Industry Roundtable - Xbox2, PSP, new price points, & the rest of this generation

sonycowboy

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Captains of Industry Dish on Gaming's Future

Discussion includes Xbox 2, PSP and new price points
Posted 6/10/04

The prevailing sentiment expressed by a small group of game industry titans at yesterday's Piper Jaffray investor conference in New York City was that the current console cycle will shift to the next in a considerably easier fashion than in years past.

The executive's on-hand included a virtual who's-who of the publishing and retail space—Take-Two Interactive president Paul Eibeler, THQ Inc. president and CEO Brian Farrell, Electronics Boutique Holdings Corp. president and CEO Jeff Griffiths, Bruno Bonnell, Atari Inc.'s chairman and CEO, and the CEO of Activision Publishing, Ron Doornink. All presented independently for their companies, then, with the exception of Doornink, later joined a panel discussion designed to discuss trends in the videogame industry.

CYCLE TRANSITION
The cyclical nature of videogames, especially related to hardware, is a facet of the business that publishers, developers and even analysts are constantly trying to get a handle on, in order to better position their companies—or clients—for the change over. Other than the hardware manufacturers themselves, what group of people is better-suited to offer insight into this evolution than the luminaries presenting in front of us?

Eibeler began, "Transitions are always difficult, though it will be different this time." He sees two reasons why Take-Two is well positioned for the inevitable change: "Key brands that will allow us to move through the cycle," and the presence of Jack of All Games (the company's distribution business), which will "Help us at this point in the cycle."

Farrell stated, "We see a rolling transition, one in which we (THQ) can continue to leverage the mass-market through 2009 on existing consoles, while also developing for the next-generation."

The real key to a smoother transition this time, according to the power brokers, will come from the looming handhelds in development by Sony and Nintendo.

Griffiths thinks, "The PSP and DS can bridge the gap between cycles." He added that the two handhelds could, "Expand the base of handheld systems, similar to what the (original) PlayStation did (with console users)."

Bonnell agreed, seeing the PSP and DS providing "Growth potential for the industry, and aiding in a smooth transition."

Bonnell added, "I don't think we have to talk about the transition today," as he views the PlayStation 2 as only in the middle of its life cycle, with "solid years of business ahead." To further emphasize his point, Bonnell noted that "during the last transition, the installed base of consoles was around 40.0 million, while during the next transition that figure should be upwards of 150.0 million."

The Atari chief also thinks that the industry "should not just be obsessed with the console business, as there are plenty of other segments to explore, such as the growing wireless market."

WHAT THE NEXT TWO YEARS WILL BRING
Forecasting is certainly an inexact science, but three of the executives weighed in with their thoughts on the years ahead.

From a retail standpoint Griffiths stated that, "the industry is entering the two best years of this console cycle," with EB, "Looking forward to the back half of the year with positive comps (comparable store sales). The big difference this year is (the pending release of) huge franchises."

The publishers who commented were not so decisive. Farrell said, "The industry could be up 5.0 percent or down 5.0 percent, depending on what levers are pulled." Bonnell agreed, noting that Atari split the difference in its forecasts, essentially calling for flat growth internally over the next year.


PSP: STILL MANY UNKNOWNS
Sony's PSP portable certainly took E3 attendees by storm, even while the company released few specific details about the device. Publishers, at least the ones at this conference, appeared to be equally in the dark.

Farrell speculated that PSP development costs would be about $1.0 to $2.0 million per game, dubbing Sony's handheld a, "Compelling proposition, but we would like to see how it is positioned." He also sees the PSP as "a late 2005 business driver."

Bonnell added, "Yeah, it's (the PSP) cool, but we have no idea of prices, what happens if it's dropped and breaks. I want to know more!" He put development costs at between $0.01 and $50.0 million for the device, eliciting a laugh from the crowd when he added that for the $0.01 price, Atari could put out a version of Pong for the PSP.

As far as pricing for the PSP, Bonnell, "Expects it to be $500.00 to start."

VIACOM SHADOW LOOMS
When posed with the question of bigger media companies buying into the interactive entertainment space (Viacom anyone?), Farrell said, "It's a logical extension," but warned, "This is not a book business, this is not a movie business, this is not a television business."

