May 21, 2008 4:00 AM PDT

The state of the next-gen video game console

Posted by Daniel Terdiman

The Xbox 360 became the first next-gen console to sell 10 million units in the United States.

(Credit: CNET Networks)

With the release Monday of Wii Fit, the exercise game that some video game analysts have predicted could become one of the best-selling titles of all time, it was Nintendo's turn to dominate headlines related to the so-called next generation of consoles.

The "next-gen" era began in November 2005 when Microsoft launched its Xbox 360 and then really kicked into gear a year later when Sony and Nintendo pulled back the wraps on the PlayStation 3 and Wii, respectively.

Being big business--video game sales in the U.S. alone in 2007 were $9.5 billion--everyone has been wanting to declare the generation's winners and losers since pretty much the first day all three consoles were on the market.

Doing so, of course, is a tricky proposition because console generations last for years, and sales ebb and flow according to a number of factors. But one thing that seems clear is that past success or failure is not a guarantee of future performance. And so while plenty of armchair quarterbacks have already written the results of the next-gen console wars, industry experts say the final results could turn current assumptions on their heads.

Here's where we are today: Nintendo has shocked the world with its Wii, bringing millions of new mainstream gamers into the fold with its innovative motion-sensitive controller, low price, and fun, easy-to-use games. The Wii was presumed the generation's sure third-place entry and now is seen as its winner.

Similarly, with the expected loyalty of more than 120 million PlayStation 2 owners, Sony's PlayStation 3 was expected to be the next-gen winner, especially with a built-in Blu-ray player and incredible graphics courtesy of its Cell processor. Yet, the PS3 is generally seen as next-gen's loser, due to high prices, the resulting lackluster sales, and the perception of a paucity of killer games for the platform.

(Credit: Shaun Charity/CNET Networks)

The Xbox 360 was expected to be a solid runner-up, but instead, it hit 10 million U.S. units sold first, dominates the list of must-have titles, and has seen its online component, Xbox Live--with more than 12 million users--become the class of the genre.

Too early to tell
But this is indeed a marathon, not a sprint. Previous console generations have had five-year cycles, but the next generation looks like seven or more.

"I think that the landscape still has a lot of change to go," said Michael Pachter, a video game analyst with Wedbush and Morgan. "Where we're at is still really early in the cycle."

According to Pachter, price is the one issue that could most drastically alter the next-gen console landscape.

Currently, the Wii costs $249--if you can find one--and top-end Xboxes and PS3s cost $349 and $399, respectively.

To Pachter, that's too much to ever attract PS2-like sales numbers.

"Consumers just have this image that consoles cost $199 or less," he said.

Pachter predicted that between now and the 2009 holiday season, both Microsoft and Sony will cut the prices on their consoles.

He expects Sony to slash $50 off the price this year and again next. That would mean a $299 PlayStation 3 for the 2009 Christmas season.

That could also mean the PS3 might finally start to give Sony the sales it has hoped for.

The PS3 was expected to be the next-gen winner based on the huge number of PlayStation 2 owners, but the new console stumbled out of the gate and is currently in third place.

(Credit: Sony Computer Entertainment of America)

In a report issued earlier this year, IDC analyst Billly Pidgeon projected sales numbers for the three next-gen consoles, through 2012.

Pidgeon suggested that by 2012, the PS3 will lead the pack, with more than 107 million units sold worldwide, while the Wii will be just behind, at nearly 107 million units.

In the shorter term, however, IDC suggested that the Wii is poised to be the dominant console, most likely overtaking the Xbox this year in total sales.

"Our forecast calls for the Wii outshipping the Xbox 360 and the PS3 through 2010," Pidgeon wrote.

To some, the big shock in Pidgeon's report is that the Xbox 360 will have fallen far behind by 2012, with just over 40 million units sold.

To Pachter, these predictions have the ring of truth.

"I think Microsoft has an image issue," said Pachter. "They've branded themselves as the hard-core gaming rig, and I just don't think that the hard-core audience is that big. Thirty or forty million, but not 120 million. I think they're going to keep capturing the hard-core, but they're never going to appeal to family, and Sony's always going to appeal to family."

Microsoft clearly disputes this conclusion.

To Aaron Greenberg, director of product management for Xbox 360 and Xbox Live, there are already stats demonstrating that the Xbox 360 is attracting broad appeal. One, he said, is that there are already 16 Xbox 360 titles with a million or more units sold in the United States, compared with eight for Wii and only two for PS3.

