It's well known that for most publishers, a significant chunk of their annual revenue comes during the critical holiday shopping season. This year, the fourth quarter is particularly important because of the launches of two new consoles. How will the Wii and PS3 stack up against the Xbox 360, which has a 12-month head start, this holiday? Which publishers will benefit? And who will dominate at retail?
To get some answers/predictions, GameDaily BIZ rounded up some of the leading interactive entertainment analysts to share their viewpoints on the next-gen battle. Participating in this panel are Michael Pachter, Wedbush Morgan Securities; David Cole, DFC Intelligence; Colin Sebastian, Lazard Capital Markets; PJ McNealy, American Technology Research; Jeetil Patel, Deutsche Bank Securities; and Anita Frazier, The NPD Group. (Note: Frazier couldn't answer all of the questions because NPD typically does not "predict.")
Which of the big three (MS, Sony, Nintendo) do you think will win out this holiday season and why?
Pachter: I think all win in different ways: Microsoft wins because of the shortage of PS3s and Wiis, and will be the default holiday gift; nevertheless, they will likely not perform as well as Sony's PS2 did in holiday 2002 (4 million PS2s sold in November/December 2002 in the U.S.). Sony will do exceedingly well with the PS2, with a ton of software support for the console and likely software sales of $750 - 800 million in November/December, far above the level of the Xbox 360 software sales. Nintendo will surprise people with strong handheld software sales, and the Wii will consistently sell out. I think the big upside is accessory attach rates, as I believe that most Wii buyers will buy at least one extra controller.
Cole: I really don't think this holiday season will be about a "winner." It is really just about getting the new products introduced. Consumers will take some time to pick out the winners and the losers. Of course, I am sure come January everyone will be trying to push the fact that they were the "winner." But I think we will have to wait at least another year. We won't know if the Wii has legs until 2007/2008 and I think we will need to wait until at least the PS3 and Halo 3 go head-to-head to make major judgment calls.
Sebastian: From a pure numbers perspective in the next generation market, Microsoft will have the biggest holiday this year. The supply of 360s at the retail level will be much improved over last year, and Xbox Live is producing some interesting network effects for the business, and finally there will be a decent number of games hitting the shelves.
As for Sony, when you see bidding for PS3 preorders reaching $3000 and higher on eBay, it's easy to imagine that they will sell whatever they can deliver to stores this holiday. But given the inevitable shortages of supply, I'd suggest that PS3 fans line up early. And also don't forget, if you include the resilient PS2 business, Sony will sell more console hardware and software this holiday than anyone else.
But, Wii is the clear sentimental favorite among gamers this year. For one, Wii has the potential to bring Nintendo back as a leader in the console market, and two, the Wii's unique game-play is unlocking a lot of creativity on the development side. I have no doubt that the Wii will sell-out at retail stores this holiday, and if you're Nintendo, despite the fact that the software looks great so far, the one thing keeping you up at night is just hoping to meet everyone's high expectations in terms of using the Wii-mote and the unique game-play.
McNealy: Xbox 360 first, Nintendo Wii second, Sony PS3 third; plain and simple because of availability.
Patel: Xbox360 - Gears of War, Call of Duty 3 and other content should help drive HW sales. Nintendo's unique gameplay and titles like Zelda should help sell those HW units.
PS3 will be a supply constrained situation, so by default Microsoft will do better.
Which publishers do you believe stand to benefit the most or lose the most this holiday?
Pachter: Ubisoft has the greatest number of Wii titles, and will be most impacted by the launch. The others are pretty balanced (with the exception of THQ, who has no PS3 titles), and most will make their quarters based upon strong PS2 software sales. I think that Take-Two has a weak lineup; THQ has an average to good lineup with a very strong catalog title in Cars; Activision has an average lineup with a sleeper in Guitar Hero; and Electronic Arts has an average lineup. No real surprises.
Cole: The console transition period can be a tough time when established players stumble and new players emerge. That being said this holiday season seems to be more about the big publishers finding incremental sales for some of their established franchises on the new systems (products like Madden NFL 07 and Call of Duty 3). For most products, the installed base of the new systems will be too low to make a major difference. Some big titles like Final Fantasy XII, Guitar Hero II, The Sopranos and others are appearing only on the established PS2.
