NEWS - Tuesday, May 20, 2003

Online Strategy Splits Video Game Industry

LOS ANGELES (Reuters) - It’s a karaoke machine and a video conferencing center, a wireless jukebox and a DVD player. The latest and greatest gadget in home entertainment? No, just the well-worn video game console your kids already have in the living room. In the turf war being fought to control space in the living room of the future, rivals Sony Corp. 6758.T and Microsoft Corp. MSFT.O have made it clear that the current generation of game consoles were meant to be Trojan horses -- the real pay-off would come when the machines were connected to a network. Now, as both companies unveil the Internet-based services expected to be the next big thing for the $30 billion games business, sharp differences over their strategies have emerged along with a debate about how much consumers will be willing to pay for such online offerings. Microsoft has bet big on its Xbox Live online service, unveiling new features and functions this month. It aims to lure users away from Sony’s top-selling PlayStation 2 console and steal growth from Nintendo Co. Ltd.’s 7974.OS trailing GameCube. At stake is an early foothold in what many believe to be the future of gaming -- the ability to sell, deliver and update games online without game discs, packaging or retail space. Last week, Sony upstaged Microsoft by announcing that the No. 1 game publisher, Electronic Arts Inc. ERTS.O , would roll out online versions of its popular sports games exclusively for the PlayStation 2, or PS2. Nintendo says its two larger rivals have staked too much on online games without thinking through the costs for consumers. "I don’t think its reasonable to make someone pay for a game and then make them prepare a network connection and charge a monthly fee," Satoru Iwata, president of Nintendo, told Reuters recently. Doug Lowenstein, president of the Interactive Digital Software Association, the trade group representing game publishers agreed: "Many potential online gamers are continuing to resist paying to play online." XBOX’S CLOSED NETWORK Xbox Live, which launched last fall, is a networked system managed by Microsoft with the software giant maintaining passwords, e-mail addresses and user information. Subscribers pay about $50 a year. Sony, on the other hand, has opted for an open system that lets game publishers design and manage their own online services and decide whether to charge customers. In allying with Sony, Electronic Arts said it wanted greater control over its online network and user information than Microsoft offered and said it wanted to use online games to help driving sales of its existing blockbusters like "Madden NFL" and "Harry Potter." "At the end of the day, it’s a retail sales multiplier," said Frank Gibeau, senior vice president of marketing at Electronic Arts. EA, which for a long time separated its online business from its core games unit on its balance sheet, and at one time had hopes of a spin-off for the Internet division, consolidated the units earlier this year, conceding that would not reach profitability as fast as was hoped. Vivendi Universal Games, which has largely shied away from online games, said it had some of the same concerns about Microsoft’s plans for Xbox Live. "I actually share the perspective that EA has to a large extent," Luc Vanhal, president of North American operations at VU Games, told Reuters. "Why would I be handing that asset over to Microsoft with nothing in exchange for it?" Meanwhile, Nintendo’s Iwata said his company was working on a service that would not require users to cough up regular fees for games. "In the near future we are hoping to announce something that addresses this issue," he told Reuters. Nintendo’s GameCube sells for $150 and has a separate add-on for connecting to networks or the Internet. While the $180 Xbox comes with a port ready to be connected to high-speed Internet access, it had always been a $40 add-on option for Sony’s PS2. But this week Sony said it would introduce a new redesigned PS2 in June with network capability for $200.

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