Geek Gestalt

U.S. video game industry sales plunged in October, dropping 19 percent from a year earlier, and 16.4 percent from September, according to data released Thursday by the NPD Group.

But with the tremendous, record-breaking, out-of-the-gate performance of Activision's Call of Duty: Modern Warfare 2 and the coming holiday season, NPD is bullish on the industry's fortunes for November.

Still, the $1.07 billion in total sales turned in by the industry in October were paltry, compared with $1.32 billion in October 2008 and $1.28 billion in September 2009. NPD analyst Anita Frazier tried to soften the blow a little bit in her monthly report, noting that while sales were down precipitously in October, it was still the third-best October sales report turned in by the video game industry.

"The continued economic turmoil, and in particular the troubling unemployment rate, is undoubtedly impacting industry sales," Frazier wrote in a statement. "Our latest Economy Tracker indicated that although consumers' general opinion about the economy is improving, their outlook on their own personal situation is worsening. If consumers' personal outlook continues to erode, they could very well be much more conservative with their holiday shopping this year."

That last sentence is no doubt one of the most chilling group of words imaginable to the honchos at companies like Microsoft, Sony, Nintendo, Electronic Arts, Activision, and many others involved in putting video game hardware and software in consumers' hands, especially as their most important sales months of the year are now at hand.

As always, regardless of the monthly results, the big console makers each had some things to celebrate in the NPD numbers.

For Nintendo, which has seen sales of its once-high-flying Wii dip and perceptions that the console's days of seeming infallible may be over, the numbers had some hope: in October, the Wii took back first place among the consoles--respectively the Wii, Microsoft's Xbox 360, and Sony's PlayStation 3. In October, Nintendo moved 506,900 Wiis, beating out the PS3 (320,600) and the Xbox (249,700).

Sony was coming off the first month the PS3 won since being launched in the fall of 2006, but while the console was beaten out by the Wii, there must certainly be some measure of gratification in having the PS3 come out ahead of Microsoft's console offering.

"In October, we saw continued momentum [for the] PS3, with nearly 70 percent growth, when compared to last October," Peter Dille, Sony Computer Entertainment of America's senior vice president of marketing, said in a statement. It was "the only console to see any growth year over year."

NPD itself touted Microsoft's chief bragging point for October: "Across all categories, the Xbox 360 platform contributed the greatest portion of total industry sales, representing 27 percent of total industry sales for the month," Frazier wrote.

Yet despite the record-smashing first-day sales posted this week by Call of Duty: Modern Warfare 2, the video game industry as a whole is facing a very painful reality: If sales don't improve quickly, there will be layoffs, slashed budgets, canceled games, and more.

Electronic Arts, for example, announced this week that it is planning to lay off 1,500 people as part of a major restructuring--the company's latest--and as a way to stave off growing losses.

And while the industry may have hoped that console sales--especially with prices for next-generation hardware now at their lowest levels ever--would help it rebound, Frazier did not offer much hope.

"Year to date, the hardware category has experienced the sharpest decline in the industry, with unit sales down 10 percent compared to the same time period last year," Frazier wrote. "Recent price cuts helped spur a one- to two-month increase in unit sales, and this month's Wii sales reflect that boost, but the other platforms have not sustained the sales momentum [after] price reduction."

CNET News reporter Ina Fried testing out Microsoft's much-heralded Project Natal.

(Credit: CNET News)

According to a report issued by British games magazine MCV, Microsoft's much-heralded Project Natal hands-free gaming control system could hit store shelves as soon as November 2010 and cost as little as $50.

MCV said that Microsoft could launch Natal with a 5 million unit global shipment.

"This and other details have emerged following a behind-closed-doors Microsoft tour of U.K. publishers and studios," MCV wrote. Microsoft "has been demoing the tech and detailing its 2010 plans in order to spur more development support."

MCV also said that it had been told by a publishing source that Microsoft is "trying to get as close as possible to 'impulse buy'" with Natal.

The technology is considered very important for Microsoft as it seeks to differentiate the Xbox from Sony's PlayStation 3 and Nintendo's Wii.

