ASIAN TECHNOLOGY INFORMATION PROGRAM (ATIP)

REPORT:  ATIP95.43 : HOME VIDEO GAME MARKET OVERVIEW: JULY 1995

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Date: 07/20/95 [MM/DD/YY]
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Date: July 20, 1995
REPORT:  ATIP95.43 :  HOME VIDEO GAME MARKET OVERVIEW: JULY 1995

ABSTRACT: Dismissed for years as an insignificant member of the computer
industry, the home video game (HVG) industry has grown at an astounding
rate, incorporating a number of leading high technology innovations and
making them everyday objects in millions of households.  Similarly, the
"multimedia home PC" (MHPC) has also commodified many important high
technologies, with an especially strong surge into the home market in
the last 12 months.

The immediate opportunity is obvious in home entertainment and games,
though both platforms appear to be positioning themselves to compete
beyond today's home entertainment market in the domain of various
"interactive" services.  In the US and in Japan, HVG and MHPC vendors
have begun to advertise Internet access and/or communications
capabilities as new reasons to purchase their platforms.  Anticipating
these markets, a third multimedia platform licensed from Apple Computer
based on the company's "Pippin" technology will make its debut in Japan
in December, 1995.

This report reviews the dramatic evolution of the HVG and MHPC
industries. In addition, we review Apple's recently announced Pippin
strategy and some of their respective future applications.

===================START OF REPORT ATIP95.43===========================

HOME VIDEO GAME MARKET OVERVIEW: JULY 1995

Prepared by Chris Stiles, Technology Analyst, ATIP Tokyo

CONTENTS

1.0     Introduction
1.1     8-bit HVG Systems
1.2     16-bit HVG Systems
1.3     32 and 64-bit systems: Sega Saturn & Nintendo Ultra 64 (NU64)
1.4     Diversification and New Channel Strategy
1.5     Multimedia Home Personal Computers (MHPCs)
1.6     New Platform:  Pippin
1.7     Conclusion


1.0  INTRODUCTION

Initially, to seasoned members of the IT community, the home video game
industry must have seemed frivolous and irrelevant.  Designed for
children and marketed as toys, there was little about the early models
of the home video game to inspire interest or concern in the computer
and communications industries.  Yet today, in many ways, the HVG
industry has already become a more strategic, more lucrative, and more
international business than many thought possible.

The fact that the video game industry ($8.8 billion) is now larger than
the Hollywood box office ($5.2 billion) is proof of how seriously the
business of gaming actually is.  By 1998, multimedia home entertainment
will generate an estimated $30 billion in revenues1.

As we move through the 1990s a number of important high technology
shifts loom on the horizon.  The first, and perhaps the most obvious, is
the continual evolution of the power of the microprocessor and it's
sister sectors, multimedia software development and telecommunications.

At the same time, the moment of convergence of the computing,
entertainment and communications industries will begin to take shape in
this decade.  In addition, as the personal computer approaches the end
of its second decade in the marketplace, it is poised on the brink of an
upheaval just as the mainframe and the minicomputer were in the 1970s.

But how?  And when?  The answer to these questions will depend on the
evolution of what we refer to as home multimedia platforms.

In Japan, PC manufacturers who have had limited success in the past are
looking to the next generation of easy to use multimedia machines to
bolster their competitiveness in the global PC market.

For Japanese HVG superpowers Nintendo and Sega, this moment in the
industry represents a rare opportunity for them to extend their reach
beyond simple entertainment into the home computing and communications
markets.

We begin our analysis with an introduction to the most pervasive
platform so far, the home video game machine (HVG).

1.1     8- BIT SYSTEMS & THE BEGINNINGS OF THE HVG INDUSTRY:  ATARI AND
NINTENDO

Under the direction of their founder and CEO Norman Bushnell, Atari
single handedly brought the video game industry to life with the
introduction of their first product, Pong.  Primitive as it was, Pong
attracted customers immediately, and within it's first year of
production it was responsible for over one million dollars in revenues.

