GameCube and Xbox Launch Show Intense Demand for Video Games

The past two years have seen an unprecedented run of strong launches for video game hardware systems.  From the 9/9/99 launch of the Sega Dreamcast to the 11/18/01 launch of the Nintendo GameCube, consumers have been flocking to stores to get the latest game systems.  This incredible show of demand can only seem to indicate one thing: boom times ahead for the interactive entertainment market.  It now seems clear that three video game console systems (Sony PlayStation 2, Microsoft Xbox and Nintendo GameCube) will battle for market share in an environment where sales should reach record levels.  This does not even include the surging portable market led by the Nintendo Game Boy Advance.

The Sega Dreamcast will probably not go down in history as a success.  However, the Dreamcast’s ultimate demise was due mainly to Sega’s limited financial resources.  On its launch day in the U.S. of September 9, 1999, Sega reported that the Dreamcast brought in nearly $100 million in sales.  That is an incredible level of demand for a consumer product.

More recent video game system debuts have left the Dreamcast launch in the dust.  The PlayStation 2 was released in Japan in March 2000, and its first month Japanese sales exceeded Dreamcast Japanese sales for the entire previous year.  When the PlayStation 2 was released in the U.S. on October 26, 2000, Sony’s main problem was a shortage of supply.  Consumers waited in line for hours to snap up the limited inventory of 500,000 PlayStation 2 units.

Not only are consumers buying new video game console systems, it now appears that they also have to own a portable game system.  The Nintendo Game Boy Color regenerated the portable market upon its release in late 1998.  Portable games have only continued to grow with the release of the Game Boy Advance in 2001.  In Japan, Nintendo reported that the Game Boy Advance sold 1.6 million units in the first five weeks after its March 2001 release.  Upon its U.S. debut in June 2001, the system brought in $45 million in its first week.

Now it appears that even the terrorist attacks, war and a slumping economy can’t slow consumer demand for video games.  November 2001 saw an unprecedented launch of two major game systems, the Microsoft Xbox and Nintendo GameCube.  Nintendo claims the GameCube brought in $98 million in revenue on its first day of release in the U.S. (11/18/01), with all 700,000 initial units selling out in the first three days.  Meanwhile, the Xbox shipped with one of the strongest software launch lineups ever for a new game system.

However, the past few years have shown that it is dangerous to judge a system’s long term potential by its initial launch.  There are a certain core group of consumers that must rush out and buy any new game system.  Nintendo, in particular, has a very loyal core consumer base.  In 1991, the 16-bit SNES had a very strong launch and quickly surpassed the competing Sega Genesis, which had been on the market for almost two years.  This was repeated in 1996 when sales for the Nintendo 64 quickly soared past the PlayStation, which had already been on the market for a year.  However, eventually both the Genesis and PlayStation gave Nintendo’s systems a major challenge.  The PlayStation actually came back to significantly outsell the Nintendo 64.

So the lesson is that we will not be able to get a good read on the video game console race until the holiday 2002 season and beyond.  Right now we can say that all three video game systems are off to a good start and each system has its own particular strengths and weaknesses.

The PlayStation 2 is, of course, the system to beat after getting a one-year head start.  Sony now has a strong lineup of first party games like Gran Turismo 3, Twisted Metal: Black, Ico, Dark Cloud, Frequency, ATV Off-Road Fury and others.  Then there is the strong lineup of third-party games such as Metal Gear Solid 2 (Konami), Tony Hawks Pro Skater 3 (Activision), Devil May Cry (Capcom), Red Faction (THQ) and many others.  Nevertheless, if it wasn’t for getting such a long head start, Sony would be in big trouble.  Compared with the Xbox, the PlayStation 2 launch lineup was weak.  There were essentially no first party games from Sony and the only standout titles were EA Sports games like Madden NFL 2001 and SSX.  After a year on the market, this software problem has definitely been corrected.  However, the fact remains that the PlayStation 2 is the least powerful system and runs the risk of being seen as passé.  On top of that, many PSX exclusive publishers are now developing for the Xbox and, to a lesser extent, the GameCube.

Microsoft has done a good job of both signing up development support and pushing the Xbox as a technological powerhouse.  Furthermore, after a weak E3, the Xbox launch lineup was very impressive.  Not only are almost all major third party publishers on board, but Microsoft had one of the best first party launch lineups ever.  Microsoft published five quality launch titles for the Xbox in diverse game genres including first-person shooter (Halo), racing (Project Gotham Racing), character-based action/adventure (Oddworld: Munch’s Oddysee), sports (NFL Fever 2002) and a multiplayer party game (Fuzion Frenzy).  This has to be a major surprise given Microsoft’s lack of experience with entertainment software.  Indeed, Halo is arguably a “killer ap,” the type of game that alone is reason enough for a consumer to buy a game system.

Despite the strong launch, Microsoft has its work cut out.  The Xbox is an unproven brand, getting a late start.  A strong launch was only the bare minimum Microsoft needed for long-term market success.  The PlayStation 2 still has a much stronger software lineup and Microsoft will have to work hard to catch-up and deliver on a consistent basis.  Microsoft may have a lot of money to spend, but its marketing efficiency is still well-behind that of Sony and Nintendo.  The jury is out on whether Microsoft can prove to be a successful long-term marketer of entertainment products.

While Microsoft and Sony slug it out for the older game consumer, Nintendo is off in its own corner of the game universe.  Nintendo dominates the under 14-year old market and there is no reason to believe that will change in the near future.  Once again, Nintendo was able to successfully launch a game system with a very limited software lineup.  Software publishing giant Nintendo’s GameCube launch titles, Luigi’s Mansion and Wave Race: Blue Storm, were significantly weaker than the Xbox launch games from new kid on the block Microsoft.  Nevertheless, everyone knows that Nintendo will eventually deliver the goods.  On top of that, the GameCube has a $100 price advantage on the competition, a big plus in a weak economy.

However, the hardware market share shakes out, it is almost inevitable that the interactive entertainment market will soar to record levels in the next few years.  DFC forecasts that, between the three leading 128-bit console systems, 65 million hardware units will be sold in the U.S. through 2005.  Based on sales during the holiday season 2001, we may be increasing that number in our early 2002 forecasts.  Stay tuned.