Battle for Console Supremacy: is Anybody’s Game

Most of the buzz in the video game business this year has been about the Sony PlayStation 3 not living up to expectations, with sales of only 1.2 million units through March. But those numbers don’t speak to the health of rest of the video game industry.

“Overall, sales have been incredible and the video game industry has performed so well it’s hard to find anything negative to talk about,” said NPD Group analyst David Reilly. “There has been some negative press about the PlayStation 3 but a lot of it is undeserved.”

Nearly six months after the PlayStation 3 and Nintendo Wii game consoles launched in November 2006, the video game industry is hitting on all cylinders. Sales the first three months of the year were up in every major category, according to data from The NPD Group. Video game hardware sales increased 94% to $1.3 billion from January through March followed by a 30% increase in video game sales to $1.6 billion and a 61% jump in video game accessories to $479 million.

Those increases indicate the video game business is on its way to another record year that should easily eclipse sales from 2006, which increased 19% and finished with a record total of $12.9 billion. But first quarter numbers haven’t been given as much notice due to the woes of the PS3 and the surprising performance of the Nintendo Wii.

The PS3 got off to a bad start when manufacturing problems cut its U.S. launch supply in half last year and caused holiday shortages. And its price of $599—a product of its costly Blu-ray high-definition DVD drive—is the highest ever for a game console and is more than double the price of the Nintendo Wii ($249).

Despite its early problems, Reilly expects the PS3 to rebound this summer. There’s already talk of a price drop and more new titles are arriving in stores. “The PS3 has had a real shortage of blockbuster titles that are exclusive to the console,” said Reilly. “But it will sell once it gets a few solid titles behind it.” He said that blockbuster hit could come with the arrival of “Metal Gear Solid” this summer.

The Nintendo Wii was nearly an afterthought when it launched last November but has performed better than expected with sales of 2.1 million consoles as of April 1. “Everything Nintendo has done with the Wii, from its price point ($249) to the way it’s been marketed, has been spot-on,” said Reilly.

Both systems are also part of the high-definition DVD format war. Sony has given the Blu-ray format a big edge with a built-in player in the PS3 which allowed it to count every console sold as part of Blu-ray’s installed base. Microsoft countered with a peripheral drive for the rival HD-DVD format that can play high-definition movies through the Xbox 360 but has sold only a few hundred thousand drives so far.

Sales of lower-priced, portable game consoles are also continuing to meet or exceed those of the big three. Game Boy Advance has more than 35 million consoles on the market but its sales are slowing as players gravitate to the PlayStation Portable (7.2 million units) and the Nintendo DS, which has sold 10.4 million units to date and 508,000 in the month of March alone.

“And that was before two new ‘Pokemon’ titles for the DS were launched in late April, so sales are really going to bust out in April and May,” said Reilly.

Another console that’s been overlooked the past six months is the Xbox 360. The system has sold more than 5.3 million units since its launch in 2005 and sold 199,000 consoles in March, easily beating out the PS3 and its 130,000 units sold.

Microsoft surprised some analysts with the launch of its new Xbox 360 Elite, which comes with a huge hard drive (120 GB) and a new port and cable that allows users to download and play high-definition video. And it comes with a price tag of $479 that’s far above the $299 price of its basic system.

In an April 30 report, analyst David Cole of DFC Intelligence questioned the wisdom of Microsoft’s strategy, noting that there are already two Xbox consoles on the market. “The goal of the Elite is to target consumers that want to download and play high-definition video,” said Cole. “However, there should be concern that what the Elite may end up doing is confusing and alienating consumers just looking for a solid game system.”

As for video sales in 2007, there’s hasn’t been a blockbuster title but several have been big sellers. They include “God of War II” for the PlayStation 3, which has sold 833,000 units since its launch in March. Another big seller has been “Lost Planet: Extreme Condition” for the Xbox 360 with 573,000 units sold. But the biggest titles are just starting to arrive and Activision’s games based on the hit film “Spider-Man 3” are expected to sell millions of units this year.