Wedbush Morgan: PS3 to 'Win' the Next Gen Battle

New Wedbush Morgan report forecasts that while console sales are often driven by the quality and content available for each system, the next generation console wars could be decided by the motion picture studios. Michael Pachter expects Sony and Blu-ray to emerge as narrow victors.
In the report, analyst Michael Pachter predicts that Sony's PS3 will command the greatest market share of next generation consoles. However, he also states that this console cycle will essentially be "a dead heat, and each manufacturer will have sufficient market share to generate significant profits."

He said, “Notwithstanding the efforts of the three console manufacturers to deliver compelling exclusive content, we expect the ultimate outcome of the console wars to be decided by the motion picture studios,” Pachter said.

“Should the studios embrace Sony’s Blu-ray standard for high-definition DVDs, we think Sony will gain an insurmountable advantage over Microsoft; should the studios embrace Sony rival Toshiba’s HD-DVD format, we think that Microsoft can maintain its first mover advantage and will dominate software sales for years to come.”

“We expect the dominant console at the end of the next cycle to be Sony PlayStation 3, primarily due to our assessment that Sony will win the high definition DVD format war. Ultimately, we see Sony winning the console war with 36% of the market, with Nintendo capturing second place at 34% and Microsoft finishing third at 30%. These estimates do not include market shares in Japan, which we expect to be dominated by Nintendo (51% through 2011) and Sony (44%).”

Pachter also said, ““We believe that a wildcard for next generation console sales will be the hardware manufacturers’ ability either to develop content internally or to secure third-party commitments for software designed exclusively for a single platform.

In this respect Pachter cites Nintendo’s catalog of exclusive properties weighing heavily in the Japanese firm’s favor. He notes that Sony and Microsoft will be on a more even keel exclusivity wise than during the previous console cycle when the PS2 had far more exclusive titles than the Xbox.

He said, "The similarity between the two platforms will likely serve to lower the costs of porting software from one platform to the other, and we anticipate that virtually every third-party title produced for one will be produced for the other."

Following overall growth of 6% in 2006, the report also forecasts unprecedented growth in next generation software sales over the coming years as the game industry booms.

"We now expect the market for interactive entertainment to grow at a mid-teen rate through 2009. Beyond 2009, we expect revenues from non-traditional sources (online games, casual games, downloadable content, and in-game advertising) to grow to a meaningful level, offsetting inevitable declines in packaged goods software goods."

Webush Morgan also expect next generation consoles to appeal to a wider audience than their predecessors, hence its prediction that the number of households owning at least one console will rise from "52% during the 128-bit cycle to 60% during the next cycle." However, "our growth forecast assumes that the number of consoles owned by each household will hold relatively steady, decreasing slightly from 1.40 to 1.38 during the next cycle."