3 Factors That Will Create Mass Demand for HD Consoles

Includes: MSFT, NTDOY, SNE
by: Bruce Everiss

This has to be the biggest event in this generation of consoles, the point when 130 million (150 million if you include Nintendo (OTCPK:NTDOY) Wii) owners of old generation consoles decide to walk into a shop and buy an HD console. A Microsoft (NASDAQ:MSFT) Xbox 360 or a Sony (NYSE:SNE) PS3. There seem to be three factors that, coming together, will decide when this event happens.

The first is the gaming. There are still far more AAA titles on the old consoles than there is on the new, HD platforms. Microsoft have released a lot of AAA games for the 360 but it has not been enough to tip the balance. Sony are way behind and there is still no compelling reason to buy a PS3 for the games.

All that changes in 2008 with a whole raft of Sony AAA system seller releases. A lot of commentators think that GTA IV will tip the whole market on its own. They imply that the power of this franchise is so great that it makes the HD consoles become compelling purchases overnight. Maybe they are right, but Halo 3 didn’t have this power for the 360.

The second factor is public awareness of what HD is. Currently most people seem to be buying HD LCD and plasma televisions for their bigger size and slim form factor, not for the HD capabilities. This is largely due to the scarcity of broadcast and recorded HD content. The format war between HD-DVD and BluRay is only confusing matters.

As more and more HD content becomes available people will gradually switch over to it. Then they will no longer be prepared to watch non HD content. It will be just like the transition from black and white television to color television. If they only watch HD broadcast and recorded content, then they will only be happy with HD game content. Watching four times as many pixels on screen makes a big difference in a game.

The third factor is price, as it has been for every previous generation of consoles. The early adopters are willing to pay a premium for the kudos of their position. But the real meat of a console's sales curve only comes with radical price reductions. Both of the HD consoles are still too expensive to have reached the mass consumer, casual purchase price point. But they will get there and they may well get there this year.

Both Sony and Microsoft have been working furiously hard behind the scenes to reduce the manufacturing costs of their consoles. When you are making tens of millions of something, every fraction of a penny counts. They have been girding their loins for a price war and a price war is what we are going to get.

As you can see, these three factors will inevitably come together to create a massive demand for the HD consoles. But how sudden will it be? Will 150 million people walk into the stores on the same day? Probably not, but it will be one event, probably a price drop, that is the trigger. There will be an overnight surge in demand. The manufacturers can control this by rolling the price cut out, country by country, over a few months, but it will still be pretty spectacular.

We have to ask if the tipping point will come at the same moment for both manufacturers. Possibly, if it comes at a certain point in the calendar, like say Christmas. But possibly not if Microsoft take advantage of their lower manufacturing costs and early adopter benefits. If they brought out a $199 Halo 3 bundle for the 360 in the same week that GTA IV is released, it would be the biggest sales week in the whole history of gaming.

So when will it happen? Probably this year. Definitely by the end of next year. And how big will it be? When the market tips each HD console will start outselling the Wii by a significant margin. Over lifetime they will possibly each go on to sell a multiple of what the Wii sells. The 360 and PS3 will go on to become the biggest selling consoles ever, until the next generation.

And who will win? Microsoft, if they capitalise on their early adopter and low manufacturing advantages. The exclusive content for GTA IV is a marketing masterstroke that could win the generation for them. Sony, if they can rediscover their core strengths and bring them to the marketplace.

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