Expanding the market, the company introduced a number of home gaming
products early in the video game industry.  In order of their release,
the Atari 8-bit computers included the 400, 800, 1200XL, 600XL, 800XL,
65XE, 130XE, and the XE Game System.  The 400/800 models were first
shown publicly in November 1978 and first sold in 1979.  The final
machine, the XE Game System, was released in 1987. The growth, expansion
and decline were phenomenal.  Rocketing from zero to over $200M in
revenues by the time their ride was over, Atari Corp. officially dropped
all remaining support of their 8-bit computer line on January 1, 1992.

Atari jump started the home video game industry by being the first
company to seriously leverage 8-bit microprocessor technology
exclusively for games.  With the adoption of this technology, the
system's number of "bits" became the one of the performance and
marketing watchwords of the HVG industry.  By using standard, largely
off-the-shelf microprocessor/IC technology, Atari quickly perfected a
product at a breakthrough price that brought the excitement of computers
and arcade gaming into millions of households for the first time.

Their original console sold for roughly $200 and each software title or
game cartridge was about $35.  With the microprocessor and ICs making
headlines across the county, having an Atari at home, in addition to
being a great way to play games, was the first piece of the computer
revolution home consumers could afford to own.  By 1984, millions of
Americans wired their Ataris to their TV sets to battle Space Invaders
and blast Asteroids.

>From that time forward, the home entertainment industry would never be
the same.

Like so many other high tech commodity businesses, the HVG industry has
been through tumultuous ups and downs.  Being the first in the HVG
industry to market with a technology or an innovation does not ensure
success. Atari was one of the first to learn this lesson as they went
from zero to $200M in revenues in a few short years, then suddenly found
themselves on the brink of bankruptcy.

There are many explanations for Atari's rapid decline.  Some say it was
because of the chaos that came in the wake of the company's sale to Time
Warner in the 1980s.  Others say it was the flooding of the market with
their inept market forecasting and manufacturing of video game
cartridges. But whatever the reason, and in spite of the ups and downs,
by the mid-1980s Atari  legitimized the market for home video game
entertainment.

With the dramatic collapse of Atari in the mid 1980s, it was just a
matter of time before another, better organized company came along to
pick up the pieces.  That company was Nintendo, headquartered in Kyoto,
Japan.

In 1985, Nintendo of America Inc. revitalized the U.S. video game market
with its introduction of the 8-bit Nintendo Entertainment System (NES)
the first of a new generation of video games. Selling over one million
units in their first year, the company overcame industry skeptics and
pressed forward with their belief that the public would still pay for
well designed home video game entertainment.  They stuck with their
strategy, and since the U.S. introduction of NES,  Nintendo has since
become the world's largest manufacturer and marketer of video games.

The dramatic success of Nintendo in spite of acute skepticism on the
part of retailers and many customers underscores the resolve of
Nintendo's of America's (NOA) President  Minoru Arakawa.  Fueled by a
vision for what the future of the HVG industry could be, Arakawa made
Nintendo, along with many of their software licensees, phenomenally
rich.  Yet again, with such a vibrant market to themselves, it was only
a matter of time before another competitor entered the fray.  The next
challenger was Sega Enterprises, Ltd.

1.2     THE HVG'S SECOND GENERATION:  SEGA AND THE ARRIVAL OF 16-BIT
         MACHINES

By the mid-1980s, thanks largely to Nintendo, the home video game
industry was worth well over $200 million.  With Atari struggling with
less than 20% of the U.S. HVG market, Nintendo concentrated on software
development for their NES product but were slow to market with the next
generation of HVG technology centered around so-called "16-bit"
microprocessor technology.

Determined to penetrate the market with their new 16-bit product called
Sega Genesis as quickly as possible, like Nintendo, Sega sold their
hardware game consoles for very little profit.  Instead, they
concentrated on driving unit sales while at the same time, charging
developers a nominal fee to create titles for their new platform.
Fueled by aggressive marketing and a quickly expanding distribution
channel, as unit sales of the NES 8-bit products began to level off,
Sega's shipments of 16-bit Genesis systems shot into the hundreds of
thousands.

