Talkin' bout a Revolution: Q&A with analyst Michael Pachter

LOS ANGELES--For every platform: an opinion. For every business strategy: an opinion. For every game: well, you get it.

Sharp as a diamond-cutter's knife, Wedbush Morgan Securities senior analyst Michael Pachter spent some time with GameSpot at the end of day two of E3 in LA.

We addressed news that had recently surfaced on the Microsoft, Sony, and Nintendo next-gen consoles.

GameSpot: Michael, has anyone seen enough of the Revolution? And is three times faster enough in this gazillion-times-faster-is-not-enough environment?

Michael Pachter: I'm taking Nintendo at their word that Revolution is a multiple faster than the Game Cube, but not a ten- or twenty-fold increase in speed.

So it's not going to be as powerful. But it's obviously going to be priced less expensive than a PS3 and Xbox 360. So strategywise, I guess what Nintendo is making a bet on is something that's probably beyond their control--the development community and publishers that are going to only make a few games for the Xbox 360 and PS3.

GS: The faster kids on the block lose?

MP: Instead of seeing our normal 200 games each console after a couple of years, we're going to see fewer. And mostly because of development costs. And probably it's going to take more time to make games. It means that there'll be bigger risks, and it will be harder to greenlight a project.

GS: But more games on the Revolution?

MP: Nintendo has a deep library, so they are able to bring their new Marios, Zeldas, Kirbys, and whatever they can bring out on the Revolution.

And Nintendo has good relationships with Japan, so they'll probably get some support from third-party Japanese publishers.

GS: Sounds like they may approach a win...?

MP: When the US publishers start to weigh the economics of chasing the Xbox 360...even if the installed base is twice as big as the Revolution, if the cost is twice as much, then the US publisher should be indifferent as to whether they make one game for the 360 or two games for the Revolution.

I talked to Nintendo and their strategy is to try to ensure that all the big games that are made for 360 and PS3 are also made for Revolution. If they succeed at that, they're going to do very well.

GS: But how can you succeed if the graphics aren't the same, if the experience isn't the same?

MP: I've seen demos of the 360 and the PS3...I'm not talking about the Sony presentation, actual in-booth demos. So far, I'm not impressed.

The 360 and PS3 look great, but they don't look appreciably different than the very best I've seen on the current Xbox. I'm sure that part of the reason that I'm not really impressed yet is that they haven't spent enough time to make everything totally fluid, motion fluid. But if the Revolution is two or three times faster than the Game Cube, why can't they get something that looks very realistic? I think they will.

GS: It's early, but can you feel a winner in this crowd of three?

MP: I honestly think that they're the same box. I mean, yes, Sony will tell you that they have more RAM, and Microsoft will tell you they have three cores, but I think, largely, they're very similar.

GS: Market share?

MP: Microsoft clearly is going to have 100 percent market share for the first year, but it strikes me that if Microsoft doesn't give me a real reason to switch from PS2 to Xbox 360, and if the consumer believes that the PS3 is just as good as the 360, then I'm not going to switch.

So the only way Microsoft gains appreciable marketshare is for Nintendo to fail.

GS: Can you drill down on those numbers?

MP: If Microsoft is going to get 100 percent of the sales the first year, the people who buy that largely are going to be Xbox owners. I doubt that more than 20 percent of the first movers are going to be people who only had a PS2. They'll be the hardcore guys who already have an Xbox or who already have both.

When Sony launches the PS3, if the lineup is comparable, and if it's fully backward compatible, plug and play without a software patch, then I think Sony keeps most of their customers.

So my guess is that it'll take a while for Sony to overcome that first-year advantage, but in five years [it will look like this:]: Microsoft at 30-35 percent, Sony at 45-55 percent, and Nintendo at what's left.

It's possible Nintendo wins if developers don't support either the Sony or the Microsoft platforms with sufficient game quantity to drive people to switch over. And if there are more games available on the Revolution, the Revolution will do better than people expect. I don't think that'll happen, I think that Microsoft and Sony are going to get a lot of support, but we'll see.

GS: Do you read any sort of a change in terms of the way these companies compete? Is this just another launch year, or preface to a launch year, or are the stakes a little bit higher?

MP: Microsoft never, ever intended to be the dominant console of the last cycle.

