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Console wars near climax, to industry's relief

After years of promises and high expectations, consumers will finally be able to purchase next-generation video game consoles as the industry's painful transition to the latest technology comes to an end later this year.
/ Source: The Associated Press

After years of promises and high expectations, consumers will finally be able to purchase next-generation video game consoles as the industry's painful transition to the latest technology comes to an end later this year.

In the fall, Sony Corp.'s PlayStation 3 and Nintendo Co.'s Wii systems are expected to join Microsoft Corp.'s Xbox 360 on store shelves — a relief to game publishers who have seen sales plummet as consumers waited in recent months for the latest gear.

But as the hype is replaced by actual gaming systems, the latest "console wars" will enter a new phase, potentially shifting the balance of an industry whose total sales top Hollywood's domestic box office receipts.

During this week's Electronic Entertainment Expo in Los Angeles, the big three console makers gave an important glimpse into the future — and further fueled questions about which maker will come up on top.

Will Sony's current dominance continue with its PlayStation 3 or will its high price tag send fans looking elsewhere? Will Microsoft's early release of its Xbox 360 snag it more market share? Or will the intuitive remote control that's offered with Nintendo's Wii prove to be the greatest draw?

On the exhibition floor, at least, Nintendo's sprawling booth appeared to be the hit of the show. Throngs of attendees crowded in lines that snaked around the Los Angeles Convention Center in order to get a first try at Wii games.

But Colin Sebastian, an analyst with Lazard Capital Markets, said he was particularly impressed with the inroads Microsoft has made in an industry Sony dominated with its PlayStation 2. He predicted Microsoft and Sony each grabbing 40 percent of the next-generation market, with Nintendo keeping a strong hold on the remaining 20 percent.

In the more distant future, the video game business will only improve, predicted Doug Lowenstein, president of the Entertainment Software Association, which organizes E3.

"The truth is it's not terribly important how many units of hardware and software are sold in 2006," he said. "Don't get me wrong — it is important to individual companies — but it is less important for the industry collectively. The real issue is how this year positions the industry for the future. That is, after all, what transitions are all about."

And in that regard, most see a lot of opportunity.

Shane Kim, general manager for Microsoft Game Studios, also predicted strong growth in the coming years.

"I think the signs are all positive," he said. "With the competition now finally entering the market later this year, I think it will start to remove that uncertainly so customers will be able to make some better decisions, because some have been waiting, frankly, wondering 'What are my options going to be?'"

According to market research firm NPD Group, overall video game sales dropped 5 percent to $7 billion in the U.S. last year as gamers waited for the new systems. Top game publishers such as Electronic Arts Inc., Activision Inc. and THQ Inc. have lost millions recently due to slow sales.

But tough times might not go away so quickly.

Availability, which plagued Microsoft's Xbox 360 last fall, might turn out to be a continuing problem, particularly for Sony. With only 4 million PS3 units expected to be available through the end of the year, analysts and industry insiders already predict there will be shortages.

Consumers also could balk at the price tags, particularly on the PlayStation 3.

At its Nov. 17 launch, Sony will offer a $499 model that features a 20 gigabyte hard drive but not some important features such as a special output for high-definition video, a memory card slot and built-in wireless. Buyers will have to cough up $599 for those extras, plus a more spacious 60 gigabyte disk drive.

Though some critics say the console is too expensive, Sony has insisted the prices are suitable considering what's under the hood.

"I think that it just demonstrates that the early adopters of this technology are much less price sensitive," Sebastian said. "You have a lot of first movers who are going to buy whatever Sony ships."

The PS3 will pack a Blu-ray disc drive for displaying high-definition graphics and movies, and a high-speed "Cell" processor promises high performance inside the sleek black or silver case.

The PS3 also has a controller that looks much like the one for the older PlayStation 2, but can be moved around to control action on the screen.

Control is the central element of Nintendo's Wii (pronounced "we"), where button-encrusted controllers have been replaced with TV-remote style wands players simply wave around to hit tennis balls or steer off-road racers.

Nintendo officials said they're focused on providing a platform for unique games rather than a high-tech, do-it-all networked media hub. The company has kept quiet on price, but some analysts have estimated it to cost between $200 and $300.

"What we are trying to do with the new machine is completely different from what Sony and Microsoft are trying to do," Nintendo Co. President Satoru Iwata said.

Microsoft, meanwhile, continues to offer the same two flavors of its Xbox 360, which debuted last November.

A "Core System" model without a hard drive comes in at $299, while the $399 model adds a hard drive but still lacks built-in wireless receiver (which remains a $100 add-on accessory). This week, the company said an HD-DVD drive for movies would be available by the end of the year.

The key element to which system succeeds will be the video games themselves.

While the manufacturers generally sell the consoles for a loss, they recoup the costs through licensing agreements and sales of software and accessories. Online capabilities are adding new revenue streams such as micropayments for additional game chapters and virtual items.

Each manufacturer announced a lineup of exclusive games that includes "Super Mario Galaxy" for the Wii, the shooter "Gears of War" for Xbox 360 and the frenetic action game "Heavenly Sword" for PS3.