The Seattle Times weighed in on the story by predicting that, "This is probably a preview of what (Microsoft CEO) Steve Ballmer and (president of the entertainment and devices division) Robbie Bach will disclose at the Consumer Electronics Show in January."

Microsoft did not immediately respond to a request for comment.

The PS3 Slim, the newest iteration of the PlayStation 3, comes with the lowest price ever for the PS3: $299. Because of the price cut, the PS3's sales rose in August and September, and many people see signs of a resurgence for the console.

(Credit: Sony)

Is Sony's PlayStation 3 at long last ready to stop being its rivals' punching bag?

With its first-place finish in September in number of units sold, Sony finally has a tangible response to persistent criticism that its PS3 can't keep up with its next-generation video game console competitors, Microsoft's Xbox 360 and Nintendo's Wii.

For the month, according to video game analysts at the NPD Group, Sony sold 491,800 PS3s in the United States, while Nintendo moved 462,800 Wiis and consumers bought 352,600 of Microsoft's Xbox 360s. It was the first time since the next-generation console wars began in earnest nearly three years ago that the PS3 finished a month on top.

Yet, as everyone knows, a single positive piece of data does not a trend make--something Sony's competitors are quick to point out--especially when the existing trend is so contradictory. So, on the heels of those rosy-at-long-last September numbers, and the August price cut and launch of the new PS3 Slim that preceded them, can Sony finally demonstrate conclusively to its detractors that it is through being badly outmaneuvered?

According to a group of experts interviewed for this article, the answer appears to be yes. No one will yet predict that Sony is ready to grab hold of the leadership position it enjoyed in previous console generations. However, there does seem to be widespread agreement that for the first time since its November 2006 launch, the PS3 is ready to seriously compete for that role.

"I think that the fact that they did introduce a new footprint for the PS3 (the Slim) and a lower price point, coupled with some of the really high-demand games" coming out for the platform, "could really prime the pump for Sony to have a resurgence for the PS3," said Brian Crecente, editor of the popular video game blog Kotaku.

"I do think that we are probably going to see, if not it topping the charts leading into the holiday, it...doing better than it has in (the recent) past," he said.

Beginning a comeback in a hole
There's no doubt, however, that Sony is beginning any PS3 resurgence in a rather sizable hole. Since the start of the current console generation (in November 2006 for the PS3 and the Wii, and November 2005 for the Xbox 360), Sony has sold 25.26 million PS3s worldwide and 9.76 million in the U.S, according to VGChartz, a Web site that aggregates video game sales data. By comparison, the Wii has moved 54.19 million units worldwide, of which 25.05 million were in the U.S., and Microsoft--with its one-year head-start--has sold 32.51 million Xboxes, including 18.66 million in the U.S.

By those measures, the PS3 has a minimum of a 2-1 disadvantage, in the U.S. at least, when it comes to the PS3 install base. That fact puts pressure on third-party developers working on games for the console because they know that there are at least twice as many Xbox buyers in the U.S. as there are for the PS3.

That dynamic, in turn, has led to one of the biggest complaints over the years about the PS3: that the software lineup has paled in comparison to that of the Xbox. To be sure, Sony has always disputed that notion.

Hard to prognosticate
Over the last three years, this space has been home to multiple arguments that the PS3 would one day emerge as the clear-cut winner of the next-gen console wars. But there's also been plenty of room here for the theory that Sony's flagship video game device was doomed to languish behind the Xbox and the Wii.

Clearly, prognostication about the PS3's fortunes has been difficult. And with the state of the economy in flux, supply chains always hard to analyze, and consumers' whims ever-changing, there's no way to know for sure how the console wars will go from here on out.

But Sony definitely feels like it's finally in the driver's seat.

"Overall, we're just hitting a stride that just (reasserts) what we knew all along--that there's tremendous value under the (PS3's) hood," said Julie Han, Sony PlayStation spokesperson.

