PSP Vs. Nintendo DS; Xbox 360 Vs. PlayStation 3 – Analyst David Cole Examines Their Future

by Louis Bedigian

“Publishers will have to be a little more creative than just cranking up the basic price.”

It’s that time of the decade again: the time when young gamers mow lawns and adult gamers mortgage their house to prepare for the next generation of game consoles.  Although the kickoff does not officially begin until Microsoft releases Xbox 360, you could say that the next generation began several months ago with the release of the Nintendo DS and the long-awaited PSP. 

Sales of both handheld game consoles have been strong, but unlike Nintendo’s previous handheld release, Game Boy Advance, no sales records were broken.  PSP’s launch was huge, but at the end of the day there were plenty of systems left on the shelf.  That’s disappointing considering how much better its launch lineup was than PlayStation 2, Xbox and GameCube’s launch lineup, all of those consolers were completely sold out within the first three days of release.  (PlayStation 2 sold its entire stock of 500,000 units in less than 24 hours.)

Clearly the handheld market is a lot harder to conquer.  Or maybe gamers are just getting pickier?  Sega’s Game Gear didn’t sell too well at $180 – perhaps it’s hard for gamers to get used to buying a handheld system that retails for as much as a home console.

Whatever the reason, the next generation looks to be the most fearsome battle yet for Sony and Nintendo.

Assuming the proposed release dates aren’t changed, Xbox 360 will launch at least six months ahead of PlayStation 3.  Being the early bird didn’t help Dreamcast stay afloat – will it really give Microsoft a much-needed edge?

What about the handheld market: who has the advantage there?  Nintendo beat Sony to market, a first for the industry.  Will this have an effect on long-term sales?

We had questions, and as always David Cole, Analyst and President of DFC Intelligence, had answers.

What is the current state of the game industry?  Is it healthy?

David Cole: From a consumer demand standpoint the industry is doing very well.  Sales are strong even as the current generation goes late into its cycle.  The challenge is that the economics are becoming more difficult with rising costs and increased platform proliferation.

Right now we're going through the transition from one console generation to the next.  Is this difficult for the industry, or are game sales so high that it does not matter?

DC: Transitions are always difficult because they tend to shake the established order.  It is a time when smart execution becomes critical.  This is a period when established players can either falter or solidify their position.  Smaller players have the opportunity to become major players.

Microsoft will launch the Xbox 360 almost a full year before PlayStation 3 is released.  What is your take on this?  Is being the first (but not the most powerful) game console released the key to success?

DC: An early launch can level the playing field.  The danger is that the competition will leapfrog you in terms of technology.  I don’t see that happening in this case because I think all the new systems will be so powerful that developers will have a hard time maximizing their potential.

Microsoft is pushing the idea of their marketplace, where people can make t-shirts and sell them online, among other things.  Do you feel that this is what gamers want from a console, or is Microsoft trying to capture a new market with these features?

DC: The new game systems will do a lot of things that haven’t been possible in the past.  However, in the end I think it will still be very much about the big exclusive games and it will be a very traditional marketplace.  Nevertheless, this generation will be a very different experience from the past when console systems were very limited.  The basic model has been that a consumer goes to the store and pays around $50 for a new game.  That has been a very limited way to play games.  The idea of being able to trade items, levels, etc., opens the model in all kinds of ways.  It will probably be awhile before we learn exactly what gamers want, but the possibilities are unlimited. 

Condemned could entice survival/horror fans. 

Any thoughts on Microsoft's claim of reaching one billion people with Xbox 360?

DC: Meaningless hype.

If in the end it came down to gamers versus a new market – if Microsoft conquered the new market but lost to Sony with gamers, would that be enough for them to become #1 in sales?  Or this new "new market" they're searching for just not big enough?

DC: We think that this next generation will once again be all about games.  Many of the new features of these game systems are about trying to give existing game consumers new opportunities. 

Let’s talk about PlayStation 3.  Gamers and game critics alike are stoked for it – tell us your thoughts.

