New Game

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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!").