That's a notion that video game industry analysts agree with. Yet when talking about Sony's laudable September numbers, they also point, first and foremost, to the fact that there were a lot of consumers sitting on the sidelines, just waiting for the company to lower the PS3's price. In August, with the release of the $299 PS3 Slim, Sony did just that.

"It's really a combination of pent-up demand and (the point) where value and pricing meet," said Jesse Divnich, an analyst with Electronic Entertainment Design and Research. "The (thing) about the PS3 was, it was really a system ahead of its time. Developers didn't really have the capabilities to take advantage of all the power in the PS3, and at the same time you had systems like the Wii, which just had perfect timing. But now, (the PS3) has caught up."

That means, Divnich continued, that the time has finally come where the PS3's jam-packed collection of a powerful video game console, a Blu-ray player, and built-in Wi-Fi met consumers' needs, even as the price dropped to where large numbers of people feel they can afford it. The lowest-priced Xbox costs $199, while the Wii runs $249.

Finally hitting a 'sweet spot'
Divnich said that at $299, the PS3 has finally hit its "sweet spot." And he said while it's likely the initial boost of sales that came as a result of the August price cut will slow down, "Long term, into 2010 and 2011, I don't think the PS3 is going to be in last place to the degree it was before. The gap between the systems will be much smaller."

For his part, Wedbush Morgan analyst Michael Pachter said he expects the PS3 to outsell the Xbox during the holiday season because of the perceived value of the $299 PS3, loaded as it is with the Blu-ray player and Wi-Fi. He and others do, however, still think that Nintendo will sell more Wiis because of the broader general appeal of that device and the fact that it is seen as a better Christmas present.

"Is Sony back? Yeah," said Pachter. "Are they back as the leader? Probably not. Are they back in second? Probably."

Another analyst, Lazard Capital Markets Senior Vice President Colin Sebastian, also attributed the September PS3 sales boost to the "pent-up" demand for a lower price, and said that there would have been serious trouble for the console if the results had not been so good.

"If they had not shown the uptick with the price cut," Sebastian said, "then we'd all be putting a nail in the coffin for (the PS3). But what we're seeing is that there's still life left for the PS3, and that's an encouraging data point (for Sony)."

Still, as Pachter put it, "Microsoft is not the type of company that's going to stay (down) for a long time. They don't like it."

That's why, Pachter said, if the PS3 can keep pace with the Xbox for the next few months, there's a good chance that Microsoft will drop the price of its console another $50 sometime early next year, a move he doesn't think Sony would be able to match.

To be sure, Microsoft wouldn't easily cut the Xbox's price--"they're certainly not going to give money away just for the hell of it," Pachter said--but it is an arrow in their quiver.

Sebastian said he, too, could see an Xbox price cut next year, as well as one for the Wii. Would Sony follow suit if its rivals did so?

"They could do it," Sebastian said. "It's just a matter of what their tolerance is for absorbing less revenue on the hardware side, and whether they can make up that revenue on the software side."

According to Xbox spokesman David Dennis, a price cut is just one of many things Microsoft would consider as a way to keep pace with the market. He said other possibilities include different hardware and software bundles. "There's a lot of different levers you can pull," Dennis said.

Not surprisingly, Dennis is dismissive of the PS3's sales boost. He agreed that there were a lot of people waiting to buy the console at a lower price, but said that the impressive initial jump in units sold came as a result of early leaks of pictures and information about the PS3 Slim, and so there were "months of pent-up demand."

Further, he predicted that Sony would not see a sustained resurgence for its console and that even in September, when the PS3 outsold the Xbox and the Wii, Microsoft brought in more revenue for the entire Xbox ecosystem--including accessories, software, and fees for online services--than did Sony.

The two halves of 2010
In the end, most people seem to agree that the overall fortunes of the consoles have as much to do with software as price. That's why each of the analysts talked to for this story pointed to a bright future for Sony: They see a lot of strength in the PS3's coming games lineup, which includes titles like God of War III and Gran Turismo 5. And then there's also Sony's PlayStation Motion Controller, which could bring the PS3 more Wii-like functionality.