Bonnell responded, "Back to the old days!" before adding, "Consolidation is not going to happen this way."

USED GAMES AND RENTALS, ANY AFFECT?
When asked if the sale of used games might be affecting Take-Two's catalog sales-which the company said contributed to its lower-than-expected quarterly results earlier this week-Eibeler joked, "We would probably prefer a product that would blow up after use by one user," before saying he saw no effect of used games on Take-Two's sales.

Griffiths did state that pre-played games provide EB with its highest profit margins.

Regarding the rental of games, Griffiths confessed that 10 years ago he, "Thought rental might be a threat to EB's model, but it passed."

Eibeler added, "Rentals helped bring in the casual gamers."

ATVI: PREPARED TO UP AD SPENDING
In a presentation for Activision, Doornink said, "Technology and demographic growth will drive the industry." He also detailed the company's aggressive marketing plans, which he called "the largest investment in our history." The movement includes expanding retailer pre-sell programs (with mass-market retailers included), a massive in-store presence and increasing television advertising substantially.

Doornink and Activision are also seeking to work with retailers on better ways to "make games more shoppable," as he mentioned the added steps needed to, say, purchase a game at Wal-Mart, which usually involves shopping behind glass and the extra steps of locating a clerk to unlock the case and retrieve a game. The company is also looking at ways to aid retailers in the faster restocking of hit titles.

$60.00 GAMES?
As games get more and more expensive to create, with the infusion of Hollywood talent and increasing technology costs, could the rising costs of production eventually be passed on to consumers?

Regarding higher prices, Doornink stated, "We think it exists, as the one price fits all policy doesn't make sense to us anymore."

Griffiths would also "like to see higher price points happen," though he's "not sure how consumers would respond to it." $55.00 to $60.00 games are, in his opinion, justified.

STRIP STORES TO LEAD EB'S GROWTH
Piper Jaffray, using NPD Funworld data as well as internal estimates, estimated that EB had a nine percent share of the U.S. retail videogame market in 2003. The same estimates showed Wal-Mart with a 23.0 percent share, followed by Best Buy (13.0 percent), GameStop (10.0 percent), Target and Toys R Us (nine percent each) and other retailers (27.0 percent).

In 2004, Piper Jaffray sees Wal-Mart dipping to a 23.0 percent share of the retail videogame market and Toys R Us dropping to a seven percent share. It sees growth for Best Buy and GameStop (to 14.0 percent) and EB (to 12.0 percent), with target remaining at nine percent and other retailers dipping to 22.0 percent.

To increase Electronics Boutique's growth, Griffiths' strategy includes opening more stores located in strip malls. He sees the potential for 2,000 strip stores in the U.S. By the end of its 2005 fiscal year, strip-based stores should account for 55.0 percent of all EB locations. Griffiths said, "the strip-stores offer the ability to compete better with mass market retailers."


DRIV3R/NEXT MATRIX DETAILS
Bonnell, with the release of DRIV3R looming, refused to give ship-in numbers for the title, saying that with last year's Enter the Matrix game the company got trapped giving out such information. He did state that the game cost around $17.0 million to develop, but that Atari "expenses R&D as we go," meaning that DRIV3R is "already clean."

Atari is also working actively on the next Matrix game. Its Matrix license comprises three titles in all, the third of which Bonnell sees coming out on the next-generation of consoles.

Bonnell is still a fan of the PC format, as he stated, "In terms of freedom to create, we need to support the PC. Not having to pay royalties for PC products also adds into the equation, making the PC very profitable for us."

THE NEXT GENERATION
As far as details on the next wave of consoles, Bonnell has, "No firm information yet," though Farrell noted that even if the publishers did, they couldn't talk about it anyway. Griffiths thinks Microsoft could command up to a 30.0 percent market share "if they come out early" with the Xbox 2, with Bonnell in agreement that Microsoft has a "big chance to be the leader" in the next wave.

Predicting the future is certainly risky business and can only be done using past performance and trends as a barometer. It appears that the addition of the PSP and DS at the end of the current cycle will only make forward-looking prospecting that much more difficult, though, if the executives are to be believed, the two products could offer a way for publishers, developers and retailers to continue to earn while the future generations become a reality.

