hardware sales fall

Despite aging video-game consoles and a holiday shortage of the PlayStation 2, the U.S. video-game industry reported healthy sales for 2004, boosted mainly by price cuts and a strong performance by Microsoft's Xbox.

Sales for hardware, software and accessories were $9.9 billion, down 1 percent from $10 billion a year earlier, according to market researcher NPD Group. Even so, video-game sales managed to top U.S. movie box-office receipts, which came in at $9.4 billion for 2004, according to Exhibitor Relations.

The decline was due mainly to a 17 percent decline in hardware sales to $2.4 billion as a result of price cuts. But video-game software sales showed a healthy increase, growing 8 percent to $6.2 billion. Given that the current generation of video consoles are now nearly 5 years old, many industry observers expected the entire industry to decline in 2004.

"This growth is occurring in the twilight of the hardware cycle, when we typically see sales level off" as consumers anticipate new consoles, said Doug Lowenstein, president of Entertainment Software Association, a trade group.

Analysts expect 2005 sales to get a boost from new handheld game units from Nintendo and Sony. Microsoft also may launch its successor to the Xbox in the fall. At the same time, console makers have leeway to cut prices further on the current generation of hardware in hopes of spurring software sales. Microsoft and Sony's consoles are priced at $149, while Nintendo's sells for $99.

Microsoft came out a winner in the console battle in 2004. The software giant's Xbox console sold 4 million units in the United States, up 27 percent from 3.2 million a year earlier, according to data supplied by NPD to its clients.

Sony sold more PlayStation 2 units than Microsoft for a total of 4.6 million units. But those sales represented a 28 percent drop from 2003 because of a severe shortage of consoles during the holidays as Sony shifted manufacturing to a smaller version of the PlayStation 2. Nintendo's GameCube, meanwhile, saw a disappointing year with sales flat at 2.3 million units, along with a weak showing in software sales.

Microsoft started gaining early last year when it cut hardware prices ahead of Sony. That trend continued during the year with the Xbox beating the PlayStation in hardware sales for the fourth quarter, a first since Microsoft launched its console in 2001.

"We won the holiday no matter how you slice it," said Maroof Haque, Xbox business manager. "If you look at who is growing, we had a phenomenal year."

But Microsoft continues to lose a large but unspecified amount of money in the Xbox business while its rivals are making money. Sony spokeswoman Janette Barrios noted that Microsoft's margin of victory was thin and it was due to Sony's supply shortage. Microsoft and Sony report their earnings for the fourth quarter Jan. 27.

NPD analyst Anita Frazier said the buzz in software for 2004 was about two blockbusters. Take-Two Interactive's "Grand Theft Auto: San Andreas" for the PlayStation 2 took the No. 1 spot, and Microsoft's "Halo 2" came in second.

While Nintendo lost on the console front, it continued to dominate handheld sales. Overall, portable hardware units accounted for 43 percent of the market. Portable hardware revenue was $828 million, up 10 percent from a year earlier. Nintendo had the majority of the market, and in November it launched its next-generation handheld, the DS. The DS sold more than 1.4 million units. Sales of Nokia's N-Gage and Mountain View-based Tapwave's handhelds were paltry compared with Nintendo's.

The year also was a good one for computer games. Big titles such as "Half-Life 2" and "Doom 3" spurred growth in PC game sales. NPD said final numbers weren't ready yet, but if the PC figures were included, software sales would be up even more for the year, said Lowenstein, of the Entertainment Software Association. Online gaming continued to grow, mostly on the PC, with online-playable titles accounting for 26 percent of units sold, compared with 12 percent a year earlier.

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