The Next Generation Game Consoles

The previous article outlined how Sony’s PlayStation 2 maintained a distant lead in the last generation of game consoles. What's different this time around? There are four primary factors that will determine the winner in the new generation of consoles.

Here’s a look at the obvious differentiators between Sony’s PlayStation 3, Microsoft’s Xbox 360, and Nintento’s Wii, and how each company plays out a unique strategy in the bid to sell the most consoles.

1 - Console Prices

The Sony PS2 only cost $300 at its 2000 launch, a price matched by Microsoft with the Xbox a year later. In the new series of consoles, Microsoft has kept the price of its 360 in the same ballpark, but Sony's PS3 sets a bold price strategy that seems to price it out of the mass market.

Conversely, Nintendo is directly targeting volume sales by skipping expensive features on the Wii, hoping not only to be the lowest price option, but also attempting to broadening its appeal outside the youth market to a wider range of casual adult gamers.

Sony has valid reasons for giving the PS3 a high price. First, it allows Sony to differentiate its system with high end components, making it the luxury choice.

Sony also needs to make a profit, so it can't deeply subsidize console sales just to defend its position, the way Microsoft is. The rest of Sony isn't doing so well, so the PS3 has to be a profitable, long running hit, not just a placeholder consuming market share.

Further, the PS3 has to compete against the existing market leader: the PS2. Sony is now selling a slimmed down version the six year old PS2 for around $130. That allows Sony to offer the PS3 at a hefty high end price and still have a product to sell on the low end.

Remember that the PS2 is still selling in volume. Over the last year, the retread PS2 outsold Microsoft’s new Xbox 360: 11 million to 6 million.

Had Sony targeted the PS3 at a lower price point, it couldn't offer as much over the existing PS2, and the two products would fight over the same sales. With an extreme price difference, few people will be choosing between the two, but rather have clear in mind which one they want.

2 - High Definition Movies

Sony is also touting the PS3 as a Blu-ray player. Standalone Blu-ray devices currently cost over $1000, more than the PS3 itself. That makes the console an easy buy for consumers interested in HD movies, even if they are not gamers.

Bundling an HD capable player helps differentiate the PS3 over other consoles, and also builds a demand for Blu-ray movies and creates manufacturing economies of scale for Blu-ray devices.

Sony is aligned behind the new Blu-ray format, which competes against the rival HD-DVD. Neither has broad popularity or a significant installed base yet. Getting Blu-ray widely installed is critical for Sony, particularly after failing to gain traction for its past standards, including HiMD, ATRAC audio players, and the PlayStation Portable’s UMDs micro movie discs.

Opposite Sony is HD-DVD backer Microsoft. It has plans to offer HD movie playback for the 360 both with an optional HD-DVD player in an external box, and over the web through its online Xbox Live video store.

It’s still too early to determine how popular either Blu-ray or HD-DVD will become, or how many people will be excited about buying HD video online for downloading. However, it does play into the video game console wars.

Outfitted with Microsoft’s $200 external HD-DVD player, Xbox 360 is the same price as the PS3. Since it’s optional, 360 buyers have a choice, but that also limits the market penetration for HD-DVD.

Similarly, the core Xbox 360 systems can’t use Microsoft's online video store without an upgrade, because they don't come with a hard drive, which is required for downloading movies.

Microsoft’s efforts to make the 360 appear cheaper may end up a costly mistake; for whatever fraction of the 6 million Xbox 360s that were sold with a hard drive, there may not be enough online sales to support ongoing operation of the Live movie store.

After all, the minority of the MP3 market connected to PlaysForSure hasn’t been significant enough to support the flaccid sales and exploding media rentals of PlaysForSure music and movie stores. Napster is going out of business, and everyone else is losing money.

The online Xbox store may likely be blown over by Apple’s dedicated iTV device, which integrates with iPods and the iTunes Store, and leverages a market created to serve 60 million iPod users and deliver 1.5 billion downloads.

3 - Available Games

The tables are turned on Sony in software availability. Microsoft has had the Xbox 360 out for a full year, and it has a several popular games available. The PS3 doesn't yet offer any games that really deliver on its hardware features, although both the 360 and the PS3 deliver spectacular looking HD graphics.

Some developers have described the PS3's unique hardware as being more challenging to take full advantage of in building games, but others report that Sony’s development tools are great. Sony is leveraging open source development tools and protocols, including Sony’s own implementation of OpenGL, the direct rival of DirectX.

Since Sony's last game console had a half decade life span, it stands to reason that Sony expects to get some serious tread out of the new PS3. That means little for game players who want to play games now however.

At the same time, the excitement of the Xbox 360 has also had a year to cool off; unlike the PS2 in 2001, the 360 hasn't been sitting untapped for a year and just now hitting its stride. Microsoft rolled out the 360 with series of popular games at launch, but fewer original games have appeared since.

