Monday, January 13, 2003		Feature

Mighty get mightier in games world
Andy Goldberg

A Nintendo Co employee displays the company's new Game Boy Advance SP (L) and the current version in Osaka, western Japan. — Reuters

FIFTEEN-year-old Trevor Thomas really wanted a bunch of new video games for his Xbox console for Christmas. His father, who is struggling to keep his finances afloat in the midst of the tech downturn, had other ideas.

He spent $ 50 to buy Trevor an online kit that allows him to play the games he already owns against players from all over the world. The gift worked out cheaper, and gave Trevor a renewed interest in his year-old system and games, which in teenage time had become positively ancient.

The experience of the Thomas family reflects a nasty turn of events in the booming video-game industry. The sector grew by 43 per cent in 2001, its U.S. revenue of $ 9.1 billion overtaking the value of box office earnings for the first time in history. But in 2002 the rate of growth slowed dramatically, and analysts now expect sales figure to be below the 26 per cent increase they had originally forecast.

The figures could indicate that the end of the video game boom is in sight. But they also portray an industry that looks ripe for consolidation as the power to create expensive blockbusters becomes increasingly concentrated among a handful of huge firms. This trend has been exacerbated by a sense of ennui among the male adolescents who form the core game buying audience. They traditionally buy games in abundance in the year following the release of a new console, but Sony’s Playstation2, Microsoft’s Xbox and Nintendo’s Gamecube are all well past that mark.

That could change in the first half of this year when analysts expect all the three companies to revamp their lines and lower prices. The aim is to bolster enthusiasm well before the launch of genuine next generation consoles in 2005.

These are expected to boast vastly more powerful graphics and super-realistic sound. Until then however, Microsoft and Sony are expected to tweak their existing consoles with upgrades that effectively turn them into personal video recorders. Nintendo, which is struggling with low sales of its Gamecube, is expected to drop the price to below 100 dollars and increase the portability of the console.

But that might not prove enough to save many of the video game publishers who are struggling to compete in a harshly competitive sector. They are finding that with most big hits coming from just two companies, gaining the attention of retailers and consumers is becoming ever more challenging. Electronic Arts, based in Silicon Valley’s Redwood City, had 2002 fiscal revenues of revenues of over $ 1.7 billion last year, and projected sales over the most recent quarter of some $ 1.1 billion.

The company, which sees itself as the Disney of interactive entertainment, has become the world’s biggest video game publisher by developing a roster of family friendly and sporting titles such as FIFA Soccer, Madden NFL. Harry Potter, and James Bond. It accounts for almost 20 per cent of all games sold. New York’s Take-Two publisher is the other gorilla of video games. It dominates the guts and gore segment with its Grand Theft Auto 3 and Grand Theft Auto: Vice City, which was the numero uno and number 3 sellers through October 2002.

Besides these two, only Microsoft, Nintendo and Activision managed to get best selling titles last year. Activision was one of three major publishers to revise earnings figures in late 2002, along with THQ and Midway.

Meanwhile specialty game stores like GamePro and Electronics Boutique also warned of reduced sales over the holiday. The cause was not only a generally weaker economy but also increased competition from major chains like Target and Wal-Mart that have considerably increased their offerings.

"The ‘haves’ are gaining at the expense of the ‘have-nots,’ " wrote UBS Warburg analyst Michael Wallace in a recent report. "What is becoming clear is that companies with top titles - Electronic Arts and Take-Two - are taking market share from the others."

With consoles in more than 60 million homes worldwide, that trend is likely to continue. Casual gamers are more likely to buy games from well promoted companies like EA, which with about a billion dollars of cash reserves also has the war chest to acquire and develop hugely expensive hit titles. Analysts predict a wave of consolidation as companies’ gear up for the complex and expensive task of creating software for the consoles due out in 2005. The wave has already started in Japan where Square and Enix announced a merger late last year.

"The next-generation game consoles are already on the horizon," Square President Yoichi Wada told Bloomberg News earlier this month. "We have to be ready for that."