Since the dawn of video games, way back in the 1970s, every five years or so has seen a major shift in the market as old hardware platforms are discarded for the latest generation of game machines. At DFC Intelligence, we specialize in tracking trends in the interactive entertainment market and making forecasts for future growth. As we go into 2001, the need to take a clear-headed look at the game market is crucial. The market is going through a major platform transition and never before has there been such a powerful lineup of new hardware systems. This is a time of great uncertainty, both for industry insiders and the average game consumer.

Past hardware transitions have been hard for companies in the interactive entertainment industry. In both the 1984-1986 and the 1994-1996 timeframes, industry sales were way off as consumers were slow to buy new systems. Although DFC Intelligence does not predict a major industry recession, we do think industry software sales are likely to slump over the next year. The reason for the predicted slump is simple: uncertainty.

Two years ago the game market was straightforward for a publisher, release a title for either the PC, the PlayStation or the Nintendo 64. For the 2000 holiday season there are six major platforms for interactive entertainment software: the PC, the PlayStation, the Nintendo 64, the Sega Dreamcast, the PlayStation 2 and the Game Boy Color. By the end of 2001 there are likely to be three new platforms added to this mix: the Microsoft X-Box, the Nintendo GAMECUBE and the Game Boy Advance. Publishers are uncertain about what mix of platforms to support, and consumers are uncertain about what hardware system(s) to buy.

At DFC Intelligence we predict that over the next three to four years consumers will buy video game hardware in record numbers. However, predicting which individual systems consumers will buy is much more difficult. Never before has the market seen such four strong players as Microsoft, Nintendo, Sega and Sony. There is a good chance that the market is headed for an unprecedented period of fragmentation among hardware platforms. Therefore, it is worth taking a look at each of the individual hardware players and where they stand.

Say what you will about Sega, one thing that can not be denied is that over the past ten years the company has been a bold innovator. Sega has been a proficient publisher of new hardware and software. New types of games, marketing to older gamers, one of the first CD-based systems, a pioneer of online console gaming…Sega has never been afraid to blaze new ground. On the other hand, Sega has often been too hasty and released products before their time. Like many pioneers, Sega has often taken the arrows and paved the way for others to succeed. Sony owes a great deal of its success for the PlayStation from following many of Sega’s innovations while avoiding many of Sega’s mistakes.

As a company, Sega is currently in a precarious financial situation. Sega’s future depends on the Dreamcast. Luckily, with the Dreamcast, Sega has a potential winner. The Dreamcast is half the price of a PlayStation 2, offers online games, but most importantly has the best new games of the holiday 2000 season. The software lineup for the Dreamcast includes Sega’s best games in years. Jet Grind Radio, NFL 2K1, NBA 2K1, Shenmue, Quake III Arena, Metropolis Street Racer, Virtua Tennis and Skies of Arcadia are just some of the awesome Dreamcast exclusives. On top of that great "older" titles like Crazy Taxi and Sonic Adventure are now available for $19.99

With the great lineup of titles and the shortage of PlayStation 2 units, the Dreamcast has a real opportunity to do well over the next several months. However, this holiday season is Sega’s last real shot. With a major price advantage, the best software lineup, and the only new system consumers can actually find in stores, it is now or never for Sega and the Dreamcast. If a large number of consumers are not convinced to buy a Dreamcast in the next few months, it is probably all over for the system. On the other hand, with solid sales this holiday, the Dreamcast could be around for quite a while. Nevertheless, for this to happen Sega must have a good Christmas.

When you are on top there is nowhere to go but down. The PlayStation 2 was so hyped that there was bound to be disappointment on its actual release. However, industry reaction to the PlayStation 2 has been especially harsh, even as consumers clamored to get their hands on a system. Limited availability, mediocre software, high prices and potential hardware defects have plagued the PlayStation 2.

Despite all the problems, the PlayStation 2 is almost guaranteed to be a success on some level. While sales may never equal the level of the original PlayStation, consumers can be assured that if they buy a PlayStation 2 today, there will still games being released for the system two years from now. The current PlayStation 2 lineup may pale in comparison with the Dreamcast, but the system has been out less than two months. It takes awhile for games to come out for a new system and the PlayStation 2’s launch titles are arguably better than the Dreamcast launch titles.