DC: The PS3 is clearly the favorite because Sony has been so dominant and so far they have not made any missteps.  That being said the challenge of the game industry is that every five years or so the playing field starts again at ground zero.  Sony will have the top publishers on board and has plenty of big name products guaranteed.  However, the appearance of a single game or two can totally change everything.  That being said I think the PS3 will have very strong sales no matter what.  What will be challenging for Sony is to try and make the PS3 as dominant as the PS2. 

What about Nintendo Revolution?

DC: The Revolution is the dark horse.  I think Nintendo has quietly been one of the most innovative companies in recent years.  I think their problem has been not going after the more casual adult gamer market that has had a huge impact in recent years.  If they can be price competitive and expand the diversity of their software lineup they would have the most exclusive platform and that could really work to their advantage.

Nintendo DS vs. PSP: who's winning?  Who has the toughest battle ahead of them in the long-term: Sony or Nintendo?

DC: The portable war will play out over several years.  Right now it is too early to declare anyone as winning.  The PSP will have a lot of publisher support, but the DS had a very strong showing of upcoming products.  This holiday season will be the first real test when the two systems go head-to-head with consumers outside the early adopter market.  Sony has the toughest battle because they are trying to bring in a new group of consumers.

I don't know about you, but my gut tells me that if Sony had charged $150 for the PSP and $30 to $35 for each game, it'd be crushing the DS right now...

DC: Price points are critical, especially in the portable market.  Unlike console systems, everyone needs their own system, and in many cases individual [copies] of each game. 

Wipeout Pure is a stellar (but expensive) racing game. 

The PSP was delayed once due to reported manufacturing issues, and now there are reports that Sony doesn't have the completed Cell chip for PS3.  They have one year to manufacture several hundred thousand consoles and finish the development of several games.  Is a delay inevitable?  Will they be ready in time for the proposed Spring 2006 launch?

DC: With very complicated technology and new manufacturing procedures, it is always a challenge to get up to speed in cranking out units.  Unforeseen problems can prop up at anytime.  However, this is not a problem exclusive to Sony.  Everyone faces this challenge.

Pricing and manufacturing costs are a huge concern for the next generation, especially with PlayStation 3.  What are your thoughts on this?  Do you believe Sony will go higher than the traditional $299.99 launch price?

DC: We don’t like to speculate on pricing because nothing is set in stone and pricing decisions constantly change based on conditions in the marketplace.  Much of the pricing decision for the PS3 will be based on what the competitive landscape looks like at the time of launch.  Obviously, the hardware manufacturers would like to charge as much as possible while the software publishers wish they would give them away.

Sony charged U.S. gamers $60 more for PSP than Japanese gamers, forcing us to buy a "value pack."  Do you expect them to do the same for PS3?

DC: I think with the PS3 Sony will be much more concerned about being price competitive with the competition.  The PSP was a fairly unique product.

Game software doesn't seem to follow the inflation or cost of manufacturing rule (they don't normally increase and they don't decrease as DVD costs go down).  Do you think that, if the $60 price point is effective, it will ever go down?  Or will game publishers continue to raise the prices, assuming we'll continue to put up with it?

DC: In the early days of the 16-bit generation prices were higher and there was a much greater range of prices.  Most titles came out more towards a $60 range with some top titles like Street Fighter II coming out at the $75-80 range.  Basic economics put a downward trend on pricing that was made possible by the lower manufacturing costs of CD.  However, at the same time development costs skyrocketed.  The challenge the game industry faces is that there are so many ways for consumers to play games that the basic model of going to a retail store and plunking down a whole bunch of money is being changed.  Going forward I think that the goal will be to get more revenue per consumer/per title, but that will probably not be by raising prices.  There is the possibility to even give a game away and get subscription revenue.  Or release a game in episodes and charge a small amount for each episode.  Publishers will have to be a little more creative than just cranking up the basic price.

I agree, though I hope they’re not too creative.  Games are pricey enough as is. :)

Thank you for your time.