Next Generation of Game Consoles Set to Shake up Gaming Industry

As the Next Gaming Cycle Approaches; Developers, Publishers, Peripheral and Hardware Manufacturers Set Sights on New Opportunities.

By: Ann-Marie Fleming
July 2005

As the gaming industry prepares for the launch of the next generation of gaming consoles, discussions are heating up as to the potential impacts that may ensue. Previous transitions have revealed that entrance into the next gaming cycle often results in higher costs, bigger budgets and larger production teams. As the current gaming cycle comes to an end and the industry prepares for the next generation, these impacts are believed to reach new levels. As Glenn Entis, Electronic Arts' (EA) Vice President and Chief Visual Officer explains, "It's a time of potential dislocation because there is discontinuity. Costs definitely go up because there is new technology and a lot of new techniques involved. Part of the issue is that you have to accelerate experience. Game teams now have to basically master new techniques that they have never used before, things which by definition we have no experience in, and that require a quick time to market for each launch."

Companies that have learned from previous transitions adjust and adapt to ensure that the next cycle proves beneficial. For many this approach becomes one of safety, as developers and publishers turn to genres, titles, themes, licensed products and brands that have proven successful, many times avoiding new and riskier directions. According to Philip Holt, Senior Vice President of Product Development for THQ, "What it means is that creative risks are minimized because of the dollar amounts involved. People look to things that have worked and try to offset some of the risks associated with increasing development costs by trying to recreate that formula that has worked for other people."

Confident that transitions are having a positive impact on the industry is Kathy Vrabeck, President of Activision Publishing who explains, "We always end up with greater household penetration of video gaming systems than we did in the previous cycle, so this is really good for the industry." Activision who experienced great success during the last transition, attributes their achievements to the Company's realization that the older platforms stay around for a while and bring with them lower development costs, reused technology, big brands and big sales, which can be utilized to offset the investments being made in the new technologies, according to Vrabeck. THQ believes their broad portfolio will allow them to continue to do very well on the PS2 as well as with their family oriented brands. "As price points come down and a new part of the market enters the console space at a sub $99 price point, a lot of our games are going to sell very well" states Holt.

PC Industry:

Another trend associated with console transitions explains Kevin Bachus, President and Chief Operating Officer, Infinium Labs, "is that game publishers tend to gravitate towards the PC market as a form of safe harbor while things are shaking up, because there is not going to be enough of an installed base on the consoles for the first year or so to support the kind of investment that goes into that." Infinium has turned to the PC arena to tap into the vast library of content available to fuel their on-demand online game service and product called Phantom® (see Figure 1). Accessible through their broadband on-demand service and receiver, the Company offers consumers access to a large selection of high profile and popular games released for the PC. These releases, however come without the challenges associated with PC gaming such as viruses, driver conflicts, crashes, and other problems associated with the fact that the PC is not a standard platform, explains Bachus. Over the past several years, THQ has made a sizeable investment in the high end PC market, deciding to enter this arena, according to Mr. Holt, "through genres that command the most market share, acting as a bridge strategy between the console transitions."

Figure 1: Phantom® Lapboard and Receiver

New Industry Opportunity:

With roots in PC gaming, Activision has a lot of experience in online play, and therefore they are experimenting throughout this cycle, as Vrabek describes, with an eye on what gamers want to do while playing online through their consoles. For this reason consumers can expect to see more online features in the Company's games in the next cycle. EA sees new doors opening as a result of the new consoles according to Entis, who believes that the industry is nowhere close to market saturation yet. "There are a lot of reasons to think that next generation games will appeal to a much wider audience than games in the past. There will no longer be a barrier to the casual audience, they will find more things to like that will draw them to the new consoles." In addition, EA sees continued attraction for hardcore gamers as they are drawn to improved graphics and advanced game play.

Gaming Experience:

As the industry moves through each transition, improvements in the level of graphics have progressed consistently through each cycle, with this next generation of consoles being no exception. However, beyond the graphical enhancements, discussions have arisen regarding measures and opportunities for the evolution of the gaming experience itself. For some this evolution towards a more true to life, and sense driven next level experience begins with the next generation consoles and their potential extension of gaming boundaries. THQ's Philip Holt sees the new consoles as moving in the right direction towards a more realistic gaming experience, "Graphics are increasing at the same rate, but the perceived value that this brings to the entertainment experience is diminishing. It is not just about the visuals anymore. Next gen is going to be all about behavior. It is going to take the high level graphics and add to the experience by not just making things look real, but by making things behave like they are real. Behavior will be animation; it will be Artificial Intelligence, all the things that bring the visuals to life. Behavior will then become a new tool that designers will be using that will change their entertainment experiences."

Working towards increasing the sensory experience in game play is Immersion Corporation, a leading developer and licensor of touch feedback technology. Immersion combines sight and sounds with touch to create a rich environment and intuitive understanding of what each player is trying to do. As Dean Chang, Chief Technology Officer and Vice President of Gaming explains, "Many of the areas where technology continues to advance are primarily on the graphics axis with some progress on the sound axis, but little is happening on the tactile touch axis. For example, when you play a golf game or baseball game today, you swing your club or bat by pressing a button and then look at the screen to see where the ball went. However, in the real world, you know at the moment of impact whether you hit the ball in the sweet spot or shanked it off the tip of the club or bat and even know if it was a good shot or good hit without even looking to see where the ball went. Further advancements in graphics don't address this problem." Immersion believes that their haptic technology, which is currently the industry standard, has the ability to bring players closer still to the real experience when consoles and associated games provide for such opportunities (see Figure 2).

Figure 2: Logitech Driving Force Pro with Immersion TouchSense Technology:

Nintendo's upcoming console under the code name ‘Revolution', is rumored to have the potential to fundamentally change the gaming experience with particular focus on their upcoming controller, which is believed to have the ability to let players configure layouts to suit their playing styles. According to Chang, the shift towards a different gaming experience can potentially result in the ability to reach a broader audience by offering simpler ways for players to interact with the games

Market Outlook:

It is typical during console transitions for the hardware makers to initially incur losses due to high manufacturing costs and low price points, however the gains from video game sales are anticipated to make up for these preliminary negative returns. Ziff Davis Game Group Research anticipates that gamers will purchase approximately five games within the first ninety days after they purchase a next generation console. According to a recent report from Merrill Lynch Japan, Sony's pricing of the Playstation 3 will cost the Company approximately $1 billion during the first year of sales. However, during the last generation Sony experienced an initial loss, which was overcome by software sales and experts expect this pattern to repeat itself. In a report completed by Kagan Research, by the year 2010 it is estimated that 54 million U.S. households will own at least one video console. U.S. video game sales, which according to the report totaled $10 billion in 2004, are expected to rise to $16 billion by 2007. The bottom line is that there are significant expectations for continued growth of the industry through the next transition and beyond.

As the next gaming cycle approaches with the upcoming introduction of the next generation of consoles, Entis reveals, "Some companies will thrive on these challenges and some will stumble. Every transition has seen some shifting of positions in the market share leader list, which you can attribute in part to decisions about how companies prepare for and time their entries for new consoles. It is a time of risk, always a time of change, which means it is always a time of new opportunities for some companies and possible missteps for others."

Ann-Marie Fleming
Ann-Marie Fleming completed her MBA in the United States, where she attended Webster University. She also holds an Honors B.A from the University of Toronto. She has over fifteen years of experience spanning the brokerage, banking, and mortgage industries within the United States and Canada.

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