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Next Generation of Game
Consoles Set to Shake up Gaming Industry
As
the Next Gaming Cycle Approaches; Developers, Publishers, Peripheral and
Hardware Manufacturers Set Sights on New Opportunities.
By: Ann-Marie Fleming
July 2005
As
the gaming industry prepares for the launch of the next generation of gaming
consoles, discussions are heating up as to the potential impacts that may
ensue. Previous transitions have revealed that entrance into the next gaming
cycle often results in higher costs, bigger budgets and larger production
teams. As the current gaming cycle comes to an end and the industry prepares
for the next generation, these impacts are believed to reach new levels. As
Glenn Entis, Electronic Arts’ (EA) Vice President and Chief Visual Officer
explains, “It’s a time of potential dislocation because there is
discontinuity. Costs definitely go up because there is new technology and a
lot of new techniques involved. Part of the issue is that you have to
accelerate experience. Game teams now have to basically master new
techniques that they have never used before, things which by definition we
have no experience in, and that require a quick time to market for each
launch.”
Companies that have learned from previous transitions adjust and adapt to
ensure that the next cycle proves beneficial. For many this approach becomes
one of safety, as developers and publishers turn to genres, titles, themes,
licensed products and brands that have proven successful, many times
avoiding new and riskier directions. According to Philip Holt, Senior Vice
President of Product Development for THQ, “What it means is that creative
risks are minimized because of the dollar amounts involved. People look to
things that have worked and try to offset some of the risks associated with
increasing development costs by trying to recreate that formula that has
worked for other people.”
Confident that transitions are having a positive impact on the industry is
Kathy Vrabeck, President of Activision Publishing who explains, “We always
end up with greater household penetration of video gaming systems than we
did in the previous cycle, so this is really good for the industry.”
Activision who experienced great success during the last transition,
attributes their achievements to the Company’s realization that the older
platforms stay around for a while and bring with them lower development
costs, reused technology, big brands and big sales, which can be utilized to
offset the investments being made in the new technologies, according to
Vrabeck. THQ believes their broad portfolio will allow them to continue to
do very well on the PS2 as well as with their family oriented brands. “As
price points come down and a new part of the market enters the console space
at a sub $99 price point, a lot of our games are going to sell very well”
states Holt.
PC Industry:
Another trend associated with console transitions explains Kevin Bachus,
President and Chief Operating Officer, Infinium Labs, “is that game
publishers tend to gravitate towards the PC market as a form of safe harbor
while things are shaking up, because there is not going to be enough of an
installed base on the consoles for the first year or so to support the kind
of investment that goes into that.” Infinium has turned to the PC arena to
tap into the vast library of content available to fuel their on-demand
online game service and product called Phantom® (see Figure 1). Accessible
through their broadband on-demand service and receiver, the Company offers
consumers access to a large selection of high profile and popular games
released for the PC. These releases, however come without the challenges
associated with PC gaming such as viruses, driver conflicts, crashes, and
other problems associated with the fact that the PC is not a standard
platform, explains Bachus. Over the past several years, THQ has made a
sizeable investment in the high end PC market, deciding to enter this arena,
according to Mr. Holt, “through genres that command the most market share,
acting as a bridge strategy between the console transitions.”
Figure 1: Phantom® Lapboard and Receiver
 
New Industry
Opportunity:
With roots in PC gaming, Activision has a lot of experience in online play,
and therefore they are experimenting throughout this cycle, as Vrabek
describes, with an eye on what gamers want to do while playing online
through their consoles. For this reason consumers can expect to see more
online features in the Company’s games in the next cycle. EA sees new doors
opening as a result of the new consoles according to Entis, who believes
that the industry is nowhere close to market saturation yet. “There are a
lot of reasons to think that next generation games will appeal to a much
wider audience than games in the past. There will no longer be a barrier to
the casual audience, they will find more things to like that will draw them
to the new consoles.” In addition, EA sees continued attraction for hardcore
gamers as they are drawn to improved graphics and advanced game play.