GS: But are they now?

MP: I don't know whether they are, but I know that this time they think maybe they can be.

GS: With the MTV special, Microsoft took it to consumers early. They didn't wait for E3. Was it smart of Microsoft to play to the bleachers like that?

MP: I think it was lame. Because I think the people who watch MTV are a subset of the audience that they want to appeal to. They want to appeal to an age demographic. And I will grant you that 19- to 24-year-olds are the largest age demographic that watch MTV, but all 19- to 24-year-olds don't watch MTV, and all Xbox owners aren't 19 to 24.

I think that they picked a target that was a very narrow subset. And obviously cost was a consideration.

GS: A better option would have been what?

MP: I think the free press is the best way to advertise. That "advertising" is not costing them anything. This article is not costing Microsoft anything, and more relevant eyeballs are going to read these words than watched MTV.

They're very funny. I don't think MTV is the gamer. Spike TV is the gamer; G4 is the gamer.

So I think [MTV] was a dumb thing. I don't know if you noticed, but they had the woman, the Asian, the Black English guy....You know what? That's just lame. It's cheesy. The people who buy the Xbox 360 are not women

Now, if it didn't cost very much, then I don't care.

GS: Now tell me what you know about 360 and PS3. Any particular attribute you think is genius?

MP: Genius or a disaster: Blue-ray. It's either going to be an absolute driver of sales, or it's going to be just an irrelevant feature that doesn't help you at all. If Blue-ray becomes the home video, the movie HD-DVD standard, Sony's brilliant to put it in the box.

I don't know about you, but I got a PS2 at launch, and I did not buy a stand-alone DVD player for two years. I used that thing to watch movies for two years.

I will do the same thing with the Blue-ray HD-DVD drive if, in fact, there are films in Blue-ray format.

The bet is that the HD-DVD format doesn't win, or they merge--and I think Howard Stringer, as chairman of Sony, is keenly aware that this is a priority for the company. I think he's taking the company in the direction of making Blue-ray work.

So that is a huge differentiator, because if you buy an Xbox 360, conceivably you're going to have to buy a separate HD-DVD player and keep your Xbox under the TV for those games that aren't backward compatible. So three boxes? With Sony it's one box. Brilliant.

GS: Going into E3 week you probably had an idea of what would transpire in the transition year, next calendar year. After you've been here and heard the pitches, you've picked up a little bit of the vibe, maybe you've seen some games... Can you give me an idea what's going to happen next calendar year?

MP: The big surprise to me is that Microsoft is not taking any more Nvidia chip-sets after this quarter. And that means to me that once Microsoft runs out of the chips that they've inventoried, that they've stored to make future Xboxes, there won't be anymore Xbox.

I don't know how many that is. Microsoft was kind of cryptic about it. They very artfully stated that they would support the Xbox well into 2006. They didn't say they would produce the Xbox well into 2006. I don't think they would stockpile more than those, and so we may see Xbox discontinued by the end of this year.

GS: Are they leaving money on the table with that move?

MP: They aren't leaving profits on the table because they're not making any money on the Xbox hardware.

I think what their view is, and I'm guessing because they haven't announced it, is that if they stop making Xboxes, but you like our product, you'll buy the 360, so that will help the 360 installed base to grow more rapidly.

The problem is, what retailer is going to carry current-generation Xbox games next year if there's no Xbox being made? If you remember back to the N64 when the GameCube came out, we saw no more N64s. What happened to N64 games? They disappeared.

GS: If it's cheap you might buy it.

MP: Well, that's the point... The point of extending the life of the legacy console is that you sell your legacy console, your PS2 for $99. You bring in a customer who doesn't have that much money, who wants to buy a bunch of $20 games. He's not going to buy a 360 and buy a bunch of $20 games.

And in theory, for every next-gen box you sell, somebody throws away a legacy box. But if you sell a new legacy box to a brand-new consumer, you maintain the installed base at a certain level, and that drives catalogue sales of older games. The retailers will carry it, and the publishers make a lot of money. Consumers have a lot of choices at low price.

Microsoft seems to be taking the strategy that they are going to abandon the current-generation console...they don't really care about legacy software sales. But it hurts the publishers, it gives consumers fewer choices, and the Xbox essentially is going to turn into a paperweight in 2006.