APRIL 22, 2008 • Over the next few months DFC Intelligence will be releasing its forecast for the game industry.  2007 was a record year for the industry and it has resulted in some significant adjustments to our overall forecasts.  The two most notable international growth trends highlighted in 2007 were 1) the continued strength of online PC games and 2) the success of Nintendo on a truly global basis.  DFC believes that some of the most exciting growth opportunities for the video game business is in the European markets.

Nintendo’s growing strength in Europe is an important trend for the entire industry.  DFC Intelligence has always argued that Europe in general has been an under-performing market for video games.  In recent years, the Europe game industry has been dominated by Sony and its PlayStation systems.  Of course, the PlayStation 2 (PS2) was the leader in all major markets, but in Europe the PS2 had over 80% market share among its generation.

Ironically, a great deal of the PlayStation 2’s success in Europe was driven by more casual products designed to reach a broader mass market.  Non-traditional game products published by Sony Computer Entertainment, such as the SingStar music games and the EyeToy camera products, were major hits in Europe, much more so than in the U.S.  A key driver behind these products was Phil Harrison, the U.K. based president of SCE Worldwide Studios.  However at the end of February 2008, Harrison left Sony.  In many ways this departure is symbolic of how the torch in Europe seems to being passed to Nintendo.

The Nintendo DS and Nintendo Wii are enjoying tremendous success in Europe.  In large part this is because Nintendo is following the mass market design philosophy that made Sony Worldwide Studios such a success.  In 2007 sales of the Nintendo DS in Europe nearly doubled and the installed base soared past the 20 million mark.  Meanwhile, the supply constrained Wii managed to pass the Xbox 360 (however in 2007 both systems were outsold by the PlayStation 2).

With the recent success of Nintendo, DFC Intelligence is now forecasting that over the next few years Nintendo’s systems will supplant Sony’s systems as the leader in most major European markets.  Of course, the DS is already a smash hit in Europe and this is expected to continue.  More significantly, DFC Intelligence now forecasts that, over the next five years, sales of the Wii will out pace both the Xbox 360 and the PlayStation 3.

The emergence of Nintendo in Europe marks a major change for the video game industry.  Nintendo has had periods of major success in Japan and North America but, unlike Sony, they have never been a leader in all three territories (North America, Japan, Europe) at once.  Europe is expected to be the fastest growing market and Nintendo’s products are perfectly designed to appeal to European tastes.  As mentioned, the Wii product line and control system are an evolution of what made the PlayStation 2 so successful in Europe.  Combine this with the lowest priced hardware and software and you have a recipe for success.

Perhaps one of the most notable signs was with the recent release of Konami’s Pro Evolution Soccer 2008.  This title came out with versions for seven different game systems including the Xbox 360, PlayStation 3, and Wii.  The Wii version received the highest overall rating on review aggregator sites like Metacritic and Gamerankings.com.  Soccer is arguably the most important game genre in Europe and now the Wii has what many consider to be the best soccer game. This alone is likely to be a driver of significant Wii sales, especially among customer looking to upgrade from their PlayStation 2.

What will Nintendo’s success mean for the other platforms?  It is important to note that DFC Intelligence is also forecasting strong sales for the PlayStation 3 and, to a lesser extent the Xbox 360.  This generation is not expected to be a case of one platform dominating like the PS2 did in the last generation.  One factor that will increasingly take hold in Europe is what DFC has labeled the “second car in the garage.  In the U.S. over 40% of game households now buy two or more of the current console systems.  By comparison, Europe has largely been a one car in the garage market.  In recent years, that car has been the PlayStation 2.  As the game market in Europe grows we expect to see more consumers buying two or more systems (although not to the extent of the U.S.)  The Wii is forecasted to be the market leader, but with a market share less than 50% compared with the PlayStation 3 and Xbox 360.

Another significant point is that the Wii clearly will not be the only platform for software.  One issue with the Wii is that it is designed to appeal to a more mass-market casual gamer.  While DFC believes that the whole concept of bringing in senior citizens and other types of non-historical gamers is over-hyped, it is true that the platform does appeal broadly to consumers appreciative of a less intense video game experience, so the software-to-hardware tie ratio is expected to be lower for the Wii than it is for the Xbox 360 and PlayStation 3.  In fact, DFC Intelligence forecasts that by 2011 software revenue from the PlayStation 3 will equal that of the Wii despite a lower installed base.

It appears inevitable that, for the PlayStation 3, Sony will lose a big chunk of its PS2 user base.  However, in the long-term, DFC Intelligence believes the PlyStation 3 will be a fairly strong competitor.  The biggest loser in Europe is likely to be the Xbox 360.  Microsoft has seen its self-proclaimed fall 2007 “greatest holiday lineup in video game history” come and go with very little impact on the Xbox 360’s position in the European marketplace.  To spur sales in 2008, Microsoft is being forced to lower the price of a system that is starting to look like a senior citizen as it approaches its third birthday.

The Xbox systems have enjoyed much greater success in the U.K. than in continental  Europe.  In large part this is because the U.K. does not have a strong PC game market like those found in other parts of Europe.  However, as in the U.S. and Australia where intense violence is more popular with gamers, U.K. gamers enjoy first-person shooter (FPS) titles and the Xbox 360 is clearly the leader in that category.  Unfortunately, outside of the U.K., DFC sees the Xbox 360 continuing to struggle in Europe.A strong Nintendo presence in Europe is a major event for the game industry.  However, as always, it is important to highlight that in Europe, like the rest of the world, the key trend is platform diversity.  Not only are there three new console systems to compete with the PlayStation 2, but PC games and portable products continue to have increased sales.  The good news is that sales in Europe continue to explode on all fronts.  Look for 2008 to break all kinds of sales records.

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