Gaming Experience:
As
the industry moves through each transition, improvements in the level of
graphics have progressed consistently through each cycle, with this next
generation of consoles being no exception. However, beyond the graphical
enhancements, discussions have arisen regarding measures and opportunities
for the evolution of the gaming experience itself. For some this evolution
towards a more true to life, and sense driven next level experience begins
with the next generation consoles and their potential extension of gaming
boundaries. THQ’s Philip Holt sees the new consoles as moving in the right
direction towards a more realistic gaming experience, “Graphics are
increasing at the same rate, but the perceived value that this brings to the
entertainment experience is diminishing. It is not just about the visuals
anymore. Next gen is going to be all about behavior. It is going to take the
high level graphics and add to the experience by not just making things look
real, but by making things behave like they are real. Behavior will be
animation; it will be Artificial Intelligence, all the things that bring the
visuals to life. Behavior will then become a new tool that designers will be
using that will change their entertainment experiences.”
Working towards increasing the sensory experience in game play is Immersion
Corporation, a leading developer and licensor of touch feedback technology.
Immersion combines sight and sounds with touch to create a rich environment
and intuitive understanding of what each player is trying to do. As Dean
Chang, Chief Technology Officer and Vice President of Gaming explains, “Many
of the areas where technology continues to advance are primarily on the
graphics axis with some progress on the sound axis, but little is happening
on the tactile touch axis. For example, when you play a golf game or
baseball game today, you swing your club or bat by pressing a button and
then look at the screen to see where the ball went. However, in the real
world, you know at the moment of impact whether you hit the ball in the sweet
spot or shanked it off the tip of the club or bat and even know if it was a
good shot or good hit without even looking to see where the ball went.
Further advancements in graphics don’t address this problem.” Immersion
believes that their haptic technology, which is currently the industry
standard, has the ability to bring players closer still to the real
experience when consoles and associated games provide for such opportunities
(see Figure 2).
Figure 2: Logitech Driving Force Pro with Immersion TouchSense Technology:
Nintendo’s upcoming console under the code name ‘Revolution’, is rumored to
have the potential to fundamentally change the gaming experience with
particular focus on their upcoming controller, which is believed to have the
ability to let players configure layouts to suit their playing styles.
According to Chang, the shift towards a different gaming experience can
potentially result in the ability to reach a broader audience by offering
simpler ways for players to interact with the games
Market Outlook:
It
is typical during console transitions for the hardware makers to initially
incur losses due to high manufacturing costs and low price points, however
the gains from video game sales are anticipated to make up for these
preliminary negative returns. Ziff Davis Game Group Research anticipates
that gamers will purchase approximately five games within the first ninety
days after they purchase a next generation console. According to a recent
report from Merrill Lynch Japan, Sony’s pricing of the Playstation 3 will
cost the Company approximately $1 billion during the first year of sales.
However, during the last generation Sony experienced an initial loss, which
was overcome by software sales and experts expect this pattern to repeat
itself. In a report completed by Kagan Research, by the year 2010 it is
estimated that 54 million U.S. households will own at least one video
console. U.S.
video game sales, which according to the report totaled $10 billion in 2004,
are expected to rise to $16 billion by 2007. The bottom line is that there
are significant expectations for continued growth of the industry through
the next transition and beyond.
As
the next gaming cycle approaches with the upcoming introduction of the next
generation of consoles, Entis reveals, “Some companies will thrive on these
challenges and some will stumble. Every transition has seen some shifting of
positions in the market share leader list, which you can attribute in part
to decisions about how companies prepare for and time their entries for new
consoles. It is a time of risk, always a time of change, which means it is
always a time of new opportunities for some companies and possible missteps
for others.”
Ann-Marie Fleming
Ann-Marie Fleming
completed her MBA in the
United
States,
where she attended Webster
University. She also holds an Honors B.A from the University
of
Toronto.
She has over fifteen years of experience spanning the brokerage, banking,
and mortgage industries within the United States
and Canada.
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www.InvestorIdeas.com/About/Disclaimer.asp
©Copyright InvestorIdeas 2005
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