A Gateway to Entertainment

The days of playing only Pong on Atari are long gone, having been replaced by adventure and sports video games that look so realistic it's almost like watching real people on television. But the advances in the video game consoles now are going beyond producing high-resolution 3-D games to include the ability to play DVD movies and access the Internet over high-speed connections.

There is a fiery competition between Sony Computer Entertainment America Inc. and Microsoft Corp. regarding their respective video game consoles--the already-released PlayStation 2 and the Xbox, which will debut in early November.

"Microsoft and Sony want to become entertainment centers in the living room, [and allow customers] to play and watch everything on their machines," says Brian O'Rourke, senior analyst for multimedia at Cahners In-Stat Group.

And the versatility they're building into their video gaming machines may be the impetus behind an almost doubling in anticipated sales of these kinds of systems during the next three years. In a study that Cahners published in early 2001, the research firm predicted that sales of the boxes would grow from $4.1 billion in 2000 to $7.8 billion in 2004.

Microsoft and Sony declined interviews for this article to discuss how the additional functionality in their machines may drive future broadband Internet use, or how this may affect other manufacturers of residential access equipment.

It seems, Sony is ahead of the pack in many ways, having introduced to the U.S. market its $299 PlayStation 2 in late October 2000. When it was introduced, the PlayStation 2 also could be used for playing DVD movies and audio CDs. The box also includes a bay in which to plug a hard drive, enabling broadband connectivity and serving as the platform for e-commerce applications and network gaming.

Since PlayStation 2 debuted, Sony has announced a slew of partnerships aimed at expanding the broadband functionality of the product. For example, Sony will incorporate IP software from Cisco Systems Inc. that will enable broader access to the Internet. Initial IPv4 technology will allow a better online game experience through prioritization of network traffic. The companies also are working on an IPv4/IPv6 dual protocol stack, which will allow game developers to use either version of the IP software in their game titles.

Sony is working with AOL Time Warner Inc. to integrate instant messaging, chat and e-mail for use while playing games. Sony also is integrating Macromedia Inc.'s FlashPlayer and RealNetworks Inc. RealPlayer8 and other client technologies into the PlayStation 2.

Most recently, Sony announced that it is integrating the Java platform from Sun Microsystems Inc. into the box, with availability expected by the end of this year. This will allow for downloads of new Java-based applications and makes it easier for users to connect and communicate with Java-enabled devices such as wireless handsets, PDAs and interactive TVs.

Microsoft's highly anticipated Xbox, which will retail for $299, reportedly provides at least three times the graphics performance of the newest generation of game consoles, with a custom-designed graphics chip capable of processing more than 1 trillion operations per second. The Xbox has a front-loading DVD tray and a multisignal audio-video connector for easy hook up to TVs and home theater systems.

Most important for online gaming is the Ethernet port incorporated into the Xbox's design.

But the new highly functional boxes may come at a cost to their developers: Rumor has it that Microsoft may lose $100 to $200 on each Xbox it sells. In a June BusinessWeek article, Merrill Lynch & Co. Inc. analysts said Microsoft may lose $800 million on the Xbox in the next fiscal year. The company publicly stated it will spend $500 million on marketing within the first 18 months.

A problem the video game manufacturers face is that most online games are very PC-centric, says O'Rourke. "There's a question if they'll want to buy a console."

Plus, the broadband access needed to grow online gaming is far from ubiquitous, despite deployments of DSL and cable modems.

The cost and the risk of whether customers actually want to use traditional video game consoles for online gaming, movie watching and high-speed access to the web is why other video game companies are hedging their bets and not moving as quickly to develop multifunctional products.

"Certainly we see the potential," says Jim Merrick, technical director of Nintendo of America Inc. "But we're really trying to stay where our best value is, and that's providing entertainment. We're staying focused on our core business. Watching movies on our platform ... we view that as competition to what our core business is."

Merrick says the company realizes that online gaming is going to become an increasingly important segment of the company's market, but that Nintendo is proceeding cautiously, and watching consumer reactions to those considered trailblazers in the market.

Many of Nintendo's games could benefit from being part of an online community. Pokemon, for one, would be ideal because of the social aspect and trading that goes on as part of the game. However, Merrick says, you have to consider the types of players a game like that attracts, which typically include elementary and middle school-aged children.

"They're not the credit card-carrying Internet consumers" who would be able to pay for online games, he says.

Consoles from all manufacturers are continuing to evolve, with enhancements to storage, picture quality and other aspects. "But all this technology is meaningless unless the value can manifest itself in game play," Merrick says.