Game Console Makers at a Crossroads

Microsoft, Nintendo, and Sony need a new game plan. Amid growing evidence old marketing strategies aren't working and concerns by some analysts that holiday sales may be lackluster, the big three console makers are scrambling for new ways to entice consumers. For years, the big three had a straightforward, winning sales formula: Console makers roll out cutting-edge hardware and couple it with compelling games and novel new ways to play. Trouble is, games by independent publishers such as Electronic Arts (ERTS) and Ubisoft have not fared as well as hoped and their makers have had to boost investment in production and marketing. Console makers, meantime, fall back on their own expensive-to-develop titles, such as Halo, Gran Turismo, and Super Mario. "There's been a shortage of software that builds excitement," says analyst David Cole of industry tracker DFC Intelligence. Life-Extension StrategiesSo now, they're relying on price cuts and souped-up consoles. Sony (SNE) introduced a slimmer design and slashed the price of its PlayStation 3 by $100, to $299. It and Microsoft (MSFT), maker of the Xbox 360, are plotting to extend the life of their consoles well past the usual five years by offering new add-ons sometime in 2010. At the E3 Expo in Los Angeles in May, Microsoft unveiled Natal, a fully hands-free control system, while Sony demonstrated a similar control system that works with the PlayStation Eye. "This industry requires risk and constant innovation," says Jack Tretton, the chief executive of Sony Computer Entertainment America. Indeed, it was risk-taking and innovation early on that brought Sony and the other console makers to the crossroads. To stand out, each company initially tried to lure game developers and consumers with standout console features. Manufacturers are willing to invest heavily in console design and make losses on the devices in hopes of making money down the road in part through sales of their own games and deals to share licenses with third-party game and accessory makers. With its Xbox 360, Microsoft relies on the Internet to sell game add-ons and other entertainment-related items. Sony pushed its hardware as an all-around entertainment platform capable of playing high-definition Blu-ray disc movies, browsing the Internet, and connecting wirelessly to other devices in the home. And Nintendo trumped both with motion-sensing capabilities in its Wii that attracted more than 60 million buyers, many of them first-time gamers. As console sales seesawed with no clear winner in sight, independent publishers were careful to develop titles for multiple platforms, lest they make the costly mistake of betting on the wrong horse. Yet many game titles suffer in quality because publishers are forced to develop for so many platforms. Competing with SmartphonesThere are other reasons console makers are under pressure. Consoles are competing with new gaming platforms such as Apple's (AAPL) iPod Touch and a growing number of smartphones. "The ultimate competition is for consumers' free time," Tretton says. Nintendo's been feeling the heat acutely of late. After the introduction of the most recent generation of consoles, Nintendo racked up record profits and crushed rivals. But its star has fallen. In the July-September quarter, Nintendo's operating profit dropped 52%, while sales slid 28%. Nintendo now expects full-year profits of $4 billion on $10.9 billion in sales, instead of $5.4 billion in profit and $19.7 billion in revenue. "Frankly, we hadn't expected it to get as bad as it did by summer," Nintendo President Satoru Iwata told financial analysts and journalists in late October. When its rivals introduce their add-ons, Nintendo's plight could worsen. Nintendo may be forced to create a new console that adds the cutting-edge graphics the Wii lacks, analysts say. The online rumor mill already is abuzz with reports that the Japanese company will unveil a new system in 2011. "Because of the Wii's rapid slowdown, we assume a new version of the console will be released in 2011," Citigroup Global Markets analyst Soichiro Fukuda wrote in an Oct. 29 report. Meantime, all three big console makers need to address the dearth of hit games and move to lure more developers to create exclusive games. Creating hits is costly, especially for console makers that have already cut prices on their devices. But it's an investment Microsoft, Sony, and Nintendo can't afford to put off.

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