bill Gates said at a recent speech to business journalists in Seattle. "With three companies, Sony, Nintendo and Microsoft, we came out a very strong No. 2. What we got from that round, at some financial cost, was not only the opportunity to play again, but to play again with great credibility."

That financial cost amounts to losses of $1.2 billion a year since the launch of its game efforts in 2001.

Still, the revenue forecast for the U.S. console market is expected to continue to grow from $8.7 billion to $11.3 billion in 2010, according to research firm JupiterResearch.

Microsoft and its Xbox is a distant No. 2 in the North American console market, behind Sony with its PlayStation2 but ahead of Nintendo and its GameCube, according to data from IDC. Olhava estimated that last year, Sony shipped about 5 million units, making up 42 percent of the market, while Microsoft shipped about 3.4 million for 28.3 percent in 2004. Nintendo shipped 2.5 million consoles for 21.2 percent of the market.

Overall, Xbox is also behind the PlayStation2, with 12.1 million currently on the market, compared with 30.8 million Sony units. GameCube logs in with 9.1 million units.

However, with this latest round of new consoles--which are generally updated as part of the five-year transition cycle--analysts expect the market to be less lopsided in Sony's favor. Microsoft, which is expected to launch Xbox 360

by the holidays, has a slight advantage. Sony's PlayStation 3 is slated for an early 2006 launch and the release date of Nintendo's Revolution is still up in the air.

Will high def mean high impact?
After five years of learning from experience with its original Xbox, Microsoft is expected to make a better showing, with some predicting the Xbox 360 will topple the next-generation PlayStation from its top market share spot.

Ultimately, the quality of the titles available for the consoles will determine the devices' popularity, and Microsoft is betting that high-definition playback of games, a key feature of the new Xbox, will appeal to a tech-savvy audience.

"The trend is more than just resolution," Microsoft vice president J. Allard said at a March developer conference in San Francisco. "It's going to change the way people play games."

That change includes emulating the movie business, which sells merchandise related to blockbusters.

At that same conference, Allard gave a sneak peek at the unified interface that will be used by all next-generation Xbox games. The interface promises to provide a central location for players to connect over the Internet and access music stored on the console. The interface also will serve as a gateway to a planned mini-transaction system that would enable players to buy small chunks of downloadable content, such as a sporty new car for a racing game or fashion accessories, such as tattoos, for a character.

Still, HD remains a top selling point, and the company has struck a marketing alliance with electronics giant Samsung to promote HDTVs with the Xbox 360.

The companies plan to place more than 25,000 Samsung high-definition televisions in Microsoft Xbox retail kiosk locations across the globe. The move will simultaneously show off the picture quality of HD sets and support Microsoft's efforts to move the gaming industry into the HD era.

Sony's new PlayStation will also have an HD element, as it uses the next-generation DVD format Blu-ray Disc, whose high capacity makes it an ideal storage medium for HD content. Double-sided versions of Blu-ray Discs will store up to 50GB of data.

Less is known about the Nintendo console, code-named Revolution, but executives have said it will focus more on being a gaming system and less as an entertainment hub like the PlayStation and Xbox. The system will have Wi-Fi wireless networking and gaming titles for the next Nintendo console will be backward-compatible with its current GameCube.