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Game Market Watch: The Big Boys Play To Win

LOS ANGELES -- Game Market Watch Conference concluded its two day gathering Tuesday with a flashy demonstration of new gaming content from Microsoft Game Studios and a lukewarm forecast for console game growth from Jupitermedia analysts.

Having evolved from best selling parlor games like Solitaire and PC simulator games, Shane Kim, COO for Microsoft Game Studios, has been one of the guiding forces behind Microsoft's gaming maturity in a cutthroat industry that requires its key business players to "have a strong appetite for risk," said Kim.

While the Xbox console and the Xbox Live broadband game service are still Microsoft's prize gaming initiatives, Kim admits that there has been a lot of trial and error involved.

"We've made our share of mistakes," said Kim, to the crowd of gaming executives.

Microsoft was late to the console gaming party with its 2001 release of the Xbox and its November 2002 release of Xbox Live. All totaled, it cost Microsoft a $2 billion entry fee.

The software giant has maintained that it was pursuing a different strategy from Japanese firms Sony and Nintendo, which only provide network adaptors for gaming connectivity and require users to supply their own Internet Service Providers and game publishers to supply their own infrastructure.

But Microsoft bought the farm with a product that could supply gamers with connectivity services and game publishers with the underlying infrastructure to enable online gaming.

Despite Microsoft's confidence in the gaming space, acceptance of its pricey Xbox platform has been somewhat stymied by lackluster sales and has garnered far more popularity in Asian markets than in the U.S.

At present, the Xbox has 350,000 subscribers in the U.S., Canada, and Japan combined, according to Jupiter Research. While rival Sony PlayStation2 is holding steady at 500,000 network adapters sold in the U.S. alone.

The reason for the Xbox's slow growth, say analysts, could be because connectivity-based gaming consoles are still at the mercy of limited bandwidth supply, and until high-speed Internet access hits the mainstream market in the U.S., console games that rely on connectivity may continue to grow only in stops and spurts, say market analysts.

According to Jupitermedia, broadband growth in the U.S. reached only 10 million households in 2001. Whereas by 2007, there are estimates that suggest nearly 41 million homes will be high-speed enabled.

Until then, the console market remains in limbo.

Another negative factor influencing Xbox sales is there is still only limited interest in connectivity consoles, according to Jupitermedia.

A recent survey conducted by the research firm discovered that there is skepticism and reluctance among adult gamers regarding the benefits of investing in a connectivity feature, and that a huge majority of younger gamers feel that console connectivity should be a free service combined with the console purchase.

Jupiter's research shows that among 18-24-year-olds, the prime market for console gamers, 29 percent of them were not interested in console connectivity. Among the 35-year-old and older group, 51 percent were not interested in console connectivity.

Jupitermedia also contends that despite the availability of connective consoles, PC gaming continues to dominate the market.

Adoption rates for PC gamers are significantly higher than console gamers, says Jupiter.

In 2001, there were 41 million PC gamers and by 2007 that number is expected to surge to 63 million. That translates into one out of every seven gamers using a PC instead of a console.

Meanwhile, console gamers clocked in at only one million in 2001, and are expected to climb to 23 million by 2003.

"It's not terribly surprising," said Joe Laszlo, senior analyst for Jupiter Research. "Head-to-head, first-person shooters, and parlor games are still the chosen favorites."

The other reason, according to Laszlo, is that PC game software is paid for upfront and rarely includes additional fees, with the exception of Sony's massively multiplayer game EverQuest and Microsoft's Asheron's Call, both of which require the purchase of software and then a monthly follow-up subscription fee.

Whereas console games generally require a subscription fee, which requires a commitment on the part of the gamer and attracts a more select, dedicated group of players. But which also creates a steady revenue stream for the game manufacturers.

For a piece of Microsoft's Xbox Live, gamers have to buy a $49.95 starter kit, which includes 12 months of access and a headset kit for voice communications.

The upside to all this market uncertainty is that online gaming will eventually make a turnaround and could some day generate substantial revenue, says Jupiter. But not right now.

"Connectivity will become a critical factor in building compelling gaming environments," said Laszlo. "Online connectivity as a fundamental feature extends the life of the game itself, and experience in the industry now will pay off in the next generation."

In the meantime, Kim and his Microsoft colleagues are just now starting to find their footing in an otherwise fiercely competitive game space. According to Kim, Microsoft's new gaming strategy will be geared toward a more streamlined and ambitious series of interactive games for the Xbox.

"Interactive games are going to be around for a long while," said Kim. "They are on the cusp of becoming a major part of entertainment."

Examples of up-and-coming Microsoft games for the Xbox include Fable and Cameo, both console-based role-playing games. Microsoft Games Studios will also increase its push toward online sports games, which have proven to be endlessly popular among men and women across the board.

Microsoft is also creating alliances with broadband providers that will carry an "Xbox compatible" seal and will hopefully attract more hardcore gamers to its stagnant user base.

Microsoft will also release the sequel to its huge Xbox moneymaker Halo, a sci-fi, first-person shooter game that can be played as a multiplayer game through Xbox Live or as a single player game.

As part of Microsoft's more quality-oriented strategy, according to Kim, they are no longer in a hurry to rush product to market and compete head-to-head with Nintendo and Sony's product rollouts, partly because Microsoft Game Studios has a patient and very wealthy sugar daddy: Microsoft Corp.

Because of this added luxury factor, says Kim, the widely anticipated Halo2 will not make an appearance on retail shelves until the spring 2004, as opposed to the holiday season, which is typically the target time for many other game manufacturers. In the meantime, Microsoft will continue to foster relationships with independent game developers and hone in on putting out fewer, but higher quality moneymakers.

Editor's note: The Game Market Watch Conference is produced by Jupitermedia, parent company of this Web site.