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A whole new ball game

Microsoft is moving with increasing intensity onto yet another turf, one that's far from its word-processing roots: gaming.

Microsoft has been accused of playing games on a number of market fronts over the years, but this time the company says it's true.

Making its global reputation on its operating systems and aggressive Internet strategy, the Redmond, Washington, behemoth is now moving onto yet another turf, one that's far from its word-processing roots. Unbeknownst to many general consumers, Microsoft is moving with increasing speed into the gaming world alongside Sega, Nintendo, and other market leaders.

Flight Simulator
In the latest reflection of this strategy, Microsoft (MSFT) announced its first equity investment in a games developer, Single Trac, this week. That followed its acquisition of Bruce Artwick Organization, the original developer of Microsoft's popular Flight Simulator game, late last year.

And between those two market moves, the company unveiled 11 new game titles at the Electronic Entertainment Expo in May, compared to its usual annual rollout of two or three new titles. Already, Microsoft has two titles in the top-20 rankings, and other game companies are prepared for more. (See chart)

"We recognize a certain percentage of market share will go to Microsoft," said Ken Williams, chief executive officer of Sierra On-Line, the number-one publisher.

So what's driving the software behemoth to bring a bigger bat to the playing field at this time? And will it annihilate the players along the way, as it has threatened--and has done--to so many other competitors.

Hellbender
Industry analysts say Microsoft is seeking to exploit its brand name and market distribution channels to make room for itself in the gaming arena. Although some die-hard gamers are sure to resist the intrusion out of loyalty to their favorite companies, Microsoft is undeterred, banking on its ability to attract newcomers familiar with its label, if nothing else.

Microsoft is hoping to extend the market leverage of Windows 95 to more gaming products. At the same time, the "dedicated console" market saw sluggish sales as buyers waited for new platforms going from 16-bit to 32-bit systems, said Dean Lester, a product unit manager in Microsoft's games division.

Not to mention the booming games and PC markets. The industry, which has exceeded $1 billion in sales, grew nearly 31 percent in 1995 over the previous year, according to PC Data. That's almost twice the rate posted in 1994. So far this year, the growth has been 26 percent.

Monster Truck Madness
"We have worked with developers in the past, but with the Artwick and Single Trac deals, it shows we're open to other relationships with developers," said Richard Brudvik-Lindner, maketing manager for Microsoft's Interactive Division, which includes the games group.

The games group accounts for substantial portion of the Interactive division's revenues, but Brudvik-Lindner declined to release figures. The PC games staff has grown to nearly 200 people, compared with less than a dozen about eight years ago.

Meanwhile, Microsoft has increased its market share ranking to sixth, with 4.8 percent of the market in 1996, compared with tenth spot in 1993 with 4.4 percent, according to PC Data.

NBA Full Court Press
Nearly twice as many game publishers have come into the industry during this time. The number of game publishers has reached 404 this year, compared with 205 in 1993, PC Data says.

"The industry is consolidating and in the next three to five years, there will be three to four companies that hold 80 percent of the market," Williams said. "I think Microsoft will take market share away from the smaller companies, but we'll be one of the ones to survive."

He noted the company will compete by continuing to build the "best games" that it knows how.

Nevertheless, no one is sure what will happen in the widely anticipated shakeout of the gaming industry.

"The shakeout is going to happen with or without Microsoft, because there are more companies than the industry can support right now," said Lee Isgur, an analyst with Jefferies & Company in San Francisco. David Cole, president of DFC Intelligence in San Diego, said he suspects that Microsoft isn't interested in making money from its games as opposed to the money the games will generate from its Windows 95 sales. "Microsoft may be willing to spend more on marketing than other competitors because of the other benefits it will get, and it may even cut the prices on their games in order to make up sales elsewhere," he said.

Brudvik-Lindner, however, adamantly refuted that speculation. "This is not a loss leader business," he said.

Microsoft's current titles that made the top 20 selling PC games during the first half of the year include Flight Simulator, which ranked fourth, and Return of the Arcade, which was 16th. (See table)

Deadly Tide
Beyond the immediate threat of the biggest software company in the world, gaming companies will also be fighting other competitive forces. The industry will have Sony and Sega jumping into the PC gaming business and expanding their grasp beyond the dedicated console market. Still more competition will come from games played via online services and the Internet.

Hellbender
Microsoft and other PC game makers are banking on attracting console players away from the TV.

"PC game sales have historically lagged behind consoles. But we see projections that the number of PC has reached a critical level, so the expectation is that PC gaming software will expand significantly," said Doug Lowenstein, president of the Interactive Digital Software Association.

But at least one analyst doubts that PC games will ever replace the console market.

"They are a stepchild that is inferior in size and revenues in comparision to the dedicated console market," Isgur said.

Top-selling PC games
for first half 1996
Rank Title Manufacturer
1 Warcraft II Davidson
2 Myst Broderbund
3 Civilization 2 MicroProse
4 Flight Simulator Microsoft
5 Duke Nukem 3D Formgen
6 Mechwarrior II Activision
7 Command & Conquer Virgin
8 Doom II GT Interactive
9 Ultimate Doom Thy Flesh GT Interactive
10 Star Wars Rebel Assault II LucasArts
11 Wing Commander IV Electronic Arts
12 Hexen GT Interactive
13 Descent II Interplay
14 Need for Speed Electronic Arts
15 NBA Live '96 Electronic Arts
16 Return of the Arcade Microsoft
17 Gabriel Knight 2: Beast Within Sierra On-Line
18 Monopoly Multimedia Hasbro
19 Top Gun MicroProse
20 MASCAR Racing Sierra On-Line