New Game

By ADAM COHEN

They oohed as animated football players threw one another to the ground. They ahhed as vividly colored martial artists gouged each other's eyes. The crowd huddled around ultrathin TVs earlier this month at the Metreon, a four-story Sony entertainment palace in San Francisco, was getting a sneak preview of Sony's much-touted PlayStation2. And they were loving it.

But this Sony-sponsored launch party was hardly a tough audience. Many of the well-dressed game gawkers were actually foot soldiers in the Sony empire, loyally cheering on a product crucial to the company's future. The real test for Sony comes this week when it rolls out 500,000--mysteriously down from a promised 1 million--of the $299 black boxes in stores across the U.S. Game magazines and Internet sites are already buzzing with the question of the season: Is PlayStation2 the great hope of computer gaming or the great hype?

For Sony it's not just fun and games. The economics of computer gaming have come a long way from the drop-a-quarter-in-the-slot days. It's now a $20 billion-a-year worldwide business. Last year games contributed more than $6 billion to Sony's sales and $730 million in operating profits. The Japanese giant has sold a mind-boggling 75 million first-generation PlayStations, 27 million of them in the U.S. And with game consoles grabbing an ever larger share of the game market from PCs and Macs, sales of PlayStation2 could get even bigger.

But PlayStation2 is being launched into the most competitive gaming environment ever. Sony is locked in a high-stakes platform war with Microsoft, Sega and Nintendo to lay claim to electronic outposts in living rooms worldwide. Right now the fight is over who will cater to the virtual sniper-attack and dune-buggy needs of legions of young gamers. But before long, these companies are betting, game consoles like PlayStation2 will become broad-ranging digital home entertainment centers used by everyone for everything from music playing to video watching. Still, the corporate battle for digital dominance in the years ahead will be determined in no small part by what happens this week, as junior high students everywhere reach a collective decision on just how way-cool the graphics on Smuggler's Run really are.

Even before this Thursday's official launch, Sony has lost goodwill, not to mention sales, for PlayStation2 with its glitchy product rollout. The company's recent announcement that it was cutting the number of PS2s available on launch day by 50% was a cruel blow to parents who had promised Junior one of the first units. And it is a headache for the 20,000 retailers selling PS2s--many of which began taking orders six months ago. The stores are bracing for hordes of irate customers. "There will be people lined up in front of the doors," sighs Dan DeMatteo, president of Babbage's Etc., the nation's largest specialty video-games retailer. Babbage's has prepaid orders from five times as many customers as it will have units for this week. A sign of the frenzy to come: a week before launch date, bidding for the $299 PlayStation2 on eBay had hit more than $500.

Sony won't explain what went wrong. Sony Computer Entertainment president Kazuo Hirai will say only that PlayStation2 is a "very complex machine that requires a lot of components." But the guessing in Japan is that the company botched the production of graphics chips. Skeptics in the gaming community are flooding the Internet with charges that Sony has created an artificial shortage in a calculated attempt to make PS2 this year's Furby, the gotta-have-it toy of the holiday season. But Sony says it isn't so. "It's absolutely ridiculous to suggest that by limiting our audience we would successfully be pursuing our business goals," insists Andrew House, a Sony vice president.

The gawky black PlayStation2 has all the visual charm of a low-end VCR. But it is packed with processing power. PS2's 128-bit processor (Sony calls it an Emotion Engine) is a big step up from the original PlayStation's 32 bits. That means the new units can play CDs and DVDs, and can accommodate add-ons for broadband Internet, digital cameras and digital music players. No modem is included with PS2, which puts it behind Sega's Internet-ready Dreamcast. But PS2 does have one feature parents will appreciate: it is backward compatible, meaning it can play the original PlayStation's 800 existing games.

The proof of a game platform is in the playing, and by that measure PS2 is getting mixed reviews. The gaming community has been grousing about the lack of top-grade games available at launch. There are only 26 PS2 software titles, and Sony is promising about 50 by the end of the year. The list contains some reputed standouts, including Madden NFL 2001 (which some are calling PlayStation2's killer app) and the snowboarding game SSX. But many of the most eagerly anticipated titles, like Metal Gear Solid 2 and the Bouncer, won't be available until spring at the earliest.

The early word on the playing experience--outside of Sony's launch party--is not particularly enthusiastic. "There is nothing on the PS2 that I've seen that gave me that jaw-dropping feeling I got with the Sega Dreamcast last year," says Dan Clark, 29, CEO of a New Hampshire credit union and an active gamer. Madden NFL 2001 is good, he says, but no better than games currently available on Dreamcast.

Part of the reason for the underwhelming array of games, gamemakers say, is that PS2 is hard to program for. "The PS2 is definitely more powerful than Dreamcast," says John Carmack, the multimillionaire, ponytailed master gamer behind legendary shooters like Doom and Quake. "But it's less convenient to extract performance from it." This is, however, a predictable stage in the gaming cycle: it's hard for gamemakers to do their best work on a platform that isn't available yet. The best PlayStation2 games are yet to come.

