The big battle in video games will be fought this year, between Sony, Nintendo and Microsoft. At the heart of this battle is the console. Between Sony and Nintendo, the installed base of video game consoles exceeds 110 million. Microsoft is a late entrant, but armed with plenty of cash and near-infinite staying power. Like what Microsoft has done so well in the past, it has focused its efforts on the developer community – in this case, the game creators who create the “blades” to be used with the razor (the console).
The console battle is important because the game console can tomorrow become not just the gateway to the Internet, but also the centre for home entertainment. With wireless and broadband infrastructure coming into place, it is also possible that gaming will go outside the core and become much more of a mainstream application.
Writes Henry Blodget of Merrill Lynch on Micrsoft’s strategy:
The video game market has network effects that provide significant advantages to the first mover within each generation of consoles. Sony, with the Playstation 2, has first mover advantage in 128-bit game consoles. We believe that this, combined with Sony’s installed base of PS1 users, gives Sony a major advantage. The success of game consoles is heavily dependent on the quality and quantity of the games available to run on them. As long as Sony’s installed base of PS2s is much larger than Xbox’s, game developers will be incented to build games for the PS2 platform, simply because they can sell into a larger addressable market.
Microsoft will attempt to offset this “second mover disadvantage” by leveraging Xbox’s superior technical specifications and more “friendly”development environment. In the video game business, games drive console sales. Microsoft has signed up 200 developers, and expects to have 20 games available at launch. In contrast, Sony has 100 titles today for the PS2, and expects 188 by March 2001 and 500 titles by March 2002. Xbox clearly has some ground to make up. However, Xbox’s PC-based development environment (which is easier to use than the proprietary environments of Sony and Nintendo), along with its leading technical specifications, should draw developers into the fold. Moreover, quality of titles is arguably just as important as quantity. If only a handful of the 20 Xbox games turn out to be hits, then Xbox may be able to erase much of its second mover disadvantage. Yet even if the Xbox experience is truly “better” for developers and gamers, however, we believe that overcoming Sony’s installed-base advantage will be challenging.
So, to win the consoles battle, Microsoft needs to ensure availability of “killer” games. This is a different situation from the PC market, wherein Intel made the chips and Microsoft the software. In this case, Microsoft is “Wintel” combined, but up against formidable incumbents.