May 6, 2004 9:52 AM PDT

Game handhelds to take spotlight at E3

New hardware will grab the spotlight next week, as the video game industry gathers for the annual Electronic Entertainment Expo trade show in Los Angeles.

While the major game machine makers are unlikely to spill the beans on their new living-room consoles, Sony and Nintendo will each show off new handheld players.

Sony's PlayStation Portable, introduced at last year's E3, is likely to be the star attraction. The company is expected to announce pricing, game selection and other details for the high-end portable game player.

The PSP is scheduled to go on sale late this year in Japan and during the first calendar quarter of 2005 in North America. Sony revealed in recent financial documents that it plans to ship 3 million units of the PSP by March 31, the end of its fiscal year--meaning that U.S. and European buyers may have to contend with shortages.

Also set to come out at E3 is Nintendo's new DS, a handheld game player with an advanced screen and other high-end features intended to make the device a step up from the company's market-leading Game Boy Advance player.

The Sony and Nintendo devices will follow a less-than-stellar debut by Nokia's N-Gage player, one of the first devices to attempt to expand the market for portable games beyond Nintendo's typically young audience. But analysts say the new devices, particularly the PSP, have a much better chance at reshaping the portable game business.

"Handheld gaming doesn't necessarily have to be a kids market," said David Cole, president of research firm DFC Intelligence. "It's a matter of getting the right product at the right price to appeal to a different audience. And Sony's coming at it from a totally different angle."

Cole said the PSP will benefit from Sony offering more generous publishing terms than Nintendo has done with its Game Boy franchise.

"The problem with the handheld market is that it's been a great business for Nintendo--but not for anyone else," Cole said. "Third-party publishers have really struggled to find a business model there. Sony has taken all the steps to make a viable business model for third-party publishers, and I think the game selection is going to reflect that."

Schelley Olhava, an analyst at research firm IDC, agreed that the PSP has the potential to change the portable game market. "They've come up with some pretty compelling features, and the Sony brand is really powerful in the gaming space," she said.

Nintendo's DS is more of an unknown, thanks to the company's reluctance to divulge any details about the device before its E3 debut.

"I'm not sure how to feel about it," Cole said. "Are they targeting an existing subset of Game Boy users looking to trade up, or are they targeting a whole new audience? Nintendo has done really well with products for their core audience, but they've struggled trying to expand the audience."

Price pressure
On the living-room side, Sony may have to respond to increasing pressure for a price cut on the current PlayStation 2. Microsoft dropped the price of its Xbox to $150 in March, while Sony has kept the PS2 at $180.

Microsoft's price cut more than doubled U.S. Xbox sales in April, analyst P.J. McNealy of American Technology Research wrote in a recent report. That puts monthly Xbox sales on track to edge past the PS2's perennial market lead--a situation Sony is likely to find intolerable, McNealy wrote.

"April retail sales data may be a compelling factor to cut prices sooner rather than later," he wrote. "Sony is sensitive to being perceived as anything but the market leader."

While the three major console makers are unlikely to do more than drop hints about hotly anticipated next-generation machines, E3 will have new consoles on display, thanks to several newcomers to the market.

Consumer electronics company Apex Digital will be showing its Discover console, a limited-function PC and DVD player that will read standard PC game discs and configure the games for display on a TV set. Apex expects to begin selling the $400 console this spring, targeting an audience of serious PC gamers who want to extend their hobby to the living room.

Also looking to enter the market this year is Infinium Labs, whose Phantom console is a similarly limited-function PC for playing standard PC games on a television--but without the DVD/CD drive. Instead, the Phantom will retrieve all game content over the Internet, through an Infinium-run subscription service.

Infinium President Kevin Bachus, a former Microsoft executive, said the subscription service is the key to making the Phantom work as a business and for enlisting support from game publishers, which he expects to welcome the arrival of a new sales channel with longer legs than traditional retail distribution. "With our service, there's really no barrier to entry for publishers," he said. "They get incremental revenue without any additional investment."

Cole said the new consoles have a chance to succeed by targeting small special-interest audiences. "They're talking about goals for hundreds of thousands of users, versus millions," he said. "That makes more sense than trying to take on the PS2. There are niches in the marketplace the big companies tend to ignore, and there's room to be successful on a much smaller scale."

On the software side, the big new thing at this year's E3 will be the same as last year's: "Halo 2" (the sequel to Microsoft's top-selling Xbox title) and PC sequels "Half-Life 2" and "Doom 3" have all been subject to repeated delays--in one case, the result of a high-profile hacking attack.

And E3 attendees will be exposed to another assortment of oddballs this year, including "Playboy: The Mansion," a role-playing, empire-building game that turns the player into a virtual Hugh Hefner. (No word yet on whether the game includes Viagra and alimony segments.)

 

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