That's why Divnich said he thinks that the PS3 is likely to dominate the first half of 2010.

But he also expects that Microsoft will release its highly anticipated Project Natal motion-sensitive controller in the second half of 2010, a move that could stir up the console pot anew. Indeed, Divnich said he thinks that the Xbox will once again overtake the PS3 at that point.

And after that? It's anybody's guess.

Is this the new PS3 Slim? Rumors have it Sony may unveil such a device at the Gamescom show in Germany Tuesday. On the other hand, it may all be fanboy-driven fervor with no substance. Either way, to CNET News reporter Daniel Terdiman, the excitement is unlikely to be matched by the reality of anything Sony may introduce.

While all new technology product rumors have to be taken with a grain of salt, you can sometimes tell--often by the volume of online chatter about a particular morsel--that one is more likely to turn out to be true.

That seems to be the case with the so-called "PS3 Slim," a rumored new PlayStation 3 form factor that could well be on the horizon. And if the latest slew of blog and forum posts are right, there's a pretty good chance Sony will formally announce the new console Tuesday at the Gamescom conference in Cologne, Germany.

That may be true, and, of course, it may not. But what I want to know is why so many people seem to be so excited about this as-yet-unseen console? After all, the PS3--once thought by many to be the most likely winner of the next-generation console wars between Sony, Microsoft (with its Xbox 360), and Nintendo (with its Wii)--has lagged far behind its competitors.

In a stark reversal of the trend on display just a few short months ago--when general retail sales were plummeting even as the video games industry was still showing growth--cautious optimism in retail is now being offset by many losing months in video games.

In July, according to industry analyst the NPD Group, video game sales fell for the fifth straight month, and the year-over-year numbers are striking: In July, the video games business posted sales of $848.9 million, down 29 percent from $1.1 billion a year earlier. Year-to-date sales, reported NPD, were at $8.16 billion, down 14 percent from the same time period a year ago.

And things are only getting worse. While the industry's June numbers were down a full 31 percent from a year earlier, they still topped nine figures, coming in at $1.17 billion in June. But that means that in July, sales were down 27.4 percent from just a month earlier.

It wasn't that long ago that many people were making the argument that video games--because of their relatively low cost and many hours of entertainment value--were seen as close to recession-proof. But now, it would be hard for anyone to make that case.

Indeed, NPD analyst Anita Frazier wrote in a report Thursday that, "In order for the industry to come in flat or slightly up for the total year, the back five months of the year have to come in 11 percent (or more) higher than the last five months of last year."

That would seem to be a near impossible task, given the recent trend. But Frazier did throw the industry a bone: "While year-to-date results are weak, there are some big titles set to be released over the next several months, including Madden (10, from Electronic Arts) this month, which should help spur sales. The worst...should be behind us, and looking beyond August, we have The Beatles: Rock Band, Halo 3: ODST, and of course, Call of Duty: Modern Warfare 2 to look forward to."

Not to mention Guitar Hero 5.

One thing was also made clear in NPD's July report: sales weaknesses in the industry are being seen across the board. However, hardware led the charge, with a drop in sales of 37 percent ($280.94 million in July, 2009, as opposed to $447.71 million a year earlier). Software and accessories were down 26 percent and 12 percent, respectively.

Microsoft was quick to jump on what may have been the only bright spot in NPD's report: that its Xbox 360 was the only console to deliver growth over a year earlier. In its own report, trumpeting NPD's numbers, Microsoft pointed out that the Xbox has turned in 17 percent growth for the year over the same period in 2008.

And while Nintendo's Wii still leads the pack among the big three consoles (the Xbox, Sony's PlayStation 3, and the Wii), its lead has shrunk considerably. In July, consumers bought 252,200 Wiis, versus 202,900 Xboxes and 121,800 PS3s.

All in all, it's hard to be optimistic about the industry's prospects, though, as Frazier pointed out, there are a slew of big titles coming down the pike that could drive big sales. Still, the same is true every year, and as a result, there are few who could argue at this point that the video game business is facing what may be its biggest crisis in years.