Who benefits if PS2 lags? Clearly Sega, the only other gamemaker with a next-generation platform on the market. Sega has been on a roll lately, racking up an installed base of 5 million units. That's way below the original PlayStation but far more than anyone would have guessed when the system was launched 15 months ago. And Sega's Dreamcast is outselling Nintendo 64. Sega also has a key advantage over the competition: its Sega Net makes it the only console that currently allows for online gaming.

"There were a lot of folks in the industry who believed PS2 would be the demise of Sega," says Kathy Vrabeck, executive vice president of Activision, a major computer gamemaker. "This gives Sega at least one more solid holiday where they can come out the winner." Sega is arming for battle. It says it will spend more money on TV advertising in the next 90 days than it has in Dreamcast's history. Another tactic: Sega dropped the price of Dreamcast, from $300 to $149.

Nintendo will also remain an entrenched player in the games market. This low-market leader has done well by relying on its own mega-successful characters: Pokemon, Mario and Donkey Kong. Those titles appeal to preteen gamers, but Nintendo has also been trying to branch out demographically, turning to third-party developers to produce best sellers such as GoldenEye and Perfect Dark, which older kids prefer. "Pokemon is a great way to attract young players," says Jim Merrick, Nintendo's technical director. "But we want gamers 18 and over too."

Nintendo is working on a next-generation platform of its own, GameCube, due next October in the U.S. And it's touting GameCube's futuristic game-storage device, a sort of mini-DVD that does not yet have a name. Nintendo is promising a quantum leap over its existing N64 cartridges, which were chock full of circuitry and extremely expensive to make.

Looming over the whole gaming industry is newcomer Microsoft. Bill Gates & Co. say their much-anticipated X-Box will launch next fall. More than 160 U.S. developers have signed up to produce X-Box games, and Microsoft has shipped 1,500 development kits in the past three months. Even a year in advance, the gang from Redmond has been putting out some PS2-like hype for X-Box.

Microsoft is an undeniable powerhouse in any tech endeavor it takes on. But the company that powers everyone's office computers and spreadsheets--when it's not jousting with the Justice Department over monopoly charges--may have some work to do to get gamers to think of it, rather than of standbys like PlayStation and Sega, as the place to go for good times.

Microsoft enters the industry as the stakes in the console war are about to get a lot higher. The nation's gaming population is expected to double in number over the next five years, attracted by the far richer experience that new technology will make possible. Wireless gaming is becoming a reality: in Japan gamers are playing on their cell phones. And the big game companies will follow Sega's lead and offer Internet gaming, allowing friends to play each other remotely. As more homes get broadband, those bigger pipes will allow more use of 3-D, video sequences and immersive content, which lets gamers literally become part of the game. In a few years, gamers will be inserting themselves as characters into their favorite television shows--chatting up Spock on the Starship Enterprise, or sitting down with Jerry and Elaine in a booth at Monk's. And future games will let people "compete" with televised real-world events--put their own car, for example, in a NASCAR race.

The potential to monetize all this fun is also growing. The money isn't in the hardware--Sony is losing about $100 on every PS2 it sells. But it more than makes that money back in licensing fees charged to gamemakers. Companies will be experimenting with new pricing options, including pay-per-play and cable-TV-like "all-you-can-play" subscriptions. One revenue area that is expected to explode: in-game advertising, including paid product placement (e.g., "Danger ahead! Call for help on your Nokia-brand cell phone!").

But the biggest prize of all lies in turning gaming consoles into broad-ranging entertainment centers. Sony acknowledges this future by calling PS2 not a game console but a "computer entertainment system." And Sony, with its wealth of consumer-electronics devices and enormous movie and music businesses, may have the most to gain by branching out. Count on it to use PlayStation2 in the future as a platform for an array of synergistic nongaming applications, from editing digital movies made on Sony camcorders to downloading Sony-brand music and music videos.

In this launch, Sony has played down those nongaming capacities. That is in part because some of these applications--like Internet connectivity--are not yet ready. But Sony may also be aware that by multi-tasking too aggressively, it risks alienating the core gaming community it is counting on to buy the new units. "PlayStation2 seems to be no more than a DVD player that can play games," grumbles Mike Roberts, an 18-year-old gamer from Missouri who says he won't be buying a PS2. "It should be the other way around."

There will no doubt be more griping this week, as gamers weigh the glitz of the PlayStation2 rollout with the reality of the gaming experience. "The PlayStation2 doesn't live up to Sony's hype," says Carmack. "It's just a next-generation machine, and they were acting like they'd invented the steam engine."

But most gamers remain bullish on PlayStation2 and Sony. "In the fullness of time, PlayStation2 will still be the primary console out there," says Jeremy Schwartz, a games analyst at Forrester Research. Which may not be terrible news for Microsoft, Sega and Nintendo. The way it's growing, this may be one category that's rich enough for many players to win big.

--Reported by Chris Taylor/San Francisco with Tim Larimer and Sachiko Sakamaki/Tokyo

With reporting by Chris Taylor/San Francisco with Tim Larimer and Sachiko Sakamaki/Tokyo