The big concern with the PlayStation 2 has to be Sony’s limited software proficiency and lack of innovation in internal game development. With the game market, Sony has mainly been a follower, watching what companies like Sega and Nintendo do and trying to improve on their efforts. Sega starts targeting young adult gamers, Sony comes along and does a better job of it. Nintendo has an analog controller with a rumble pack, Sony releases the Dual Shock analog controller. Microsoft announces a hard drive for their system… well you get the idea. Sony has also been very dependent on third party developers. Key PlayStation franchises like Final Fantasy, Metal Gear Solid, Resident Evil, Tomb Raider, and even Crash Bandicoot, have come from outside Sony. Now that third party publishers have other options, one can expect that most PlayStation 2 titles will be available for other systems as well. A major advantage of buying a system from Sega or Nintendo has always been the great games that these two companies develop and publish only for their systems. Outside of Gran Turismo, Sony has no true exclusives.

Even with all the problems, Sony is still our favorite to remain the market leader with the PlayStation 2. However, it is no guarantee. We think it is highly unlikely that the PlayStation 2 will have the huge market share that the original PlayStation enjoyed.

A year ago the potential entry of Microsoft into the game hardware market was still a rumor. A year ago, many people laughed at the idea of Microsoft getting into video games. Now we know full well that Microsoft is planning to get into the video game hardware battle in a big way. As people have had a chance to look more closely at Microsoft’s plans for the X-Box no one seems to be laughing anymore. The X-Box looks to be a very serious player.

The X-Box specs are indeed stunning. This system looks to be the most powerful game machine on the market when it is released in late 2001. Of course, we all know that it is games, not technology, that excites most consumers. The main doubt about Microsoft is whether they can produce the type of products that will drive consumers to buy the X-Box.

The X-Box has become a serious player because game developers and publishers do seem to be supporting the system. So far, Microsoft has done an excellent job of reaching out to the top developers. Most developers seem to love the power and ease of development the X-Box affords.

Of course, Microsoft does not have the in-house software development skills of a Sega or Nintendo. On the other hand, neither does Sony. The PlayStation and PlayStation 2 rely mainly on a huge level of third party developer support to build their software library. Assuming the X-Box has the same level of third party development support as the PlayStation 2, the system could be a huge challenge to Sony. The PlayStation 2 has a strong brand name and a one year headstart, but the X-Box could be the better piece of hardware.

For such a powerhouse, Nintendo seems to get surprisingly little attention among hardcore gamers. Nintendo is often dismissed as a company that makes games for kids. Furthermore, overall PlayStation software sales have been about two times Nintendo 64 software sales. Not only is Nintendo’s system once again going to be the last one on the market, but the GAMECUBE name sounds like a toy for kids. No wonder many people seem to think Nintendo has lost their touch.

However, it is easy to forget that Nintendo is a software powerhouse. In terms of revenue, Nintendo is far and away the leading publisher of game software. Nintendo produces the blockbusters. Over the last three years all of the top 10 money earners have been Nintendo games. Nintendo’s problem with the Nintendo 64 were mainly due to high-priced software and a lack of third party support.

With the GAMECUBE, Nintendo has a chance to correct many of its mistakes. Because the Nintendo 64 was cartridge-based it was difficult for third party publishers to make money on N64 games. On the other hand, third party developers and publishers seem excited about the GAMECUBE because it will be CD-based. Cartridges also meant higher software prices for consumers. Nintendo can now compete with Sony on software prices.

Imagine a game system that has almost every game available for the X-Box or PlayStation 2 PLUS Nintendo exclusive brands like Zelda, Mario, Donkey Kong, Pokemon etc. Then look at how Nintendo has quietly expanded into more adult content with products like Perfect Dark/Goldeneye, Jet Force Gemini, Conker’s Bad Fur Day, Excitebike 64, 1080 Snowboarding and a growing lineup of internal sports games. From there think about the cool ways that you can combine the portable Game Boy Advance with the GAMECUBE. All-in-all you have one powerful system that could appeal to gamers of all ages.

All the talk of cool new game systems can be confusing and that is the point. The market is in a period of uncertainty that will not likely be settled until well into 2002. From a consumer perspective deciding which system to buy is more difficult than ever. Right now the Dreamcast has the best games, but will it be around tomorrow? One answer to that question, for some consumers, is that even if Sega fails, the games out today can justify the price of a Dreamcast. On the other hand, the PlayStation 2 will be around. However, consumers have to know that the price of the system will come down and the games will get better. Given that the GAMECUBE and X-Box are likely to be very cool systems, consumers with a budget for only one game system may want to wait.

In the end, although the new systems get all the press, most consumers will still stick with their old systems for awhile. If you look at the latest sales charts for November one can see that not only are most top selling titles for the PlayStation, Nintendo 64 and Game Boy Color, but they are also sequels to established brands. Even as they look to the future, gamers love the old and familiar.