The appearance by Beatles Paul McCartney and Ringo Starr at the Microsoft Xbox E3 press briefing on Monday caught the world by surprise, and turned into a perfect way to formally introduce 'Beatles: Rock Band.'

(Credit: Daniel Terdiman/CNET)

LOS ANGELES--If you were among the thousands of people at Microsoft's E3 press briefing on Monday, it's a pretty sure bet that the appearance on-stage there of Paul McCartney, Ringo Starr, and Yoko Ono was one of the most unexpected things imaginable.

But if you think about it, the very existence of the game that led to their showing up during the Xbox press briefing, Harmonix and MTV Games' "Beatles: Rock Band," is even more surprising. After all, the Beatles have, over the years, maintained a stranglehold over control of their music. For example the Beatles are still the holy grail that iTunes has not yet been able to corral.

The game will be released on September 9 (09.09.09) on the Xbox 360, the PlayStation 3, and the Wii.

So how did the game come to pass?

Since the two remaining Beatles weren't able to come to the phone for this article, I decided to stop by the Harmonix booth at E3 and ask the game's lead designer, Chris Foster, for the skinny behind what has got to be one of the biggest coups in video gaming history.

Foster said the story begins a couple of years ago, when MTV President Van Toffler ran into Dhani Harrison, son of the late Beatles guitarist George Harrison, in some random social setting.

"It was just sort of through happenstance," Foster said. "Dhani was a big 'Rock Band' fan, and there was this sort of, 'Wouldn't it be nice if...but it'll never happen.'"

Beatles RockBand rocks E3

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But being a "Rock Band" fan, Dhani Harrison took his idea to Harmonix CEO and co-founder Alex Rigopulos and began a conversation about what a Beatles version of "Rock Band" could be. Foster said that the idea seemed like a huge challenge, but, deciding to pursue it, Harrison began evangelizing the idea to Apple Corps, the Beatles' U.K. publisher, and its shareholders, particularly McCartney, Starr, and Ono.

"So then, from that point, it was just sort of getting them familiar with ('Rock Band')," Foster said, "and getting them understanding what the game could be like."

By now, the discussions were far enough along that Harmonix put together a simple demo of the kind of music and conceptual art that could be used in the game, Foster said.

And, amazingly, inexplicably, it worked.

Creative partners
"At that point," Foster recalled, things "moved to (the Beatles) being creative partners" in the project. One of the most vital things to happen at that point was the introduction of music producer Giles Martin to the "Rock Band" project. Martin, the son of the Beatles' original producer, George Martin, helped Cirque du Soleil put together its Beatles show, "Love."

That was crucial, Foster said, because Martin was able to help solve one of the most important problems any Beatles "Rock Band" game would have, adding multitrack capabilities.

"We needed multitrack," Foster said, "because in 'Rock Band,' (players) need to get (individual) feedback about whether they're playing well or not. So with all those pieces in place, we were able to do a demo of what the music (in the game) would be like."

As things progressed, the developers knew that to make the game feel authentic, they'd have to offer players real Beatles venues to play in. So they worked to add famous Beatles locations like Liverpool's famous Cavern Club, the Ed Sullivan theater, Shea Stadium, the Budokan in Tokyo, and the rooftop at Apple Corps.

Then, Foster said, the development team came up with the idea for adding psychedelic dreamscape visions to the game. The game's trailer (see below) does a great job of demonstrating that element, as do some of the best pieces of Cirque du Soleil's "Love."

'We respected them and their music'
To Foster, the chief reason that the improbable game ever came together at all is that "they liked that we respected them and respected their music. I don't want to put words in their mouths, but what was important to us was that we respected them."

That's one reason that the development team made sure to include venues where the Beatles had actually played famous shows. "We weren't shoving them into live venues that didn't make sense," he said.

Another important factor was the developers' adding the ability to include vocal harmonies as part of game play.

"Their music is so much about harmonies," he said. Adding vocal harmonies was something that had never been done in "Rock Band" before, but it was considered vital to accurately representing the Beatles' music in the game.

