Amid hype, new gaming console frenzy creates headaches
DALLAS - The release of the new PlayStation 3 and Wii video game consoles this weekend may be a boon for gamers, and ultimately for the $10 billion-plus game industry.
But in the short term, new system launches are as much a headache as an opportunity for retailers like Grapevine, Texas-based GameStop Corp. and manufacturers Microsoft, Sony and, to a lesser extent, Nintendo.
And the challenge only seems to get bigger with every new generation of consoles.
"I think it's tougher than it used to be," said Jeff Karp, senior vice president of North American publishing for Electronic Arts, the biggest game publisher in the world. "The complexity of every launch now is that much greater."
There are several reasons why console launches are hard and getting harder.
For one, console makers always upgrade their hardware when they release a new system, which means manufacturing processes have to be revamped, but Sony has crammed several bleeding-edge components into the PS3.
One of those components, the Blu-ray disc drive, has proven difficult to mass-produce, leading to shortages through at least the end of the year.
Those shortages are compounded by the fact that gaming has gone mainstream.
So while fewer consoles are coming out, more people are trying to buy them, exacerbating an already frustrating situation.
Also, if few consoles are being sold, few games are being sold - and that's where the industry makes most of its profit.
Sony has promised 400,000 PS3 systems will be available in the U.S. today for the launch.
But Colin Sebastian, interactive entertainment analyst for Lazard Capital Markets, estimated this week that Sony probably has between 150,000 and 200,000 systems available right now.
He said that game publishers won't suffer too much from the shortfall, since most games sold this year will be for consoles already on the market.
"The financial impact over the holiday period from new consoles will likely be more significant for hardware manufacturers and video game retailers, such as GameStop," Sebastian said in a research report.
GameStop spokesman Chris Olivera said he couldn't discuss shipment numbers and other financial details, since the company is in a quiet period before reporting quarterly results next week.
But he confirmed that GameStop will not be able to fulfill all its pre-orders for the PS3 on launch day - it should be able to do so before Christmas - and has canceled all pre-orders placed by GameStop employees.
Unlike last year's equally anemic Xbox 360 launch, though, a steady stream of PS3s is expected through the holidays.
For Sony, that might actually be bad news.
Research firm iSuppli Corp. estimated Thursday that Sony will lose between $240 and $300 on every PS3 sold.
While taking a loss on the hardware and turning a profit on the games isn't a new strategy, the tiny number of PS3 consoles in living rooms means game sales will be limited.
Sony, which also publishes games, has said it expects to lose $1.7 billion in its gaming division in the fiscal year ending in March.
Microsoft is also struggling to squeeze a profit from its gaming efforts.
In the first quarter, Microsoft had a net loss of $96 million in its Entertainment and Devices division, although that was down from a $173 million loss a year ago.
Nintendo, for its part, has said the Wii will be profitable from day one.
In fact, the Wii, which is built around an innovative, motion-sensitive controller rather than HD graphics or movies, is expected to be in much greater supply than the PS3.
The console is also the least expensive of the three new systems, at $249.
Nintendo's decision not to mimic the cutting-edge systems built by its competitors has paid off.
For the fiscal year ending in March, which includes the Wii launch, the company predicts net income of a little over $700 million.
But even that's down from about $830 million in 2006.
Still, the launch woes will probably fade over the next year or so, as the consoles become easier to make; demand and supply balance out; and game sales accelerate.
Sebastian predicts that software sales in the U.S. will grow from $7 billion last year to $11 billion by 2009 or 2010.
"We expect new consoles to sell well through the end of the year, and this fifth major platform transition is likely to be the largest product launch in the industry's history," he said.