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Video Gaming's Hardware Hangup

By Erin Chambers It's a gamers delight this fall as the makers of perennial best-sellers Doom (Activision; ATVI), Halo (Microsoft; MSFT), Grand Theft Auto (Take-Two Interactive; TTWO), and Madden NFL (Electronic Arts; ERTS) are all set to release new versions of these fan favorites before the holidays (see BW Online, 8/23/04, "No Softening in Gaming Software"). But even with the expected fourth-quarter boost from these new games, the overall gaming market -- including both hardware and software -- will probably be flat this year. London-based games researcher and newsletter publisher Screen Digest recently estimated that total sales for 2004 will reach $18.2 billion, nearly even with 2003 numbers.

The main reason for the lack of growth: Old hardware. Consumers are awaiting a new crop of consoles scheduled to come out in 2005 and 2006. Ben Keen, research director at Screen Digest, points out that the industry is cyclical by nature because gaming consoles have a "built-in limited lifespan" of around three or four years.

Once console sales peak and prices begin to drop, game makers often flood the market with new software releases, hoping to capitalize on increased availability of low-price hardware. And that's just what Electronic Arts and its ilk are doing now. Gaming consoles such as Microsoft's Xbox and Sony's PlayStation 2 have been on store shelves for three or four years now, making price cuts and flat-lined hardware sales inevitable, says Keen.

LESS BUZZ. Signs are rife that the console market is losing steam. Nintendo (NTDOY) recently slashed the price of its handheld Game Boy Advance SP by 20% in Japan, while Microsoft and Sony (SNE) made similar cuts to their machines. "To really get that big boost, [the gaming market] will require new, improved and more powerful gaming consoles," said Zandl Group President Irma Zandl. "Without that, it's not going to grow."

Zandl's New York-based consumer research indicates that in 2002, 30% of 8- to 12-year-olds were talking about wanting new gaming systems, compared to just 11% this year. The trend is similar among teens and 18- to 24-year-olds.

This is probably just a temporary slow-growth cycle. Indeed, the overall market -- which Screen Digest defines as video games for personal computers and consoles such as the Xbox and PS2, as well as hybrid education/entertainment software -- has shown significant annual sales gains since the late '90s. "There's plenty more scope for strong sales within the current console cycle," said Screen Digest's Keen in a statement. "We expect the launch of exciting new handheld machines to give the market a huge boost ahead of the next generation of TV-based consoles."

SELECTED WINNERS. As with most cutting-edge electronic devices, smaller is better. Sony plans to debut its handheld PlayStation Portable (PSP) in Japan later this year. Nintendo will compete with the new dual-screen DS, a revamped handheld with multiple-player and text-messaging capabilities through a wireless connection. And in early September, Nokia (NOK) announced worldwide shipments of its newly redesigned N-Gage, a combination cell phone and handheld gaming device, have hit the 1 million mark.

But until these and other new hardware offerings build up a critical mass of users in 2005 and 2006, many consumers in the innovation-driven industry will continue to buy new games -- or newer versions of old ones -- for the consoles they already have. That means the boutiques that make the most popular games -- such as Electronic Arts and its Madden NFL series -- are in for a very happy holiday season.

For most of the hardware makers, however, the real celebrating won't happen for another year or two. Chambers is a reporter for BusinessWeek in New York

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