Game developers, many who were uncomfortable with Nintendo's restrictive
licensing arrangements,  rushed to create titles for Sega Genesis.
Sega's strategy was a masterful way to take advantage of the latest
developments in microprocessor technology to enable a new generation of
high impact entertainment game hardware and software, while offering
their product for a price comparable to the obsolete but established NES
system.

For their counter-assault, Nintendo brought their own 16-bit technology
machine called the Super Nintendo Entertainment System (SNES).
Borrowing an idea from Sega, they offered a number of software titles
including ones adapted directly from the video arcade, most notably,
Donkey Kong. Not surprisingly, unit sales of SNES were in the millions.
However, because Nintendo underestimated the importance customers would
assign to the new technology Sega's Genesis system offered, over the
course of roughly three years, Sega overtook Nintendo as the
market-share leader in the critical U.S. market.

In 1995 Sega of America's best-selling Sega Genesis  system continues to
reign supreme as king of the 16-bit hill now for the second year in a
row. To keep the momentum going, Sega continues to aggressively develop
new titles with Genesis as the choice system while pushing ahead with
new 32-bit and 64-bit systems. With a 55 percent share of the 16-bit
hardware and software market, Genesis sales for 1994 totaled more than 4
million units bringing the total U.S. installed base to more than 15
million.

Fighting a losing race, the original market leader Atari suffered from a
dearth of compelling new titles and faded into irrelevance while the
executives at the formerly invincible Nintendo scratched their heads in
disbelief.  As with previous generations of HVGs, potential newcomers to
the industry began to plan the introduction of their own 32-bit and 64-
bit systems in a classic example of a technology "leapfrog" strategy.

1.3     32 AND 64-BIT SYSTEMS:  3DO, ATARI JAGUAR, NINTENDO ULTRA 64 AND
        SEGA SATURN

Like the PC industry, the HVG market became fiercely competitive on
price, features and the availability of the latest and most
sophisticated titles. The industry punished any company that missed a
beat, either in hardware or software.  Yet unlike the PC industry at
this time, which was primarily selling direct or through authorized
dealers, in the HVG sector each consumer outlet in the distribution
channel became an unusually hotly contested battleground for shelf
space, mind share and market share.  In the eyes of many customers Sega
and Nintendo had achieved a rough sense of parity in terms of hardware,
though Nintendo continued to hold a lead over Sega in the number of
titles.
        
As the struggles in the 16-bit HVG domain began to make clear, the most
successful platform wasn't always the one with the largest
installed-base.  Atari learned that lesson early but never recovered.
More than ever before, success revolved around hardware, the strength of
manufacturer's relationships with their developers, and the ability of
both parties to make key titles available for the critical Christmas
buying season.

Typically over 50% of all HVG consoles sell between Thanksgiving and New
Year.  Even as 16-bit technology came to dominate the market by the
early 1990s, developers could make or break a HVG platform by
withholding or creating a major title in time for Christmas.  And while
Sega and Nintendo never suffered a major setback at the hands of
developers, newcomers to the market discovered how difficult the market
could be without hit titles for their platform on the shelf.

Again, Atari in particular discovered how brutal the game of catch-up
could become after allowing themselves to be leapfrogged by hardware,
and assigned second or third priority by developers, even after
introducing a technically impressive 32 bit system called Jaguar.  With
this lesson clearly etched in the minds of every HVG company in the
industry, would-be challengers to Nintendo's dominance of the industry
waited in the wings for new technology to create another opportunity for
platform manufacturers to play the next round of musical chairs.

By early 1992 the HVG hardware and software industry generated over $1
billion in revenues and penetrated over 40% of US households.  In
household s with children aged 8-18 the penetration rate was over 80%.
Yet despite its phenomenal growth, the industry began to show signs of
stagnation as sales began peaking in 1994.  According to Patrick
Ferrell, president of Infotainment World, a San Mateo, CA research and
publishing company,  after 1994 the 16-bit market began "its decent into
oblivion...but the fall and landing of 16-bit was more gradual than the
8-bit demise due to pricing strategies and consumer confusion sown for
1995 and 1996."