Sebastian: The launches of the new consoles can't come soon enough for the publishers. With few exceptions, the big publishers will all have games ready at launch, and the software we've seen of late on the PS3 and Wii is looking good. EA, Activision, UbiSoft and THQ all have multiple titles launching this holiday on new platforms, with THQ more leveraged to Wii, and less leveraged to the PS3. In general, with development costs rising this cycle, and gamers demanding more immersive experiences, including online functionality, it continues to be a tough market for small developers and publishers.
McNealy: We like the holiday lineups from Activision and Electronic Arts in particular, who both have some popular franchises coming out with new iterations this holiday.
Patel: Biggest beneficiaries remain companies such as Activision and UbiSoft, due to a narrow lineup of quality titles. Biggest losers appear to be, at the margin, EA, but slightly difficult to call since they have the broadest lineup of any publisher this holiday.
How important will pricing be to the battle of the consoles this season?
Pachter: Pricing on the consoles is largely irrelevant, since the PS3 will be supply constrained and will sell out, and the Wii could sell many more units at their low price point if they could deliver them. Because demand will exceed supply, pricing doesn't matter.
Frazier: I don't think pricing will be an issue this holiday. I think that the two new systems (the PS3 and the Wii) will sell out, since demand will most definitely exceed supply. I think that pricing will be an issue moving forward, and many consumers we surveyed for our "next gen" report said they will wait for at least one price cut. But there is still likely to be an inventory deficit (relative to demand) in the early months of 2007, so we won't see the pricing issue come into play until that equalizes a bit.
Cole: This season it is of very little importance. Unit shipments are low enough that demand could exceed supply. Long term it is a very big deal.
Sebastian: Not very important this season. Hardware prices will become a bigger issue after this year, when the manufacturers begin to battle over market share, and as more price sensitive consumers enter the market.
McNealy: I think that the hard-core gamers have been saving up their $600 for a PS3 for a while, and with limited availability, price won't really come into play for that console. The Wii pricing will be attractive to those gamers who can't find a PS3, and the Xbox 360 pricing may look more palatable given games such as Gears of War only available on that console.
Patel: Pricing is already having an impact, as Xbox360 HW is underperforming the Xbox by 7% and PS2 by 30% at the same stage of the cycle (11-12 months). Consumer affordability needs to be in the $300 [range] early in the cycle to drive adoption. Nintendo is in the sweet spot, Microsoft close, and Sony at $600 is not in the race for mass market dollars for 2 years.
What impact do you expect the next-gen DVD formats (HD DVD vs. Blu-ray) to have?
Pachter: Blu-ray will probably determine whether Sony finishes first or third. If Blu-ray is the standard, a lot of people will be willing to pay an extra $100 for a box that works like the 360 and lets them watch movies; if not, they won't.
Frazier: I believe technical capabilities are a means to an end, and not the end itself. I don't think consumers who don't want to play games will go out and purchase a gaming system for its particular DVD capability. I firmly believe that the key to the console battle is content. The platform with the most compelling content will end up ahead.
Cole: Not much in terms of games. I really don't think game players are making purchasing decisions based on media format.
Sebastian: Not much of an impact this year. Sony clearly views Blu-ray as one of the key strategic priorities of the PS3, but ultimately market share will be won by having the most popular games. But we'll have to wait a year or two before we know whether Blu-ray offers a better gaming experience.
McNealy: I expect that Blu-Ray will be crucial to the messaging for the PS3 over the next few years because when you move beyond the hard-core gamer market, the multi-functionality of the PS3 will help drive sales. We expect to hear more from the overall Blu-ray camp over the next year, and the louder they get, the easier it'll be for Sony to sell the PS3 at $599.
Patel: Increases functionality of the box and makes for a more interesting entertainment solution. Again, two things to consider: pricing will be a sticking point with consumers while longer-term consumption of entertainment through the device may be challenged a bit by next-gen DVD, film/television, casual gaming through the boxes.
Who do you anticipate to have the biggest retail presence this year: MS, Sony or Nintendo?
Pachter: Sony will have the biggest retail presence because of PS2, with PSP and PS3 filling in nicely. Microsoft is a single platform company, with very little Xbox content on the shelves and a lot of 360 titles. Nintendo will have very few GameCube games, a lot of GBA/DS titles, and a handful of Wii titles, so Nintendo second.
