The video game industry ought to be riding high. Public interest has never been greater, overall sales are up, and blockbuster movies such as "King Kong" and "Star Wars" routinely look to video games to extend their reach into popular culture.
But companies that make and sell video games are suffering, caught up in an unusual set of circumstances that are cutting profits and jobs just when they should be in top form. Major game publishers Activision Inc., Atari Inc. and Electronic Arts Inc. all missed their most recent earnings expectations and each company has had layoffs in recent months. Retailers such as Electronics Boutique Holdings Corp. and GameStop Corp. have faced similar problems.
"There are many, many things that are happening that are not normal," said Michael Pachter, analyst with Wedbush Morgan Securities Inc.
In 2005, total sales of hardware, software and accessories rose to an all-time high of $10.5 billion, according to research firm NPD Group Inc. -- big enough to make games a force in pop culture with aspirations of rivaling movies and music.
But the efforts of three major game-console makers to come out with new-generation devices have disrupted the industry. Microsoft Corp.'s Xbox 360 got a head start by debuting in November, but shoppers continue to struggle to find any of the systems in retail stores. Sony Corp.'s PlayStation 3 is due out this spring, but analysts believe it could be delayed. And Nintendo Co. has released few details about the new system it will roll out later this year.
New game systems are expensive propositions for companies that make titles such as Halo and the Call of Duty war games to play on them. Game development costs tend to double for each new generation of hardware, as makers figure out ways to push new technologies while giving consumers compelling reasons to reach for their wallets. As costs rise, this is still a business largely stuck at a $50 price point for new titles.
The crunch is worse than usual because publishers do not know when the new gaming systems will be widely available, so they do not know how many resources to devote to development, Pachter said.
Meanwhile, sales of games for last year's devices have taken a hit, now that game fans see the devices as somewhat obsolete.
There are other potential problems. The new-generation consoles look best when plugged into high-definition TV sets -- and it is not clear how many people will buy a new television just for the latest version of the Madden football game.
And the cost of the new gaming systems continues to rise. Perhaps no question haunts the industry more at the moment than the mystery of when Sony's PlayStation 3 will come out and how much it will cost.
Delay for PlayStation 3?
A spokesman for Sony said yesterday that the PlayStation 3 is set for a release this spring, as the company has been saying for almost a year. But a new report from Merrill Lynch & Co. that the PlayStation might be delayed in this country until next year has been taken seriously enough by analysts to make Sony share prices take a tumble this week.
It gets worse for Sony investors. The report's authors looked at the list of components going into the new PlayStation and calculated that the devices will cost the company $900 apiece to build. The company will have to give the console a high retail price or sell it at a major loss, the report concluded.
Sony President Ken Kutaragi has said that he expects the device to be "expensive." While game consoles have typically enjoyed a five-year lifespan, Sony has said it is shooting for 10 years this time out.
Microsoft -- which still hasn't profited from the original Xbox -- rolled out the Xbox 360 last fall in the hopes of gaining a competitive advantage over Sony. The company has sold as many as it can manufacture, about 900,000 in North America, but that's fewer than Wall Street analysts had expected -- not to mention shoppers, who have been unable to find the $400 devices on store shelves.
Many more options
While Microsoft and Sony have been circling each other, the market for video games has changed, exploding with options for consumers. Electronics stores are having to cram in games and add-on gadgets to plug into a growing array of game devices, including multiple systems from the big manufacturers. For Sony, there's the PlayStation 2 and the PlayStation Portable, while Nintendo has the GameCube, the Nintendo DS and several styles of Gameboys. Games for personal computers continue to be popular, and a new form of gaming -- online role-playing games -- has become hugely popular. One online game, World of Warcraft, has more than 5 million subscribers.
Doug Lowenstein, president of the Entertainment Software Association, deemed the industry's troubles to be "cyclical and entirely predictable." What's important is that gaming is growing in popularity, and consumers will continue spending as the industry works out its kinks, he said.
"The early adopters all know what's going on," he said. "They all expect the PlayStation 3 this year. That always tends to slow down purchases for the current platform, no matter how good the current games are. They're sitting on their dollars more than they will be a year or two from now."
