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This Week in the Video Game Wars

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Given the long lead-time in game design, the scramble to create Wii content has set the pay-off portion of the console cycle back several months for all the game makers.

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Continuing with our fight-card analogue, this week's undercard fights took place in the video game industry. Both the hardware and software companies are still scrambling from the effects of the victory of Nintendo's (NTDOY) Wii in the current round of console wars. The Wii is outselling Microsoft's (MSFT) Xbox360 and Sony's (SNE) PS3 combined, throwing a monkey wrench in the plans for everyone in the space.

Specifically, Electronic Arts (ERTS), Activision (ATVI) and the other software makers all spent the last 18-months dedicating themselves to parsing their design resources towards making games for Xbox360 and the PS3. Given the long lead-time in game design, the scramble to create Wii content has set the pay-off portion of the console cycle back several months for all the game makers.

It's going to take a while for the dust to settle but here's what we know so far and what we learned this week:

  • Sony is going to drop the price of the PS3, taking even greater losses on each box sold. The company dropped prices $100 this week and is said on Wednesday that they will cut prices again before the end of the year.
    Conclusion: Too little, too late. Sony needs to be more creative if they are going to make the PS3 relevant. Specifically, they need to do things like...
  • Microsoft signed a deal to download select movie titles from Disney (DIS) directly to the Xbox360. The titles will be in hi-def, though the catalog will be limited at first.

Does this deal in itself mark a sea-change in how consumers watch movies? No. It's a baby-step in the digital revolution. What a Disney/ Microsoft deal does immediately, however, is make Microsoft look like a nimble start-up compared to Sony. The fact that Mr. Softie and Disney were able to come to terms on a content download deal before Sony was able to cut a deal with its own film division should mortify Sony. It calls into question exactly how effective SNE CEO Howard Stringer's effort to "streamline" the consumer electronics giant can possibly be.

Sony has a profitable film division (they own the Spiderman franchise, to name one asset) and an embarrassing flop of a game division operating under the same corporate umbrella. The fact that they aren't able to lever off shared assets to create a larger whole defeats the entire purpose of Sony as Conglomerate.

If Sony can't do better than this, the entire company should be broken into separate parts.

  • From where I'm sitting, the game makers will, eventually, win from Nintendo's Wii becoming dominant. The argument against that conclusion is that Nintendo makes more games in-house than either Sony or Microsoft. My strong view is that the software guys *need* to be on the Wii in size. Though delayed, Wii titles will eventually be cheaper to produce than titles for the other consoles. What's more, Nintendo can't afford to make it hard for third party players to make Wii games.

    We've moved well past the days when Mario Bros. was the only must-have title for a console. Nintendo needs software and the software guys to be on the leading platform.

    Everyone wins and, unlike the fight Sony seems to be engaging inwith themselves over content control, the free market will demand the relationship between software and hardware gets fleshed out.

I'm still long Activision (ATVI). While I like that ATVI beat their quarter, as announced this week, it's a longer-term play for me.

Position in ATVI.

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