This confusion comes from the intense market share battle taking place
among companies that will be selling new platforms this year including
Sega, Nintendo, Sony, 3DO, Atari and others. 2

As the HVG market has matured and reached something of a saturation
point, pressure to shorten successive product design cycles and reduce
the time to market of new systems has become especially intense.  Where
in the 1980s a generation of HVG machines might be expected to stay
current for 3-4 years, the shorter design cycles associated with the PC
industry have impacted the HVG market.

Increasingly, the third generation of HVG machines have more components
in common with their larger PC cousins.  As a result, the life of the
32-bit HVG architecture is expected to be remarkably short.  Even as
Sega and Nintendo finish rushing stopgap 16-bit to 32-bit "bridge"
products to market, at the same time they're struggling to keep pace
with their competitor's 64-bit "super" systems.

1.4     DIVERSIFICATION BEYOND HARDWARE AND NEW CHANNEL STRATEGY

With markets saturated, the technology in transition and "upgrade"
customers stalled in anticipation of 1995's 64-bit systems, Sega and
Nintendo are battling with a special intensity to secure reliable
revenue streams aside from hardware sales.  They're turning to joint
ventures, crosslicensing, and new distribution systems, hoping to
diversify their strengths and bolster margins.

For example, until recently, Nintendo's famous game characters the
SuperMario Brothers and Sega's Sonic the Hedgehog were characters one
could only experience in a home video game.  With cross-licensing
efforts underway, game characters have migrated to the movies and
television.  In the summer of 1994 SuperMario Brothers were featured in
a nationally distributed motion picture, as was Capcom's Street Fighter.
 
Keen to preserve their brand identity, Sega's Sonic the Hedgehog has had
his own Saturday morning cartoon series.  Other ventures include
featuring Busby Bobcat, star of Claws Encounters of the Furred Kind, in
a Thanksgiving TV special.  Busby belongs to Accolade, the largest
privately held video game company.3  This strategy is a radical, but
logical, departure from earlier marketing campaigns which relied more on
print media, in-store promotional material, and directmail.
        
In terms of distribution channels, both Nintendo and Sega are
experimenting with new ways of delivering content to their installed
base.  For example, Sega has arranged an alliance with Blockbuster Video
enabling customers to rent Sega game cartridges just as easily as they
rent videos.  Initially reluctant, Nintendo sat on the sidelines until
Sega's success with this distribution method convinced them it could
work.

In a separate venture, Sega has established joint ventures to create a
game channel dedicated exclusively to delivering Sega software to
customers on demand over existing cable lines.  Not to be outdone,
Nintendo is said to be investigating alliances to deliver Nintendo
content via direct-broadcast satellite.

Regardless of who comes out ahead in the struggle for channel dominance,
the fact that the industry's two primary players are experimenting at
all underscores their interest in diversifying beyond the realm of
razor-thin hardware margins and hit-or-miss software title production.

1.5     MULTIMEDIA HOME PERSONAL COMPUTERS (MHPCS)

In 1994 Macintosh and Microsoft/Intel PC's with CD ROM drives reached
combined sales into the home segment of a record 1M+ units.  Consumers
snapped-up these so-called"multimedia" computer configurations at a pace
that surprised even the manufacturers.  Aside from signaling a turning
point in the demographic profile of the PC industry, this PC penetration
rate has ominous overtones for the HVG industry.

As HVG manufacturers continue to compete in a highly fragmented segment
with multiple, proprietary systems, multimedia PCs are targeting
consumers like never before with a far more unified set of standards.
1995 promises to the year where the PC competes almost directly against
the game machine for the first time in history.
        
The giants of the video game market are intent on keeping the consumer
HVG turf to themselves by reinforcing their proprietary systems with
optimized microprocessors and fast CD ROM drives to beat back the
challenges from PC manufacturers.   This strategy will probably continue
to work so long as a significant difference in price between PC and HVG
systems remains.