"Being first to market was a big advantage for us," Greenberg said, referring to Xbox's year head-start. "It allowed us to become the default platform for third-party (publisher support). We've got 12 million users for Xbox Live, the largest game lineup, and the most exclusive titles."

Microsoft, of course, has a stake in promoting the sense that the console wars are over before they really begin, but the numbers don't necessarily support that idea.

According to research firm NPD, through April 2008, Microsoft had sold 10.08 million Xbox 360s in the United States, Nintendo had sold 9.51 million Wiis in the U.S., and Sony had moved 4.29 million PS3s.

But despite the Xbox leading the pack so far, the Wii clearly has the momentum. It sold 714,000 Wiis in April in the U.S., compared with just 188,000 Xboxes and 187,000 PS3s.

"We can say we're pleased with the way consumers of all kinds have responded to the Wii," said Denise Kaigler, Nintendo of America's vice president of corporate affairs. "Everyone continues to have great experiences with their family and friends. Plus, NPD says that no video game system in history has sold so many so quickly."

Bumps in the road
Despite its amazing success so far, Nintendo has had trouble meeting demand for the Wii. So its sales could even be higher.

The Wii was not expected to appeal to very many people but it has been a sensation, opening up the video game industry to a large number of new players and selling out wherever it is sold. It is now expected to take over the next-gen sales lead in the U.S. in a matter of months.

(Credit: Nintendo)

Microsoft, too, has had bumps in the road. It also had console shortages and a very widely discussed series of problems with Xboxes breaking down.

But most agree that Microsoft's answer to its quality problems has been a case study in responsiveness.

"You have to give them a ton of credit," said Pachter, referring to Microsoft's offer of three-year warranties for Xbox 360s. "They didn't back away from it, and they didn't try to blame it on anybody else."

Sony's problems, of course, have been the most well-chronicled.

Sony was originally expected to follow its dominance with the PS2 into the next generation.

Instead, from the get-go, the PS3 was seen as being far too expensive at $599, built-in Blu-ray player or not.

Sony acknowledges the problems, but argues that the PS3 is finally ready to turn the corner.

"There were two main barriers to entry (to the PS3) for consumers: cost and content," said Patrick Seybold, director of corporate communications for Sony Computer Entertainment America, "and we have addressed both of those. We reduced the price...and we demonstrated an exceptional lineup of products that certainly separate PS3 from the rest of the industry."

But another problem for Sony has been the perception that there aren't very many must-have games available for the PS3 and that cross-platform titles sell better on Xbox. Hits like Grand Theft Auto IV, Assassin's Creed, Guitar Hero III, Electronic Arts' Madden football, and other cross-platform games seem to sell better on Xbox than on PS3, and the biggest PS3-only successes have been MotorStorm and Resistance: Fall of Man.

The Xbox 360, by comparison, has had a series of such hits, including Halo 3, Gears of War, and BioShock, which is being turned into a movie.

Similarly, new games like Fable II, Gears of War 2, and Halo Wars are coming exclusively to Xbox 360.

But PS3 owners can look forward to Metal Gear Solid 4 and Little Big Planet, both games that are expected to sell a lot of copies, and probably drive additional sales of the console itself.

Wii Fit, in the meantime, is expected to be the kind of game that appeals to a very wide audience.

"I think it's going to attach about a one-third rate to all Wiis," Pachter said.

But of course, the Wii has had its share of hit games, including Super Mario Galaxy, which was impossible to find last Christmas, Mario Kart Wii, and Boom Blox, Steven Spielberg's first game under his partnership with Electronic Arts.

So what happens now?

One thing seems evident: This is a good time for the video game industry. According to NPD, the whole business is booming, with $5.47 billion in sales through April, up 31 percent from $4.18 billion a year ago.

No one knows, of course, if Pidgeon's analysis of the future of the consoles will play out, but even if it does, it shows that all three console platforms have a strong future.

"I think what's most exciting for the entire industry is the amazing growth we've been witnessing," said Greenberg. "The biggest entertainment launches are now in the games industry...We feel pretty bullish. We feel this year will be the biggest year in video games history."

On June 10, Geek Gestalt hits the highways for Road Trip 2008. I'll start in Orlando, Fla., and visit many of the South's most interesting destinations. Stay tuned, and be sure to keep up, both now and during the trip, with what I'm doing on Twitter.