The video game and interactive entertainment market is changing at a rapid pace. The resurgence of Nintendo, increased investment from large media companies, growing digital distribution and advertising opportunities, the emergence of markets such as China, India, Latin and South America, Eastern Europe and many others issues are making the business more exciting, but also exponentially more complex. In order to help keep the industry informed on a regular basis, DFC Intelligence has launched the DFC Dossier, a vehicle that will let us focus on key issues on a regular basis. We will be releasing the DFC Dossier about 10 times a year. This premium, subscription report is designed for the key decision makers in the game industry, the people with substantial time and money invested in taking responsibility for shaping the future of the industry. If you would like to receive a free sample copy of the DFC Dossier please contact Ozzie Monge at omonge@dfcint.com.

We realize there are many people who would like to stay abreast of the issues facing the video game industry, but are not yet in a position to make a financial commitment to in-depth research. For this reason, we will continue to publish our free, monthly briefs. Our goal with the free briefs is to keep the general public informed of what we see as some of the biggest issues currently facing the industry.

Of course, the most pressing issue facing the game industry is growing the installed base for new game systems. Thus we thought this month we would take a mid-year look at how recent events in the marketplace are altering our forecasts and outlook as we go into the critical second half of the year.

DFC Intelligence often releases forecasts in multiple scenarios that account for different factors such as price decreases, new products and form factors, and other determinants that can cause a significant change in the marketplace. So far in 2007 it is safe to say that the market has followed what we called the Nintendo Best Case Scenario. More specifically:

· The Nintendo Wii is on track to meet our Nintendo Best Case Scenario forecasts for 2007.

· The Nintendo DS looks like it may exceed our 2007 forecasts by 10%.

· The Sony PlayStation 3 is on track to match our sales forecasts for 2007 under the Nintendo Best Case Scenario. In terms of installed base it looks like the PS3 will be in third place until at least mid-2008. To move more PS3 units in 2008 we think Sony will have to be more aggressive on pricing.

· The Microsoft Xbox 360 is running behind where they should be to maintain a strong market position. However, the Xbox 360 lineup is heavily weighted towards the second half of 2007. If the Xbox 360 can have a strong holiday 2007 they may be able to maintain at least a second place position for another year.

Conclusion: The pressure is on Microsoft to really drive sales of the Xbox 360 this holiday season. If Halo 3 and other products fail to drive Xbox 360 sales, the system will soon flirt with numerous unsavory scenarios, the worst of which is the danger of becoming a distant third in the video game market share battle.

There has been a great deal of focus put on Sony’s PlayStation3 launch woes. However, so far in 2007, the news from the Xbox 360 front has not been encouraging. In the first six months of calendar 2007, Microsoft shipped slightly over 1 million units of the Xbox 360 compared with Nintendo shipments of over 6 million Wii systems and Sony shipments of over 4 million PS3 systems. The Xbox 360 had a one year lead, but the competition is catching up fast.

Of course, the bulk of sales for the video game industry come in the second half of the year and it can be a mistake to extrapolate performance in the first six months to the full year. For the Xbox 360, Microsoft is putting the focus almost entirely on the second half of 2007. Microsoft has humbly called the upcoming Xbox 360 titles the “Greatest Holiday Lineup in Video Game History.” Whether it is the greatest lineup in video game history is of course subjective. However, the fall 2007 Xbox 360 release schedule is clearly a strong group of products with a wide variety of games. We would say that this will probably be the last holiday season that the Xbox 360 will have such a clear software advantage over the competition. If consumers are not lining up to buy an Xbox 360 this holiday, Microsoft clearly has problems.

The competition is breathing down the neck of the Xbox 360. The Nintendo Wii has almost caught up with the Xbox 360 in sales and the PlayStation 3 is looking to have a much stronger lineup in 2008. If Sony can keep its PlayStation 2 core base happy for another year or so, they will be in a good position to migrate them to a PS3. This means for Microsoft it is imperative they get consumers into the store NOW.

One concern is that Microsoft seems to be in danger of losing its position as the online game leader. Microsoft has pushed the Xbox Live online game service as the key distinguishing factor for its systems. However, the PlayStation Network does a good job and offers many of the same features as Xbox Live. Upcoming offerings like PlayStation Home and some fairly high-end downloadable games, start to push the PS3 toward the cutting edge when it comes to online offerings.

Even the Wii seems to have enough online features to keep the average consumer happy. The Virtual Channel let users download classic titles. We have been having fun playing YouTube videos on the Wii and battling people online with the recently released Pokemon Battle Revolution works just fine.

There is nothing about Xbox Live that would really standout for the average consumer. The ability to download high-definition video is nifty, but that is not why consumers buy video game systems. The competition actually stands out in several key areas such as Wi-Fi connectivity and, most importantly, being free to use. Xbox Live is the only service that requires a paid subscription to play others online. This is a key limiting factor for not only consumers, but also game developers. When Microsoft talks about Xbox Live having over seven million users, they include free Silver members with no online game play capability, old Xbox owners that have not upgraded to the Xbox 360 and Gold members. Only the Gold members can play Xbox Live games online.

In the grand scheme of things we don’t think online games will be a major determining factor in the purchase of this generation of game console systems. As always it comes down to the games. This holiday season, the Xbox 360 clearly has solid product offerings. We won’t be the judge of whether this is the greatest holiday lineup ever. What we will say is that if this lineup of titles can’t move boxes off the store shelves, come January, we will have to seriously revaluate Microsoft’s long-term position in the marketplace.

DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry.

A sample of reports on the video game and PC game market include:

DFC Dossier The DFC Dossier is published ten times a year and provides subscribers with regular updates and analysis of the latest market trends.

The Online Game Market This 800 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles.

The Market for Portable Video Games This 185 contains complete five-year forecasts by platform, a look at portable game software, portable game online trends, and business models and revenue expectations for game publishers.

Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Complete five-year forecasts for all individual console and portable game platforms by region (Asia, Europe, North America, rest of world)) through 2012. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as portable game systems.

The Business of Computer and Video Games This report includes an historical analysis, overview of individual hardware system, top-selling games, game genres, consumer demographics, business models, retailer profiles, marketing elements and case studies, industry trends.

Market Leaders in the Video Game and Interactive Entertainment Industry This 750+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 25-50 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company.

Overview of the Video Game and Interactive Entertainment Industry This report is designed to provide an overview of some of the key trends in the video game and interactive entertainment. The focus is on highlights from the forecasts and analysis of trends, game genres and business issues found in DFC reports.

The Game Market in China This 350 page report contains a complete look at the rapidly growing Chinese game market, including forecasts to 2010, government regulations, market entry strategies, business models, distribution options, game genres and numerous company profiles and case studies.