A typical HMPC system in the US sells now for between $1,900-$2,500 and
comes equipped with:  8MB RAM, 500MB+ internal hard drive, double or
quad-speed internal CD ROM, Fax Modem, 14" or 15" color monitor,
operating system, keyboard, mouse and roughly a dozen software titles.
By comparison, HVG systems are ramping up their features while keeping
very close to their original price points.

Figure A:       HVG Hardware Evolution and Pricing  (7/95)


Hardware        Atari     3D0        Sega      SNES      Sega
                Jaguar               32X                 Genesis

Introduced      1994      1993       1992      1988      1989

Architecture    64-Bit    32-Bit     32-Bit    16-Bit    16-Bit

Bus Bandwidth   106.4     50         NA        1         1
(MB/sec)

Render Speed    850+      64         15.4      1         1
(MB/sec)

Colors          16.8 Mil  16.8 Mil   32K       256       64

Processors      Five:     Four:      Five:     Two:      Two:
                GPU       ARM60      68000     65C816    Z80
                DSP       DSP        Hitachi   DSP       68000
                Object    Graphic(2) Z80
                Blitter              VDP
                68000                32XVDP

16 Bit Sound    Yes       Yes        Yes      No         No

S-Video Output  Yes       Yes        No       Yes        No

RGB Output      Yes       No         Yes      Yes        Yes

Retail Price    $149.99   $299.95    $149.99  $99.99     $99.99


That gap gives HVG manufacturers time to make their transition to 64-bit
technology while they continue to concentrate on shipping as many units
as possible, thus ensuring some measure of market-share security.
Nintendo is building its Ultra 64 using the MIPS processor.  Sony is
creating its PlayStation also based on the MIPS CPU, and Sega is
developing the Saturn system using six CPUs.  Both systems are already
in the Japanese market and are scheduled to arrive in the U.S. in late
1995.  Their success depends on consumers being willing to spend more
for these new platforms, and upon the inability of current PC makers to
deliver a comparable machine at a lower price featuring traditional PC
multimedia titles.

In 1994, for the first time, the worldwide sales of personal computers
(from all manufacturers) into the home exceeded 10M.  However, 1994 was
also the first year in which more personal computers sold into the home
went into homes already having a personal computer than those in which
there was no personal computer.

This statistic suggests that the penetration of the personal computer
into the home is entering a maturing age.  In the US, more than 60% of
the households have combined gross income less than $40k per year.
While most of these homes have one or more television sets, it is
expected that even by 1997 the number of homes in this category with a
personal computer will be well below 10%.

The question is, "Do consumers want another platform dedicated to
interactive multimedia?"  For the videogame maker, the answer must be
"yes," otherwise, the market belongs to the PC.4  If that answer is
"yes", then it is still probably too early to even hint at winners
within the HVG segment.

The weaker contenders have a number of handicaps:  Atari's present
system, the Jaguar needs titles to remain viable, and Nintendo's
Ultra-64, even when it ships in time for the 1995 Christmas buying
season, will face considerable competition.  Taking full advantage of CD
ROM technology, Sony's PlayStation, Sega's Saturn and 3DO's product
appear to be well-matched opponents.5

As with previous generations, delivery date, quantity and quality of
titles, as well as ongoing developer support commitment are the keys.
Those platforms and companies that survive this year's Christmas
shakeout are likely to remain viable and should be able to consolidate
their position in 1996.  Those platforms that can't muster the shelf
space or the titles in time will take their place in the dustbin of
history alongside the early Ataris of the world.

1.6     NEW PLATFORM:  PIPPIN

The high barrier price of personal computers is limiting its ubiquitous
penetration into homes around the world.  If this trend does not
reverse, it means limited growth for both multimedia hardware and
content sales in the years to come, just as many new title publishers
are entering the industry.  It is essential to the long-term health of
the CD-ROM title industry that the growth it is experiencing now,
continue into the future.
                        
