Next-gen DVD battle will decide console war - Pachter

Whether or not Microsoft can mount a serious challenge to Sony's market share in the console market may be almost entirely down to the outcome of the battle between the Blu-Ray and HD-DVD next-generation DVD formats.

That's according to leading industry analyst Michael Pachter of Wedbush Morgan Securities, who has pinpointed the struggle between Toshiba and Sony in the high definition movie space as crucial to how the games market will move in the coming years.

"Notwithstanding the efforts of all three console manufacturers to deliver compelling exclusive content, we believe that the ultimate outcome of the console wars will be decided by the motion picture studios," Pachter commented in a note issued this week.

"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."

Pachter believes that Sony has allowed Microsoft to gain that first year advantage because of its desire to hold off on releasing the PS3 until such time as the Blu-Ray technology was ready - a risky strategy, but one which could yet pay off for the firm.

"Should Sony win the high definition DVD format war, we expect a more rapid adoption rate for the PS3; should Sony lose the DVD war, we expect sales of the PS3 to approximate annual sales of the Xbox 360, and believe that Microsoft can retain its first mover advantage," Pachter explained.

Microsoft's Xbox 360 utilises a standard definition DVD drive, but the firm has announced its intention to launch an add-on unit which can play HD-DVD content and is expected to announce further details at E3 next week.

However, uptake of such devices for consoles has traditionally been slow, and while the peripheral will answer critics of the Xbox 360 who point out that the device for which Microsoft coined the phrase "HD Era" doesn't actually play back any HD physical media, it is unlikely to make a major impact on the fortunes of the device - or the HD-DVD format.

Pachter's estimation, which is supported by comments from other analysts covering the movie industry, is that Blu-Ray will win the format battle against HD-DVD, despite its apparent disadvantages - including being later to market, and being more expensive.

"We expect the dominant console at the end of the next cycle to be the Sony PlayStation 3," he explained, "primarily due to our assessment that Sony will win the high definition DVD format war."

It's not all bad news for Microsoft, though, with Pachter anticipating that Xbox 360 will "enjoy a first mover advantage for the next two years, capturing approximately 42% of U.S. and European combined next generation hardware unit sales through 2007."

Looking past 2007, however, the market seems likely to settle down to a more familiar pattern - "with Sony capturing around 45% of the total market, Microsoft capturing 35%, and Nintendo capturing 20%. These estimates do not include market shares in Japan, which we expect to be dominated by Sony (65% through 2010) and Nintendo (25%)."

Pachter is also upbeat on the fortunes of Nintendo's Wii, which he expects to capitalise strongly on its positioning as a second console and a mass-market proposition - not least because customers will not feel compelled to buy a HD monitor to enjoy the system.

He believes that the uptake of Xbox 360 and PS3 will both be slowed by the need for consumers to upgrade their screens in order to enjoy the full advantages of each console, with Nintendo being "well positioned to exploit the slower adoption of next generation technology, as its Wii console does not require an HD monitor."

Pachter also claims that Wii will benefit from having more software exclusivity than Xbox 360 and PS3 - as the latter two consoles are likely to be very similar in hardware terms, and the economics of software development increasingly militate against creating titles exclusively for these platforms.