Frazier: The games industry is really on a roll, and I expect that it will benefit all three hardware manufacturers from a retail support standpoint. While there will no doubt be a significant inventory deficit with regard to the PS3, the PS2 is still selling very strongly, and at its current price point is an attractive gift option, and I think retailers recognize that. Nintendo is certainly doing extremely well with the DS, and since the Wii is on several top "toy" lists for the holidays, I see retail support behind it as very strong. Finally, the 360 has ramped up nicely, and its inventory situation appears to be resolved. If there is limited inventory available for the two new systems, I can see retailers really getting behind the 360 to maximize holiday sales.
Cole: Sony has been the powerhouse at retail and starting this holiday season they will have three active systems being promoted. Nintendo has the Wii, the DS and to a lesser extent the GBA. This gives them a solid presence. With Microsoft the focus is pretty much all on the Xbox 360. GameCube and Xbox will probably be MIA at retail so [the] advantage [goes to] Sony when it comes to retail presence.
Sebastian: If you add up current-gen, next-gen, and handheld products, Sony will have the biggest presence this year, and will support its business with a $70 million marketing campaign.
But each of the three manufacturers will be very visible as they build awareness for the new consoles and attempt to outshine each other with the "cool factor." Retailers such as GameStop and Game Crazy will have kiosks or demo units of new consoles, so the battle at the store level has certainly begun.
McNealy: Define "biggest" - Sony and Nintendo are each doing kiosks, and Microsoft has had them for a year already.
Patel: Biggest retail presence will likely come from Nintendo, due to the lower price points and mass market positioning of the Wii.
Is missing the holiday in Europe this year a big deal for Sony's PS3 or has that been overblown?
Pachter: Missing holiday in Europe is a problem for Sony simply because the promised a worldwide launch in May. Had they never promised, it would have been minor, but they permanently damaged credibility at retail with their promise/retraction. I think they should have planned better.
Cole: Sony has dominated Europe and they probably feel they have more time to wait for that market to develop. I think their big mistake was saying they were going to be out in Europe holiday 2006 and shortly after announcing a delay. They just set themselves up to create a bad impression and shake confidence.
Sebastian: To be fair, Sony has never launched a console in all three major geographies simultaneously. The bigger issue is whether they have worked out production issues by early next year and are able to adequately supply Japan and North America while launching in Europe. I think you could see supply constraints on the PS3 for some time to come.
McNealy: It certainly doesn't help, but pushing out Europe is just a manufacturing reality. In two or three years, no one will be talking about residual effects of Sony "suffering" in Europe from launching later there.
Patel: Missing the holiday is not a big issue for this calendar year, but it certainly impacts the CY07 holiday opportunity with a likely smaller HW installed base of PS3s.
What are your thoughts on the portable market for this holiday?
Pachter: Portable will be better than ever, primarily because people looking for a Wii are likely to buy a DS or PSP before they buy a 360. This is based upon my view that Wii buyers are looking for something more family friendly than the 360, which is perceived to be an adult box. In fact, the existence of Xbox Live Arcade makes the 360 VERY family friendly, and games like Viva Pinata are pretty clearly intended for children, but perceptions are difficult to change.
Frazier: The portable market is very strong, and I think that even with increased competition from new systems the portable market will close the year having realized some big gains.
Cole: When you talk about winners and losers this holiday season, the portable market could be a key area. Right now the DS has a lot of momentum. The DS and PSP are targeting different markets, but I think an interesting thing to look for this holiday season is whether the DS with its sleek new Onyx look can capture some of the audience the PSP is targeting.
Sebastian: Handheld systems always sell well over the holidays; they are convenient and hip gifts, not to mention more affordable than the new consoles. I certainly expect Nintendo to continue with momentum in the DS Lite business, and for the PSP, still waiting for that breakaway hit title that can get that business more energized.
McNealy: The DS continues to sell well in North America, and I think Sony recognized that the PSP hasn't met expectations. Sony's PSP bundling approach with no price cut hasn't been exactly popular with the video game publishers and retailers.
Patel: Nintendo DS Lite is showing solid momentum still, especially in the mass market. This still is the system to beat, whereas PSP appears to be losing its luster.