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Game Industry Market Forecasts Part 2 4/23/03 At DFC Intelligence, we are often surprised by the number of people in the investment community that are concerned that video games might be a “fad” industry. We are often asked questions along the lines of “consumers went out and bought a lot of new game systems with this generation, but can market growth sustain itself into the next generation of game systems?” In other words, were high sales for the PlayStation 2 and other 128-bit game systems simply a one-time phenomenon? Last week DFC published a 500-page report with complete forecasts for the game industry, Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry. This report has forecasts through 2007 for not only the existing game systems, but also for new game systems from Sony, Microsoft and Nintendo. Of course, a major problem with forecasts of this type is that we know very little about these unreleased systems. For starters, we do not even know when these systems will be released. Because of the uncertainty regarding the release of new game systems, the new DFC report contains three separate scenarios for future market growth. One scenario has all three major players (Sony, Microsoft and Nintendo) releasing new game systems in 2005. Another scenario has all three releasing new game systems in Japan in 2005 and the rest of the world in 2006. The final scenario has one player (Microsoft) getting a major head start by releasing a new game system a year ahead of the competition. The good news is that under all three scenarios we forecast that the successors to the current 128-bit game systems will be the strongest selling game systems of all times. There are several reasons we are making this forecast. 1) We think that the new game systems will be launched on equal footing. In other words, the major hardware manufacturers will not allow the competition to get a major head start by being on the market a year before any other system. The 128-bit systems were launched between 1999 (with the Sega Dreamcast) and mid-2002 when the GameCube was released in Europe. We believe this staggering of launches probably slowed overall consumer sales in the current generation. Consumers will often hold off on buying a new game system until all the systems are on the market. 2) If multiple game systems are released around the same time, it will force the hardware manufacturers to become more price competitive. Price competition is already occurring with the 128-bit systems, but will likely become more intense with the new game systems. Of course, lowering prices is one of the greatest spurs to increasing sales. 3) The three major hardware manufacturers are now more experienced at launching game systems on a worldwide basis. Historically, a game system launches first in Japan, then in North America, finally followed by a launch in Europe. Microsoft changed that with the Xbox, launching first in the U.S., followed shortly by a launch in Japan and Europe. We think Microsoft’s entry into the market will increase the pressure for hardware manufacturers to get systems out on a worldwide basis. This could be especially true in Europe, a market that has not been milked to its full potential. 4) The final and most important factor in market growth is the issue of basic consumer demographics. There are more and more people in the world, and more and more of these people are video game players. The past five years started to show how consumers that start playing video games in childhood carry over the hobby into adulthood. This is similar to what happened in the music industry when children of the 1960s and 1970s continued to listen to and buy the music of their youth as they grew older. As a result the size of the record industry tripled in the 10-year period between 1983 and 1993. The chart below shows the basic growth trend driving the video game and interactive entertainment industry. Yes, the game industry goes through ups and downs. However, the overall trend is clear: each new generation of game systems results in greater market growth.
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