And that also presented the developers with a hurdle they had to clear.

"The challenge (was) making it so vocal harmonies were fun and challenging, but really accessible, and finding a way to put that in the game, without overwhelming" players, Foster said. "(We didn't want to make them) feel like they failed to sing like the Beatles."

Foster acknowledged that contracting with the Beatles was a huge win for Harmonix, especially when it's been clear for some time that "lots of people were thinking about doing it."

The game is already being anxiously awaited by players, developers, and industry executives alike, and for both game play and business reasons.

"Clearly, (the Beatles) saw an opportunity of reintroducing their music to the current music-loving consumer and it makes perfect sense for them as they try and manage their brand," said Nintendo President and COO Reggie Fils-Aime. "So I think it makes a lot of sense and, candidly, what the music industry is finding is that the games industry is a great way to drive music sales."

And for Microsoft, having McCartney, Starr, and Ono take the stage at the Xbox press briefing at the University of Southern California's Galen Center was a gigantic victory. A Microsoft spokesperson said that the appearance came about because the company is always talking to its publisher partners, including, in this case, MTV Games. And that as "Beatles: Rock Band" progressed, the Beatles decided that the Xbox press briefing would be a very appropriate place to announce the game.

Note to Sony and Nintendo: Work harder at finessing those publisher partner contacts, and next time, maybe the stars will pick your E3 briefing.

To Foster, a big part of what makes the game seem authentic was that the designers concentrated on "telling the Beatles' story" but still finding a way to do so in the context of a "Rock Band" game that fans of both the band and the game franchise would appreciate and recognize. And also because the game will appeal to even the youngest Beatles fans.

He explained that the Harmonix team liked the idea of bringing new, younger audiences to the Beatles for the first time. But reality soon disabused them of that notion.

"The (Beatles') music is like the air we breathe," Foster said, "and it catches every generation...It's sort of presumptuous to think you can introduce the Beatles to anyone."

This camera, from Israeli startup 3DV Systems--which has reportedly been acquired by Microsoft--could form the basis of a new motion-sensitive controller that Microsoft is reportedly working on.

(Credit: Jared Kohler/CNET)

Nintendo won't be the only video game console maker with a sophisticated motion-sensitive controller if a report out Tuesday from The Wall Street Journal is accurate.

The report said Microsoft plans to unveil a new video camera that would allow players of its Xbox 360 console to control games by moving their bodies. And if true, it's a clear shot across the bow of Nintendo and its innovative Wii console, which shocked the video game world when it was released in late 2006 with its own motion-sensitive controller.

The camera may well be the product of Microsoft's reported acquisition of Israeli start-up, 3DV, which had developed a motion-sensitive camera.

For months, there had been speculation that Microsoft's interest in 3DV was about taking on Nintendo and the Wii. But neither company would confirm such speculation. On Tuesday, Microsoft declined to comment on the Journal story.

At the Game Developers Conference on Friday in San Francisco, Georgia Tech professor and author Ian Bogost talked about the lessons that can be learned by game designers from the iconic Atari 2600.

(Credit: Daniel Terdiman/CNET Networks)

SAN FRANCISCO--If you draw a straight line representing the evolution of video games from the Atari 2600 to the Nintendo Wii, one thing is clear: if you don't know your past, you can't know your future.

That was the central lesson of Georgia Tech professor Ian Bogost's Friday talk at the Game Developers Conference here, "Learning from the Atari 2600." Essentially, Bogost argued, it's not always necessary to reinvent the wheel; sometimes, instead of being discarded as so much arcane, the discoveries of the past are best adapted for the future.

Bogost and MIT assistant professor Nick Monfort recently published Racing the Beam, a book about the iconic Atari VCS, popularly known as the 2600. So Bogost's talk Friday was clearly drawn from the research for that project. And while his fondness for the 1970s-era video game console was evident, the point he was really trying to make was that the seeds of successful games--especially those enjoyed by large groups of diverse people--have very little to do with the latest and greatest technology and much more to do with mechanics that make for enjoyable shared experiences.