Perhaps Niels Bohr, a Nobel Prize winning physicist, summed it up best in a quote attributed to him:

"Prediction is very difficult, especially of the future."
 

dskillzhtown

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Jun 6, 2004
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Atari is also working actively on the next Matrix game. Its Matrix license comprises three titles in all, the third of which Bonnell sees coming out on the next-generation of consoles.
WTF? Another game?
 

Defensor

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Bonnell added, "Yeah, it's (the PSP) cool, but we have no idea of prices, what happens if it's dropped and breaks. I want to know more!" He put development costs at between $0.01 and $50.0 million for the device, eliciting a laugh from the crowd when he added that for the $0.01 price, Atari could put out a version of Pong for the PSP.

As far as pricing for the PSP, Bonnell, "Expects it to be $500.00 to start."
Oh jeez, not this sh!t again.
 

kaching

"GAF's biggest wanker"
Jun 8, 2004
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Much better coverage of this conference than the CNN Money article. Where is this article from?
 

GDGF

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Jun 6, 2004
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All this questionable press can't be good for Sony's PSP business. It's almost like the press is treating them in the handheld sector like Nintendo is often treated in the console sector.






:)
 

GuntherBait

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Jun 7, 2004
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Lost Weekend said:
All this questionable press can't be good for Sony's PSP business. It's almost like the press is treating them in the handheld sector like Nintendo is often treated in the console sector.






:)
Yeah, but seriously.... They have to expect crap like this.
 

Mashing

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Of course they are... the industry has seen Nintendo's way of handling the market and they know they are very savvy... they've yet to see anything halfway resembling Nintendo's agressiveness in the handheld market from Sony. It's perfectly natural for the industry to be skeptical about the PSP given Sony's timid approach toward it thusfar. Nintendo may have fucked up with the N64... but you can damn be sure that Nintendo will guard it's portable marketshare like never before. Nintendo is almost an entirely different beast in the handheld market compared to it's home console market... they don't make costly mistakes.
 

ravingloon

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Rises in prices will kill the industry and any analysts, CEOs who thinks otherwise are gravely mistaken. Prices need to be going down. (And I don't care about the cartrdige era, because it was a different era.) Over the last couple of years, I rarely pay retail. Unless it's AAA that I really want, I just wait for a sale or price reduction or buy used. There's too many games and choices to be spending 50 dollars on something. The world has changed (Used games at the malls, internet) for them to be playing by old rules.

The ESPN titles are a good sign. The physical cost of a CD/DVD is minimal and I bet they net higher total profits at this price point than they did at 49.99.

Edit: The price quote is attributed to Activision. My memory seems to remember them spouting this crap for a good while now.
 

Mashing

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The ESPN games are priced low, because they can't compete with EA's game in any other fashion...

Great for consumers though and ESPN NFL Football is looking to kick Madden's ass this year
 

andthebeatgoeson

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sonycowboy said:
Madden CE $59.99
Halo 2 LE $54.99
FFXI $99.99 (not fair, i know)
But their still is the option to buy $50 games. I don't see myself paying too much above $50 soon. Most of the games I bought over the past few years have been sub $40. The glut of games demands me to wait (ie Ace Combat 4 at $20, best deal in 10 years) for games to drop. And competition demands lower prices, not higher. Who's gonna be the first? Sony is scared to lose more market share, so they'll keep prices low and people bitch that Nintendo doesn't have a good $20 player's choice lineup. Fuck them if they think I'll pay $50+ for a game.
 

Slo

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USED GAMES AND RENTALS, ANY AFFECT?
When asked if the sale of used games might be affecting Take-Two's catalog sales-which the company said contributed to its lower-than-expected quarterly results earlier this week-Eibeler joked, "We would probably prefer a product that would blow up after use by one user," before saying he saw no effect of used games on Take-Two's sales.

Griffiths did state that pre-played games provide EB with its highest profit margins.

Regarding the rental of games, Griffiths confessed that 10 years ago he, "Thought rental might be a threat to EB's model, but it passed."

Eibeler added, "Rentals helped bring in the casual gamers."
Interesting.
 

AniHawk

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I just can't see the PSP being $499.99 and having 3 hours battery life. That's suicide. I'm guessing $299.99 at the highest.

And as far as $59.99 games... I doubt we'll see them (again).