This is where Apple Computer, Inc.s new PowerPC-based HVG platform
called Pippin is expected to make its debut.  Pippin is a multimedia
player platform derived from Apple's second generation Power Macintosh
hardware and system software.  It is designed to achieve the lowest
possible cost while optimizing it as a playback tool for multimedia
CD-ROMs initially created for the Macintosh and/or IBM compatible PC.

The Pippin platform is intended to integrate into the home market (and
probably schools) as a part of consumer AV stereo and TV environment.
Because it is derived from both the hardware and software architectures
of the Macintosh, it provides developers with a simple and easy porting
effort to take their investment in personal computer CD-ROM content and
make it available to a wider audience in a more natural environment
associated with entertainment and fun.

Like 3DO,  the Pippin platform must be licensed and distributed by many
companies which collectively can reach a much larger audience than one
company alone.  Therefore, Apple has chosen to make the Pippin platform
available under license to manufacturers interested in building and
selling their own version.
                        
If all a family wants is the least expensive video game player and does
not want to be able to use their purchase for other uses they will
probably be better off buying the upcoming new platforms being
introduced by the video game giants Nintendo and Sega.

According to public documents from Apple, the company believes that
families are looking for much more than video game players today.  They
want to be able to play their favorite games, but they also want to
communicate, learn, play interactive music, and access information.
Pippin provides them this capability, while many of these features are
only just being suggested by existing HVG vendors

Bandai has announced its intention to ship their first Pippin product,
known as the Bandai Power Player by Christmas of 1995 in the Japanese
market.  Other Pippin licensees are also expected to make announcements
in 1996.  Publicly anticipated sales volumes for the Bandai product are
roughly 500-600K units in the first 12 months.

The results of the shakeout in the 32 and 64-bit HVG market and the
success or failure of the Pippin platform will have a dramatic effect on
the home computing industry, especially for MHPC vendors.  If they
succeed, the HVG segment will be well-positioned to grow in to the
traditional home PC market space.  If they fail, then the MHPC will face
the home computing market virtually unopposed.

1.7     CONCLUSION

Dismissed by many as too cute, under powered or simply unimportant in
the larger strategic context of the computing industry, the home video
game market is on the brink of a historic transition.

As these devices take on more of the characteristics of the personal
computer, and as the personal computer takes on more characteristics of
the traditional multimedia game machine, former distinctions between the
two devices are vanishing.  For HVG manufacturers, this could finally be
their chance to break out of their limited niche market and move into
the broader communications, education and computing markets.  At the
same time, as home PCs are redesigned, especially new platforms like
Apple's Pippin, for the first time they are in a position to become
nearly ubiquitous in homes around the world.
        
Early analysis suggests the PC platforms, if they can leverage the
availability of existing PC multimedia titles and deliver them into
homes in a system that is competitive with HVG machines, will have an
edge.  Not because the next generation of game machines will be under
powered, but because the HVG industry is rife with so many incompatible
standards.

The Christmas 1995 buying season will give us a good idea of what to
expect from PC and HVG manufacturers.  In the end it won't be the
direct-satellite distribution network, the industry pundits, or the
Saturday morning cartoon or the boxoffice cross licensing deal that will
determine who wins.  On Christmas 1995, the 8-year olds of the world
will get the multimedia systems they've been asking for all year, and
the computing, content and communications industries around the world
will never be the same.

Footnotes

1 "Multimedia market (to hit $30 billion in 1998)", Television Digest,
Oct 11, 1993, v33, n41, p. 15.

2 "Interactive product sales expected to double by 1998", Supermarket
News, Vol 44, No.22, P. 38.

3 "Playing Games", Forbes, August 16, 1993, P. 108 by Richard Shaffer.

4 "Onset of Consumer Multimedia Wars", by Jonah McLeod, Electronics, Jan
9, 1995, v68, n1.

5 "The Gaming of 1995:  battle lines drawn for Christmas showdown", by
Stephan Somogyi, Digital Media, January 2, 1995, Vol.4, No.8, p.30.

=====================END OF REPORT ATIP95.43r===========================