Console Makers: Move It or Lose It

Fasten your seatbelts. This holiday season's going to be a wild ride for Sony, Nintendo, and Microsoft in the battle of the consoles

by Christopher Megerian

The Big Three gaming companies are powering-up their laser guns, sharpening their swords, and gathering their robot armies for what could be one of the bloodiest holiday seasons in video game history. The epic battles will play out on TV screens around the globe, but could do real-world damage to the bottom lines of console makers.

Hotly anticipated blockbuster games are nearing release, and each next-generation console—Microsoft's Xbox 360, Sony's PlayStation 3, and the Nintendo Wii—has had at least a full year to ripen on store shelves. "This is the most competitive holiday season in the history of video games," says Pacific Crest Securities senior research analyst Evan Wilson.

Get ready for giants Microsoft and Sony to square off in a battle for the hearts, minds, and wallets of the hardcore gamer. (Although Nintendo has been extremely successful with its innovative Wii console, its focus on casual players has allowed the company to circumvent gaming's perennial "mine is bigger than yours" competition.) But the pressure is likely to weigh heaviest on Microsoft (MSFT), which had a year's head start on its console competitors and is the market leader with more than 11.6 million Xbox consoles sold. The company just slashed the price of the most popular version of its Xbox 360 console by $50 following an earlier $100 price cut by Sony on the PlayStation 3.

By Microsoft's own estimates, the company has fallen anywhere from 1.4 million to 3.4 million short of sales predictions it made in 2006. Meanwhile, Nintendo (NTDOF.PK) and Sony (SNE) are both doing substantially better in the first half of this year, according to numbers from those companies, Slowing sales and the onslaught of sharper competition has placed increased pressure on Microsoft to outperform rivals this holiday season. "It is imperative they get consumers into the store NOW," according to a July 31 report by David Cole, president of gaming research firm DFC Intelligence.

Make or Break Season

Despite feeling the competitive heat, Microsoft is counting on an impressive lineup of games due out later this year, including Halo 3, the third installment in its popular Halo franchise. The first two games in the series have collectively sold almost 15 million copies since November, 2001, and the third game has already racked up 1 million pre-orders. Microsoft announced on Aug. 9 a bevy of cross-promotions, from Mountain Dew's Halo 3 "Game Fuel" soda to exclusive Halo 3 videos on Comcast Web sites. Also on the roster is the epic science fiction role-playing game, Mass Effect. "It's almost an embarrassment of riches," brags Shane Kim, corporate vice-president at Microsoft Game Studios.

Microsoft may be the one embarrassed if it's not able to solidify its No. 1 position this holiday season. "If this lineup of titles can't move boxes off the store shelves come January," writes Cole, "we will have to seriously revaluate Microsoft's long-term position in the marketplace." If that happens, Cole believes Microsoft could be in danger of becoming a distant third in the battle for market share in the video game business.

Bad press regarding equipment malfunctions (including general hardware failures and accusations that the console scratches game disks) has dogged Microsoft, which means Don Mattrick—who took over the gaming division on July 30 after industry veteran Peter Moore left to head EA Sports—may have his hands full for the rest of the year.

Still in the Running

With about 4.3 million consoles sold since the PS3 launch last November, Tokyo-based Sony has lagged the furthest behind. But Sony Senior Vice-President for Marketing Peter Dille insists the PlayStation 3 will soon hit its stride and begin outselling its competitors. "The PlayStation 3 will not only [still] be relevant in 10 years, it will still be driving the market," he says.