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Revenue from game consoles will plunge, report predicts

Sales of video game units will increase substantially over the next few years, according to a new report, but revenue for manufacturers will actually decrease.

Sales of video game consoles will increase substantially over the next few years, but revenue for manufacturers will actually decrease because of the subsidies used to entice customers, according to a new report.

U.S. shipments of consoles, such as Sony's PlayStation2, will peak at 21.2 million units in 2003, according to the report from market researcher International Data Corp. Revenue will decline, though, from $3.3 billion in 2001 to $2.3 billion in 2003.

The discrepancy arises from the practice of subsidizing the cost of the consoles. Manufacturers typically sell the consoles for a few hundred dollars, far less than the actual cost of building the units. The difference is made up through software sales and licensing fees.

Subsidies are expected to become even more widespread over the next few years as Microsoft enters the console market. The software giant announced last week that it plans to spend a record $500 million to launch its Xbox console next year.

"By the 2001 holiday season, when the transition to next-generation hardware will be in full force, the U.S. video game market will be extremely crowded and highly competitive," IDC analyst Schelley Olhava said in a statement. "Battles among Microsoft, Nintendo, Sega and Sony will lead to market-share and pricing wars."

Those wars are likely to claim a few casualties, Olhava added, with software availability and selection the critical factor in determining who survives.

"Historically, the U.S. market has supported only one or two platforms," Olhava said. "Those that don't win in terms of first or second place in market share could be relegated to niche status."