'Racing the Beam,' the new book by Ian Bogost and Nick Monfort, looks at the history and lessons that can be drawn from the Atari 2600.

(Credit: Ian Bogost and Nick Monfort)

For Atari co-founder Nolan Bushnell, a former carnival barker, the bloodlines that led to the 2600 were three things, Bogost argued: the fun-for-the-whole-family excitement of a midway, the shared competition of a game of darts played in a tavern, and the gather-around-the-TV sense of family time afforded by the den. At the same time, Bushnell wanted to repeat the success he'd had with coin-op arcade games like "Pong," but for the home.

What he was after was what Nintendo has also tried to build into its Wii: a feeling that people can have fun doing something together. That's why going to the movies is so much fun, or going out with friends to a bar: because it's something people can do together, in a social space, whether they're competing or not.

And it's about context, Bogost said. You can drink at home, but it's not as fun as doing it in a bar. Or you play pool in your house, but it's not the same thing as doing it with friends at the local tavern. And while no video game system can replicate being out in public, the right mix of game mechanics and tools can allow people to feel like they're in the middle of a social scene, even if they're in their living room.

"That's why Wii Bowling is the best game in the Wii Sports collection," Bogost said. "It really re-creates the experience and context" of real bowling.

"So what we see, I think in the (2600)," Bogost said, "is the adaptation of familiar subjects for familiar spaces."

He talked about the successes and failures of some of the games designed for the 2600, explaining that, for example, the original 2600 Pac-Man game didn't work because its designers didn't do a good job of adapting many of the atmospheric elements of the original arcade version. For example, it was missing the familiar music, as well as the animation of Pac-Man chomping and turning as he made his way around the maze.

The OnLive system will be shown with 16 games from a series of major publishers during the Game Developers Conference in San Francisco this week. OnLive is aiming to upset the traditional video game business model.

(Credit: OnLive)

SAN FRANCISCO--Sony, Microsoft, and Nintendo, look out. Your traditional video game console business model may be in danger.

It's too early to tell how much danger, of course, but a start-up called OnLive announced a brand-new game distribution system Monday night that, if it works as planned, could change the games game forever.

OnLive, which was started by WebTV founder Steve Perlman and former Eidos CEO Mike McGarvey, is aiming to launch a system--seven years in the works--that will digitally distribute first-run, AAA games from publishers like Electronic Arts, Take-Two, Ubisoft, Atari, and others, all at the same time as those titles are released into retail channels. The system is designed to allow players to stream on-demand games at the highest quality onto any Intel-based Mac or PC running XP or Vista, regardless of how powerful the computer.

The system will also stream games directly to a TV via a small plug-in device, and players can use a custom wireless controller as well as VoIP headsets in conjunction with it.

The OnLive system includes the ability to use wireless controllers similar to those available for standard console systems like the Xbox or PS3. It also has a small micro-console that will allow games to be streamed directly to a TV.

(Credit: OnLive)

Based here in San Francisco, OnLive timed its formal unveiling to this week's Game Developers Conference, where it will be showcasing the technology and 16 initial games it will launch with.

The service is currently in a closed beta, but is expected to go into a public beta this summer, and to launch this winter.

According to Perlman, OnLive's technology will make it possible to stream the games in such a manner--high quality, no matter what kind of system the user has--by virtue of a series of patented and patent-pending compression technologies. And instead of requiring users to download the games, OnLive will host them all and stream them from a series of the highest-end servers. Users will have only to download a 1MB plug-in to get the service up and running.

OnLive is hoping to capture a significant portion of the video game market share. In February, the industry posted one of its strongest months ever, with total sales of $1.47 billion, up 10 percent from a year ago. And in February, the Xbox, PS3 and Wii accounted for total sales of 1.42 million units.

The OnLive system aims to bring cost-efficient instant and high-quality video games streamed to Macs and PCs.