Players who buy games tend to blow through titles quickly, so the question that remains is: how well will Sony and Microsoft facilitate the development of new games that can maintain the interest of players going forward?

Both Microsoft and Sony have been criticized for creating hardware that just makes existing games look better; that's something Nintendo hopes to exploit with the Wii, which trades formulaic games with breathtaking graphics for simpler games that are more involving and fun to play.

Fun, playable games launched the explosion of arcade games in the early 80s. Those games had broad appeal and are still played twenty years later. The Wii shares its strategy for cheaper, fun game play with Apple's New Dual Processor Game Console and the potential for interactive TV games.

The Wii has around 60 games that will be available this month and 30 more will be available by the end of the year; only around 20 titles will be out for the PS3. The Wii also ships with a game: Wii Sports, while the PS3 only comes with a Blu-ray movie.

Wii games are $50, PS3 and 360 games are $60, although some popular 360 games are now $70. No included games means PS3 buyers will have to pay significantly more than $500 just to get started.

4 - Platform Development

In order to make the $4 billion it has lost in console gaming count for something, Microsoft needs to not only upgrade its existing Xbox players to the 360, but convert users from the market leading PlayStation.

However, the Xbox and 360 were released two years closer together than the PS2 and PS3, a factor that helps to retard the Xbox upgrade cycle. The majority of the original 24 million Xbox consoles are only a few years old, while far more of the 111 million PlayStation 2 users are ready to upgrade, given that their boxes are now several years old.

Still, Microsoft has only sold 6 million of the new Xbox 360s in the last year, which isn't an improvement over the pace of the first Xbox, and certainly not impressive given that, for the last year, it has only been competing against old PlayStation 2.

Sony actually sold 11 million PS2s this year, outselling the new Xbox 360 with its six year old, reheated box!

One of the lethal problems for the GameCube was that developers dropped support for it, citing low game sales. Still, despite rumors and to the contrary, GameCube console sales were very close to the Xbox.

5 - Market Share

Market share and unit sales and are important in a market where software title sales explode in popularity and then quickly fade out and need to be consistently replaced with new content.

The game consoles are all making a point of maintaining backward compatibility. That lets Sony’s PS3 benefit from the PS2's 111 million installed base.

Every PS2 sold displaces more of the market, making it even less likely that the Xbox will gain traction. However, if Sony fails to sell enough PS3s to create sufficient demand for PS3 titles, developers may continue to target the PS2 instead.

Part of the reason for Microsoft's Xbox sales being so low is that they have been largely limited to the American market, with only half a million ever sold in Japan. The PS2 sold nearly twice as many its first weekend in Japan, and Japan represents 20% of the Playstation's base. The Xbox lacks games that appeal to the region’s tastes.

It's hard to say how well the Wii will compete against the entrenched but expensive Sony PlayStation, and the heavily subsidized 360. It targets a different market and focuses directly on games; it doesn't even play movies at all. However, Nintendo is certainly not a rival to count out in the gaming market.

The Wii provides support for GameCube titles, which will may give them a second chance as more casual gamers try out the wildcard Wii. Nintendo has also sold 26 million of its DS handheld system, and 76 million of the Game Boy Advance, compared to the nearly 23 million PlayStation Portables Sony has shipped.

Early reports say that the PS3 is severely constrained by manufacturing issues related to Blu-ray, while the Wii is in good supply and selling rapidly... and that it’s a good, fun product. On its website, Nintendo has videos not just of Wii games, but clips showing players playing the games.

Wiivoluton

Nintendo plans to sell 4 million this winter. If Nintendo can maintain its strong initial sales, the Wii will make a solid platform with a shot at recapturing territory and leadership lost with the GameCube.

Nintendo has some obvious advantages: it clearly makes the highest hardware margins, allowing it competitive leverage to lower prices in the future and bleed sales of the 360 the same way Sony did a generation prior.

Unlike the PS3, the Wii will be available this winter. Most stores report having sold out their initial supply of PS3s, and do not think they will be getting more, while ongoing, volume shipments of the Wii are planned.

The Wii’s low price and unique features make it a likely accessory purchase for people who already have another game console, a computer, or a device like the iTV. Nintendo’s advertising attempts to appeal broadly to families and people who are outside the hardcore gaming market.

It's a hard race to call, but the people I've talked to have all expressed interest in buying a PS3 to sell on Amazon, but a Wii to actually play. If I can find one for sale, I’ll be getting a Wii too.

iPod vs Zune: A Buyer's Guide

Hacking iPod Games: How Apple’s DRM Works

Five Ways Apple Will Change TV: 4

Apple's New Dual Processor Game Console

This Series

Tech: Video Games

What do you think? I really like to hear from readers. Leave a comment or email me with your ideas.