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APRIL 25, 2005
By Olga Kharif An X-Factor for the New Xbox? Better sound and HDTV quality should be impressive. Best of all, though, could be Microsoft's potential six-month jump on the competition Next month, Microsoft (MSFT ) may tell the world when it'll unveil the next generation of its Xbox video-game console. The machine is expected to allow for the best surround sound yet and high-definition TV that could make gaming more realistic than ever. Say you're playing a next-generation Madden NFL game. When a 300-pound defensive lineman runs into your quarterback, the impact -- facial expressions of pain, the sound of breaking bones -- will be so real it'll make you cringe, boast game makers at Electronic Arts (ERTS ). The next Xbox, code-named Xenon, is expected to hit stores in the fall. It will be the opening salvo in what could be a nasty fight in the coming year for dominance of the gaming market. Microsoft, a relatively late starter in the business, has scratched out a 17% share of the market for consoles since its 2001 debut, according to consultancy DFC Intelligence. And it's now a significant rival to Sony (SNE ) and Nintendo. At the moment, Sony is unquestionably the market leader with a 68% share, according to DFC. At the end of 2004, Nintendo's 15% share gave it the third position (see BW, 4/4/05, "Japanese Gamers: Tired of the Pummeling"). This time around, though, the folks at Microsoft headquarters in Redmond, Wash., hold an intriguing hand. The new Xbox should hit the market with cutting-edge technology a good six months ahead of rival products from Sony and Nintendo. Back in 2001, Microsoft was months behind. SPIRALING DEVELOPMENT COSTS. And that's important, because new console introductions tend to throw everything into the air in the gaming industry, and the first company that wins the hearts and minds of all-important game developers with its new technology is sure to gain market share against its rivals. Simply put, a new console is "the ctrl-alt-delete for the industry," says Scott Steinberg, vice-president for entertainment marketing at game publisher Sega. The move to HDTV, hastened by Microsoft, could send costs of developing games spiraling out of control -- and push many gaming software companies out of business. To take advantage of the new devices' HDTV and other advanced capabilities, game development costs will jump four times, estimates Evan Wilson, an analyst with Pacific Crest Securities in Portland, Ore. The cost of intellectual property, such as rights to comic book and movie characters, will also rise, as gaming companies prepare to enter genres like psychological thrillers. For the biggest companies with the deepest pockets, that's no problem. "We want to create interactive experiences that move you in the same way great art, great movies can move you," says Neil Young, vice-president and general manager for EA, the world's largest video-game publisher. But for smaller publishers, it won't be so easy. WIRELESS GAMING? Those software makers will also face steeper competition from Microsoft, which, like all console manufacturers, also produces some games of it own. Since 2001, it has been able to grab 3% of the world's market for video games, estimates David Cole, founder of DFC. That might not seem like much, but this market is still highly fragmented. The world's third-largest software maker, Sony, holds only 6%. Market leader EA owns 17% of the market, followed by Nintendo with 12%, according to DFC. So what's Microsoft's secret sauce? Industry insiders expect the new Xbox will contain, among other features, an embedded Wi-Fi access point, allowing users to play online games without the encumbrance of cables. Its Xbox Live online gaming network should offer a slew of social networking capabilities, allowing for better multiplayer game action. "They've really established themselves as cutting-edge," says Cole. That could spell trouble for both Sony and Nintendo. While Sony and Microsoft declined to comment for this story, Nintendo execs say they're unperturbed. "You can't make the assumption that [Microsoft] would gain market share just because they come out with a console earlier," says Perrin Kaplan, vice-president for marketing at Nintendo in Redmond, Wash. Perhaps not. But if Microsoft pulls this off, it may not be gamers who are crying. It will be the software giant's competitors.  Kharif is a reporter for BW Online in Portland, Ore.
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