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Much to play for in £15bn games consoles business

December 20, 2001

Microsoft and Nintendo the losers as new models are unavailable in Europe

 

ONCE AGAIN this Christmas, the hottest toy for many families will be a brand new computer games console. Although this might sound like kids stuff it is a huge business – at $24bn it’s much bigger then the movie industry. 

 

It’s a shame then that for two out of three of the world’s games console manufacturers, Christmas 2001 has come a few months too early. Since they can currently only make enough machines for the Japanese and North American market, Santa did not get any for giving to European children.

 

Unlike other technology businesses, the computer games industry is not currently in recession – quite the reverse. The economic cycles in this industry are not created by the world economy, but are inflicted by the manufacturers themselves.

 

Every five years or so, they announce their ‘next generation’ machines. This throws the whole industry into a shuddering halt – publishers delay new releases; developers start learning how to develop for the new consoles, and hard-core gamers stop buying games and start dreaming about their next toy.

 

And this is what happened a couple of years ago: Sony announced their Playstation2; Nintendo its GameCube; and Microsoft surprised everybody by announcing that it was entering the market, not just as a software supplier, but as a manufacturer.

 

But at least in Europe , the Christmas story this year is just a little bit Dickensian. The Ghost of Christmas Present is undoubtedly the Sony Playstation2, launched just over a year ago and now in plentiful supply. More than 20 million have been sold and huge rafts of high quality games are on the shelves, “urgently entreating and beseeching to be carried home in paper bags”.

 

The Ghost of Christmas Past in this scenario is Nintendo, who were once the market leader in games before Sony’s arrival. Ten years ago the surprising answer to an insider joke “what is the second largest software company in Redmond , Washington ?” was Microsoft – Nintendo has its US Headquarters in the same small Seattle suburb as the software giant, and such was the market dominance of Nintendo at the time that they sold more software than Microsoft. 

 

For the last few years Nintendo has been best known for its portable GameBoy brand, and not consoles. But its GameCube launch has been a success, with well over 1m units already sold in both Japan and North America . For hard-core gamers, the GameCube is the most impressive of the new platforms. Nintendo is using its vast experience to ensure that the games available for it are spectacular. Nintendo President Hiroshi Yamauchi is even investing over $150m of his own money in developers to ensure the great games keep flowing.

 

The Ghost of Christmas Future in this tale is Microsoft.  Its traditional business of PC software having reached saturation point, Microsoft has been casting around for a new growth industry to enter. 

 

The decision was made to take on Sony and Nintendo head to head and to make a games console, the Xbox. With its $35bn cash pile, Microsoft can never be underestimated, but it has not made a good start.

 

The Xbox launch was disappointing. Microsoft is not widely known for putting much fun into people’s lives and it seems that they forgot what Sony and Nintendo know too well – people don’t really buy games consoles, rather they look out for great games, and then buy the console to run them on. It seems the Xbox games are just too boring. Gamers, who are among the best networked people in the world, quickly get the word round.

 

What to do about it? Well, BusinessWeek reported last week the rumour that Microsoft is aiming to buy Take2, famous for publishing some of the most exciting, edgy, games on the market - particularly Grand Theft Auto 3, which recently went straight to the top of the charts worldwide, and the forthcoming State of Emergency , which has received rave previews.  Maybe Microsoft should have just come straight to the source – both Grand Theft Auto and State of Emergency were written here in Scotland .

 

The stakes are huge, for unlike Nintendo, Sony and Microsoft have another, bigger, agenda. They want to provide your complete home entertainment system, capable of playing DVDs, storing music, and attaching to broadband entertainment services.

This is a battle that Microsoft has decided it cannot afford to lose. Kids’ stuff this isn’t.

 

Ian Ritchie is the Deputy Chairman of VIS Entertainment plc.

 

 

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