NEXT CONSOLE CYCLE COULD BEGIN WITH A ‘WHIMPER,’ ANALYST SAYS

Pachter warned that “for every long-time console owner who is genuinely excited about the launch of a new console, there is a recent console purchaser who has the potential to be alienated.” He said there were “several decisions” that might “influence the degree to which consumers accept a new console introduction or resent it,” among them: Backward compatibility, how much game play enhancement they actually offered, the amount of games available for them, the addition of features or new functionality and pricing of hardware and software.

The lack of backward compatibility in any of the next consoles could prove disastrous, Pachter said. He guessed, however, that each of the 3 major console makers would make their systems backward compatible, including Microsoft, despite rumors that the company was weighing whether to include that feature.

Pachter called the potential lack of sufficient software support for the next consoles at launch “the biggest land mine,” noting how few games were available for Nokia’s N-Gage handheld devices last year. Pachter said the next-generation consoles had “the potential to similarly alienate consumers, in particular the ‘Xbox Next’ should Microsoft fail to enlist the support of an adequate number of 3rd-party developers.” He called Microsoft’s first-party development capability “far inferior” to rivals Nintendo and Sony, while the Xbox maker “lacks the history in Japan to enlist significant support” from Japanese 3rd-party publishers. Because of this, Pachter predicted Microsoft will end up launching the next Xbox console “in a fashion similar to its last console launch -- with a relatively thin lineup of content” and “we think consumers will be alienated by such a move.” Although Microsoft will likely be able to offer “bigger” exclusive games next time around, Pachter said the company’s “poor track record in choosing content… gives us limited confidence that it will succeed this time around.”

Adding to the difficulty that Microsoft could have in offering adequate content support for its next Xbox initially was the extended amount of time that’s expected to be required to make games for the next consoles. “It is not clear to us that software for the next-generation consoles will be ready in time for a 2005 console launch,” Pachter said. He predicted that “the average next-generation console game” will “take at least 3 years to complete, compared with the average 20-month completion time for current-generation games.” Because a potential 2005 console launch was “only 18 months away, we do not expect many titles to be available to support such a launch,” he said. Echoing game publishers, Pachter said he expected the current game console will, therefore, last considerably longer than the last one, when most game makers stopped making titles for the first PlayStation prematurely. Pachter said he didn’t expect publishers to make the same mistake this time.

Of “PS3,” Pachter said Sony faced a dilemma if it wanted to add the same kind of features to the console that were offered in its PSX HDD DVD recorder/game system hybrid, now shipping only in Japan. He speculated that if Sony wanted to include DVR functionality, broadband Internet accessibility, wireless LAN functionality and DVD read-write functionality, PS3 might have to cost $500 -- a price that “many consumers will be alienated” by.

Despite improvements that Nokia made in its latest N-Gage device, Pachter predicted the platform “will remain a footnote in handheld gaming, and expects its sales to drop to near zero when the ‘Nintendo DS’ and Sony PSP are on the market.”

Pachter said he expected PS2 will continue to be “the dominant console” of the current cycle, with Xbox remaining “a distant 2nd” and Nintendo’s GameCube following slightly behind at #3. Saying Sony had “a competitive advantage over Microsoft in the breadth of first-party titles available for bundling” with hardware, Pachter said he expected Sony “to exploit this advantage in the price wars.” SCE America Exec. Vp Jack Tretton told Consumer Electronics Daily last week that his company ruled out an additional PS2 price cut this year (CED June 15 p3). But if Microsoft again lowered the Xbox price, Sony could conceivably opt to compete with Xbox via attractive bundles.