Friday, January 28, 2005

The Next Generation

As the next-generation console information (and misinformation) starts to ramp up, I wanted to discuss what's likely to happen.

First off, these are the lying times. Microsoft, Sony, and Nintendo are all jockeying for position with hints about product announcements and hardware specs. They will be leaking all kinds of disinformation about announcements and specs in the next two months, and you can ignore almost all of it. What you can depend on is that PS3 and Xbox 2 will both be at E3, both will almost certainly be playable (Xbox 2 100% certainly, PS3 75%), and only Microsoft will announce the actual launch date for console. Sony will wait. If they don't, they're much more concerned about Microsoft than anyone expected.

Nintendo's next-gen console will probably be there as well. That was just announced in the last day or so, and I don't know if that was planned or just panic, so that will take a few weeks for the details to play out.

I've heard several industry analysts say that Microsoft is making a mistake releasing the Xbox 2 in 2005. That's just wrong. Their competitive position certainly wouldn't be stronger after twenty million people bought the PS3. Assuming decent software support, the company with their next-generation console out in fall of 2005 has a HUGE advantage over the competition in the United States.


Right now, there is an installed base of about sixteen million DTV's (digital televisions, whether ED or HD) in the United States. Over seven million of those, though, were sold in the last year, which was a 75% increase in sales over 2003. It's entirely reasonable to project the installed base by the end of 2005 at around thirty million. And if somebody has one of those spiffy sets, which console would they buy--a next generation console with 720p support for EVERY GAME, or console with four-year old technology and only occasional 480p support? It's a no-brainer next Christmas--if Microsoft gets the console out in time for the holidays.

I've said this before, but Microsoft's strategy is one of attrition over time. They make mistakes with a first-generation product, whether it's software or hardware. They made plenty of mistakes in the first year with the Xbox. However, they made very few after that. For a first generation console to have a larger installed base worldwide (19.9 to 18.8 million) than Nintendo's Gamecube is a remarkable accomplishment. And while Microsoft is getting hammered in Japan, they're doing extremely well in both the U.S. and Europe. They also have a 1.4 million user installed base with Xbox Live to provide an additional revenue stream.

All that Sony has going for it in the U.S. right now is the Grand Theft Auto series. That's how much momentum they've lost in the last two years. So as incredible as it might sound, Sony is as vulnerable as they've been since the PS2 was introduced in October of 2000.

For the last eighteen months, Sony has been posturing that there was no need to release the PS3 until 2007. And analysts acted like that idea was mother's milk. This proves conclusively that being an "analyst" does not require you, in any way, to actually "analyze." Sony announced quarterly results this week and revenue from their videogames division was down twenty-seven percent year over year. That's staggering. Sony blamed it all on hardware shortages, but a shortfall of that magnitude can't be explained away so easily. The real problem is that the PS2 has lost the buzz, and it's not coming back. They waited too long on PS3, they're in damage control mode, and the next year is going to be very ugly for them.

I'm not even mentioning Nintendo because they have no idea how to introduce a new console, at least in the U.S. I believe that Nintendo is a victim of an unwavering belief in their own omniscience. They hold up fried shit on a stick and everybody screams "It's Nintendo! Brilliant!" Sometimes they are truly brilliant, in deep and staggering ways, but most of the time they're odd and strange and relatively ineffective. That's a separate discussion, but I don't think anyone believes that they will be second in the next generation, at least not outside of Japan. In the United States and Europe, they're going to be third--and possibly a distant third.

So what does Microsoft need to do between now and the end of the year?
1. Get Xbox 2 out for the holidays in 2005.
There's no wiggle room on this. The console needs to be out six months before PS3. That would allow a sizable user base to develop before there's another next-gen option.
2. Hit the price point.
Consoles are incredibly price-sensitive. There has to be a barebones version of the console for $299. Period. Having other versions with hard drives and other functionality for $399 or whatever is fine, but if the $299 price point isn't hit, the launch fails. And $249 would rock the industry.
3. HD support for all games.
Again, there's no wiggle room here. To decisively tap that thirty-million base of DTV's, high-definition must be supported in addition to standard-definition. It can't be developer-optional.
4. Launch the system with top-quality sports games.
Sports games are system sellers.
5. Launch the system with at least one top-quality FPS.
Again, these games are system sellers. A "Halo 2 Redux" with 720p support would work.
6. Manage the software stream.
Ten to fifteen titles at launch is adequate, particularly if there are several five-star titles, but there needs to be a steady stream of software behind that. There needs to be a significant, high-quality software library available before PS3 launches.
7. Buy an exclusive on Rockstar games.
This one's optional, but it would be a terrific move. I don't know what Take-Two's contract with Sony stipulates, but it appears that their relationship has cooled. It would be a huge boost for Microsoft to have Grand Theft Auto titles be exclusives on the new console for the first six months. Microsoft is drowning in money--it doesn't matter what it costs. Just scratch the check. And if you can make sure that EA isn't pissed off, buy Take-Two. It means you acquire Rockstar (the five-hundred pound gorillas of video games), the best sports developers in the video game industry (Visual Concepts/Kush), as well as PopTop (with the genius of Phil Steinmeyer). Yeah, I know you get all kinds of baggage by acquiring Take-Two (dodgy accounting practices, SEC investigations, and who knows what else), but again, you've got mountains of cash to survive all that. SCRATCH THE CHECK.

Just remember that half of what you hear from these companies in the next two months will be posturing and disinformation. They will float trial balloons to see how they're received. And they'll say some things just to screw with each other. Right now, though, my best guess is that Microsoft will be the first company to officially announce their new console, and it will happen at the Game Developer's Conference on March 9. They're giving a keynote address for the conference titled "The Future of Games: Unlocking the Opportunity." That seems too obvious an opportunity to pass up.

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