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Will PlayStation 2 sell well after initial rush?

Once hard-core game players have snapped up the first few million units of the new game console, Sony may have a tougher time unloading the other 25 million units it expects to sell here.

The North American arrival of Sony's PlayStation 2 this week is expected to set off a buying frenzy that won't abate for a couple of months.

But once hard-core game players have snapped up the first few million units of the new game console--which goes on sale in the United States amid considerable hoopla at 12:01 a.m. Thursday--Sony may have a tougher job unloading the other 25 million units it expects to sell here.

With rival Sega pushing the advanced graphics and Internet connectivity of its Dreamcast console and with Microsoft waiting in the wings with its Xbox, due late next year, Sony's quest to make the PlayStation 2 the center of the modern living room faces a number of challenges.

A year ago, analysts touted the $299 game console as a Trojan horse that could potentially displace the PC as the main conduit to the Internet in the home. But the console is coming to market sans the anticipated modem and with a lineup of games that don't fully exploit the console's technical advances.

"I think it will take awhile for Sony to prove that PlayStation 2 is a better gaming platform than Dreamcast," MicroDesign Resources analyst Peter Glaskowsky said. "The titles that have come out in Japan so far haven't made all that convincing an argument."

To compound the situation, Sony suffered another setback when it cut in half the initial American shipments of the PS2. The company originally promised 1 million units. But component shortages forced Sony to reduce that figure to 500,000.

The cutback will likely result in long lines at retailers Thursday and at least a few frustrated parents rearranging their holiday shopping plans. Sony will let customers start lining up at 8 a.m. Wednesday--16 hours ahead of time--outside its Metreon shopping complex in San Francisco.

But as long as Sony can keep its promise to pump out 100,000 units a week following the launch, the business impact of the initial shortage should be fairly minimal, said Schelley Olhava, an analyst at market researcher IDC.

"If they can maintain their schedule through the holiday season, they should be fine," she said.

Faithful fans of the original PlayStation will wait the weeks or months it takes to trade up to the new version, Olhava said, especially because Sony has helped cement their loyalty by taking the unusual step of making the PS2 backward-compatible: It will play games for the original PlayStation, as well as titles designed for PS2.

"That was a smart decision by Sony," she said. "The installed base will feel a lot more confident going out and buying the PS2 knowing their existing library of games won't be obsolete."

The software question
A tougher challenge for Sony may be the software question. Games are what sell a gaming device. And despite the much-hyped technical superiority of the PS2 console, initial games for it are unlikely to offer the knockout graphics and play that consumers have been led to expect.

"Sony kind of got overconfident and thought the systems would sell themselves, that they didn't have to focus on the software," said Sean Caszatt, editor of Game Assault.

Sega vs. Sony
"Usually a company with a new game console will pour a lot of resources into one or two games that show off what the system can do. Nintendo had 'Super Mario 64,' which really knocked people out and got them to buy a Nintendo 64 system. Sega had 'Soul Calibur' and 'NFL 2K,' which made people feel like they had to have a Dreamcast," Caszatt said.

"There's really no one killer application yet for the PS2. That's why a lot of pretty serious gamers are saying there's no reason for them to buy the thing now."

Although it's typical for the first titles for a new gaming device to be underwhelming because software developers need time to learn how to exploit the new hardware, the complex multiprocessor design of the PS2 could make it an extreme case.

"It's been a very challenging platform for developers to adjust to," Glaskowsky said. "There are so many different elements, it's difficult to adjust to them all. I think you'll see a progression through next year. I think it'll be towards the end of 2001 where it's clear the PS2 titles are superior in graphics and performance to Dreamcast--which is right when they have to be ready to compete with the Xbox."

The PS2 will also suffer in comparison to the Dreamcast--at least initially--for its lack of Internet functionality. Sega's heavily promoted SegaNet service allows Dreamcast owners to play against each other online, using the console's built-in modem.

Sony has said it is developing a broadband Internet strategy for PS2. And all PS2s will include USB and FireWire ports to accommodate future additions such as modems. But the actual launch of any online service is expected to be at least a year off.

Still, analysts say Sony's delay in offering online capability may not be too much of a liability. Current Net-based gaming is dominated by PC users playing card games and checkers on sites such as Pogo.com and Yahoo Games, hardly the type of graphics-rich experience intended for the PS2. Multiplayer versions of visually intensive games such as "Quake" attract only a niche audience of PC enthusiasts.

"Right now, the game market is a packaged-goods market," said Gerry Kaufhold, principal analyst for converging markets at Cahners In-Stat Group. "The interest in playing these kind of games online is still in the early stages of developing."

Broadband strategy
As long as Sony has a solid broadband strategy in place by the time its customers start expecting to be able play "Crash Bandicoot" with distant friends, the electronics giant should do fine, Kaufhold said.

"We've done a lot of studies on broadband gaming opportunities," he said. "And the upshot is that it's going to take long enough to develop that market that the PlayStation 3 will be hitting the market when it's really the right time."

Meanwhile, Sony may have a secret weapon in the PS2's DVD drive, which can play movies as well as game discs. Sony's own studies show the majority of PS2 buyers who are over 30 in Japan, where the console went on sale earlier this year, purchased the units mainly to watch movies. DVD players cost much more in Japan than in the United States, however, so the film factor isn't expected to be nearly as big a draw here.

"The DVD will not be the driving force that brings people into the market here, but it's a nice bonus," Olhava said.

Still, the DVD factor could help draw a second wave of buyers who normally wouldn't consider getting a game console, especially if Sony drops the price on the PS2 by $50 to $100 in six months, as many observers expect.

"A lot of people who have been sitting on the fence about buying an exotic TV appliance may be swayed by the PS2 offering games and movies," Kaufhold said, noting that U.S. sales of DVD players are expected to reach 18 million next year. "If PS2 gets even a fraction of that, they've really expanded the market for video game consoles."

And as Sony also happens to be one of the biggest movie distributors in the world, it stands to benefit from whatever type of disc people shove into the PS2.

"Sony could do some really interesting combinations with movie DVDs and interactive features," Kaufhold said.

The upshot is that Sony is likely to have a pretty bang-up 2001 with the PS2. Hard-core gamers will snap up every available unit for the first few months, and after that more compelling games will emerge and predicted price cuts could help draw in consumers interested in more of a general living room appliance.

"I don't think it'll be hard for them to sell PS2s in the next six months," Olhava said. "The first couple million units are going to go to the serious gamers. Then I think it's very possible for them to bring in a second wave of new users going into the summer."

After that all bets are off, as Microsoft enters the market with the Xbox, which boasts Microsoft's marketing muscle and technical specifications suitable for a nuclear sub.

"The Xbox is the giant flashing red question mark," Kaufhold said. "Nobody's positive that's even going to come out. But if Microsoft really delivers, that really changes the market."