Microsoft lags in video games race

VIDEO game players can expect to enjoy the spectacle of a real-life price war in the near future as the major console makers battle it out for market share.

Slow global sales of Microsoft's Xbox since it was launched in November have prompted industry analysts to predict that price slashing is on the way.

When the much-telegraphed box hit US stores it was fighting against two well-established rivals, Sony and Nintendo. Sony had been first mover, bringing its PlayStation 2 console out a year before the Xbox and it had built up a loyal following of gamesters.

Nintendo also had its Gamecube on the shelves and it came with a reputation established by the veteran Gameboy of Mario Brothers fame.

The struggle for dominance will be long, hard and hyped up, for games is expected to be one of the key growth areas for hardware and software manufacturers.

Last week, market research firm DataMonitor estimated that total sales of game products will top £15 billion by 2004, compared with £11.7 billion last year. Even for a company the size of Bill Gates's Microsoft, that is a total worth chasing but, unlike its software business, it is not the dominant player with virtual market control.

Reports of poor Xbox sales are pouring in from around the globe. Figures published last week showed that in the key Japanese market the Xbox was trailing dismally behind the much-cheaper PS2, having sold only 4300 units against Sony's 100,000 and Nintendo's 25,000.

That low figure suggests demand has dived steeply after it was reported to have sold up to 123,000 units in the first three days of the February launch in Japan.

In Australia the PS2 is outselling the Xbox two to one, although Microsoft claims that it is on track to sell 100,000 machines in three months.

Sales in Britain and Europe have been poor, say analysts, and they expect Microsoft to have to cut its price from the current £299 to compete with the £199 PS2 if it is to have any chance of grabbing significant market share.

Although the Xbox is an amazing technical device, capable of handling one trillion commands a second, its major selling point is proving little real advantage. It was designed for connection to broadband internet services, but too few people in Europe have access to the high-speed links.

This is expected to change, according to Datamonitor, which expects online games to be a big driver of sales of the new consoles.

Cost, however, remains a key to success, said the consultants, and the Xbox is just too expensive.

Last month Rick Sherlund, senior software analyst at Goldman Sachs in New York, cut his sales estimate by 500,000 units this year to 900,000. He slashed his prediction for Microsoft revenues for the quarter to end-March by between $200 million (£139 million) and $300 million.

Microsoft stands by its original target of shipping four and a half to six million units by end-June.

The key to breaking into the market for Xbox will be the quality of games produced for the console, and there has been an improvement. Last month six of the 20 top-selling console games in the US were Xbox products.

Despite the slow start, Datamonitor believes Xbox will eventually take second slot from Nintendo, but will never challenge the PS2.

Adrian Drozd, Datamonitor games analyst, said Sony already has a PS3 machine on the way, but Microsoft will be faster off the mark with its next product.

It is highly unlikely that the US giant will allow its main competitor to steal a march in the way that Sony was able to do with its early launch of the PS2, he said.