Shakeups in Video Game Industry Ahead of Holiday Rush

With the 2007 holiday selling season suddenly upon us, all three of the major video game makers are shuffling the deck with an eye towards not repeating the mistakes of last year. One year ago, both the Nintendo Wii and Sony PlayStation 3 arrived with fewer-than-expected units to sell, leading to some defections to Microsoft's Xbox 360 console. But Microsoft saw sales of its own console drop off right after the holiday season, followed by a year of reliability issues that may still not be resolved.

For its part, Microsoft tried to resolve the Xbox 360 reliability problems with a record-setting $1 billion warranty program. The company has yet to specify exactly what went wrong with its consoles, though evidence suggests that the original design of the device is rife with endemic heat issues that led to massive component failures. Company representatives say the problems are fixed. And a limited edition Halo 3-themed Xbox 360 console contains new hardware components that run cooler and quieter and should be more reliable. It's unclear if these moves will be enough to stave off customer defections.

Speaking of Halo 3, the latest version of Microsoft's blockbuster video game reportedly generated over $300 million in its first week. And though Microsoft isn't talking unit numbers, it appears that up to half of all Xbox 360 owners have bought a copy of the game. While an incredible feat in its own right, the 360 installed base isn't huge--about 11 million units worldwide--and Microsoft has other issues to deal with: Bungie, the eccentric game makers who created the Halo series for Microsoft, are separating from the software giant and will become an independent entity again. They've reportedly tired of making Halo games and being stifled by Microsoft's corporate culture.

Sony, meanwhile, couldn't meet demand for its expensive PlayStation 3 console last year, but it turns out that was largely because they made so few of them. This year, as console availability rose to normal levels, consumers stayed away in droves, and Sony has sunk to third place in the console wars. To combat this problem, the company this week announced massive price cuts in Europe, and I'd be surprised if Sony didn't make similar cuts in the US. It is rumored to also soon begin offering a PS3 unit with a smaller hard drive, which would cost less than the current version.

Meanwhile, the Wii has been so successful this year that it will soon eclipse the 360 in total sales numbers, despite being on the market for a year less. Now the number one console by a long shot, the Wii faces two obstacles in the months ahead: First, the console lacks a must-have collection of games, key to long term viability. And the Wii's motion-sensing hand controller, though innovative, has proven to be physically dangerous, with users inadvertently throwing the controller into TVs and other people. Nintendo responded this by voluntarily providing all Wii controller owners with a free rubber cushion that should prevent some injuries. All Wii consoles sold after the middle of October will include these cushions.

Barring any major developments, Nintendo is expected to capture first place this holiday season, thanks to good word of mouth and the low cost of its console. Microsoft, with Halo 3 driving new console sales, should retain the second position. Sony is, by far, in the worst position: The company needs to aggressively lower prices on its console and ship at least a few must-have PS3-specific games. Right now, the only thing really differentiating the PS3 is its stratospheric pricing.

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