One logical way to look at E3, the premiere convention of the video-game industry, is that it’s a contest between Sony (SNE) and Microsoft (MSFT) for the hearts of gamers. Sony seems to be winning this year’s pivotal debut of next-generation consoles—and by a large margin.
Microsoft had already ceded ground to its archrival last week after clearing up months of confusion and announcing that game publishers would be able to block used games from playing on the new XBox One console or to charge users who wanted to play second-hand games. It’s not clear whether this is going to have a huge practical impact. “No publishers would have the balls to do it,” said Michael Pachter, an analyst with Wedbush Securities. Still, this issue has been pulling at the hearts of gamers for months, and Microsoft has played directly into their image of the villain.
This has allowed Sony to ride into E3 as the hero. On Monday it announced that it would not restrict used games on the Playstation 4. A reporter for Ars Technica who attended the press conference said that the immediate reaction was unlike anything he has seen in 10 years of attending the conference. Not often does the maintenance of the status quo inspire such joy.
Sony’s new Playstation will also be significantly cheaper than the Xbox One, at $399 versus $499. For Microsoft, this means it has to convince gamers that its device is worth $100 more than the competition.
But other conflicts underlie this year’s conference. The console companies are striving to stretch upmarket, beyond gamers and into more generalized home entertainment, while watching the lower end of the gaming market flee to simple games on mobile devices. The worst fears are that Sony and Xbox will suffer a fate similar to that of Nintendo (7974:JP), whose new console has performed worse than even the most dire predictions.
Microsoft, in particular, isn’t just talking to gamers. The company has always been interested in Xbox largely because it wants to capture the proverbial living room. It already has millions of subscribers to its Xbox Live program, through which it can distribute products that go far beyond gaming. This could be a more fertile market, considering the strain that the gaming industry is feeling from tablets and smartphones. No gaming console is going to seem cheaper than a device that fits in your pocket and also makes phone calls.
But evolving into a full-featured home entertainment device does not come without risks of its own. John Riccitiello, former chief executive of Electronic Arts (EA), warned the console makers against forgetting where they came from. “Ensure the box delivers awesome game experiences, better than anything we’ve experienced before, and millions of gamers will line up at midnight to buy it. Delivering a box that raises the question of whether we should buy the new console over the $100 Apple TV device or a $60 Roku player will cause too many gamers to wait it out and commit only when the smoke clears,” he wrote in May in an editorial published on Kotaku, the gaming news site.
Microsoft is trying to quell those concerns at E3. Sony doesn’t have a good answer to Kinect, for instance, and the XBox will hold exclusive on a series of popular games, including the new Halo, Metal Gear Solid V, and TitanFall. It is increasingly uncertain that selling gamers these types of big-ticket console games will represent a good business for much longer. But there’s no guarantee that consumers are dying for an expensive device to anchor their more general home-entertainment systems, either.
That market remains open mostly because companies haven’t figured it out yet. Smart televisions haven’t exactly set the world on fire, Google’s (GOOG) media streaming device was a flop, and Apple TV (AAPL) has been surprisingly modest in its scope. Many consumers are cobbling things together themselves, without buying a single device that costs $500. It may be that many people have most everything they need by the time these products hit the stores. ”In that scenario, Microsoft doesn’t win, but neither does Sony. And both companies have to fall back on the core game audience, which will end up giving Sony a distinct advantage,” said James McQuivey, an analyst with Forrester Research. “Though it would be a Pyrrhic victory to be sure, as those gamers are a dwindling, though passionate, lot.”