(Credit: OnLive)

An intended benefit of this infrastructure, Perlman and McGarvey explained, is that users will be able to play streamed games via OnLive with no lag, so long as their Internet connections meet minimum thresholds. For standard-definition play, that would mean a minimum 1.5 Mbps connection, and for high-def, 5 Mbps.

That's obviously an essential feature, as it's hard to imagine anyone paying for a service like OnLive, no matter what games are on offer, if the user experience is inadequate. But the company promises that as long as users have the requisite minimum hardware, operating systems, and Internet connections, they should be able to have seamless play.

The upshot of this infrastructure model, Perlman said, is that OnLive is somewhat future-proof, meaning that players won't have to upgrade anything to keep on playing games on the system years into the future. Instead, the upgrades will happen on the back-end, with the company regularly boosting the power of the servers it uses to host and stream the games.

And while demos always have to be taken with a grain of salt, CNET News did see a real-time presentation of OnLive on at least two different computers and on a HD TV. Game play was as smooth and lag-free as advertised

So far, OnLive has yet to make its business model public, but what seems likely is some form of subscription service, where players will pay a monthly access fee and then pay additional costs, depending on whether they want to play games once, or buy them for permanent play.

The company also said that it will probably offer free trials of some or all of the games it offers, allowing consumers to decide whether they want to buy. OnLive recognizes that some players may use those trials as a way of deciding whether to buy such games from traditional retail stores, but Perlman and McGarvey suggested that as long as people are interacting with the OnLive system, they'll be happy.

It's clear that OnLive is modeling its system at least somewhat after Microsoft's hit Xbox Live service. So fans of multiplayer games won't be on their own. Rather, they'll have full access to multiplayer features of games built for them. And another interesting social feature is one that will allow users to digitally watch others play games in real time. The company thinks that users will find it exciting to watch the best players in action, even if they themselves are only kibitzing.

Perlman said that the concept of spectating in online game systems is, in and of itself, not new, but that OnLive presents the first time players will be able to look in on what others are playing without owning the games themselves.

Another social feature in the Xbox Live mold is what are called "brag clips." These are essentially 15-second replays of game action that players can share with friends if they want to show off their prowess. This is possible, Perlman said, because OnLive is continually recording the last 15 seconds of action.

The OnLive system includes social features such as 'brag clips,' which allow players to share 15-second videos of game action they want to brag about.

(Credit: OnLive)

All told, McGarvey said, OnLive offers a full suite of standard social features including friends, clans, rankings, leader boards, tournaments and more.

From the outset, OnLive isn't partnering with any of the first-party publishers--Microsoft, Sony, and Nintendo, meaning that franchises like "Halo" or "Zelda" won't be available. And that makes sense, since those companies are hardly likely to want to sign up with a company whose very technology may obviate their longstanding business models.

That means, Perlman and McGarvey acknowledged, that many players who sign up for OnLive's service will still maintain their consoles, and continue to buy games for them. At least for the rest of the current generation of machines, they said. But come the next generation, all bets are off, they said.

And for the nine--to date--third-party publishers who have committed to being involved, McGarvey said, OnLive presents a much more efficient and profitable distribution model than the standard retail structure. That's because the system is all digital, cutting down on physical distribution costs, and because it is designed to eradicate piracy and second-hand sales, both of which are banes of the publishers' existence.

Indeed, McGarvey said that OnLive has gotten strong commitments of titles from the nine publishers. That means, added Perlman, that the planned launch this winter could be accompanied by the most titles of any new gaming system launch in history.

In addition, McGarvey said publishers are eager for the kind of raw data that OnLive can provide about players' usage of the games, including whether they like or dislike games, how much they play, how they play and so on. That data is hard for publishers to collect with traditional consoles, he argued.

Clearly, OnLive has set an ambitious goal: dethroning the console makers as the game industry's kings. And as is always the case with brand-new and publicly unavailable technology, it is far too early to know whether the company or the service can live up to that goal. But if its demo is any indication, OnLive is definitely onto something, and given that the company has been in stealth mode for so many years, it's possible that the console makers will be caught off guard.