When the mammoth Electronic Entertainment Exposition opens Thursday at the Los Angeles Convention Center, attendees will find the big three video game companies--Sony, Nintendo and Sega--squaring off like deranged aircraft carriers, with football field-size exhibits and deafening soundtracks meant to signify dominance of the world of interactive entertainment.
More difficult to spot, but much more important, are the dangerous undercurrents pulling the industry apart. The makers of video game machines are facing a mortal threat from the multimedia PC, which finally has the speed and graphics performance to make it a viable game platform. And those who create game software--for the PC or the console machines--face an overcrowded market that's more cutthroat than ever before.
"A lot of people say this show will make or break their company," says Doug Lowenstein, president of the Interactive Digital Software Assn., which is sponsoring the event. "Some companies that are here this year won't be the next year. There is significant competitive pressure, and some companies won't make it."
The biggest question is whether a new generation of products, including a snazzy new machine from Nintendo and vastly improved software for the Sega and Sony machines introduced last year, can generate enough excitement to lure consumers back into the crumbling market.
At the end of March, there were roughly 45 million people playing video games, down from 93 million at the end of 1993, according to Fairfield Research, a Lincoln, Neb.-based market research company. Not surprisingly, the video game industry's total sales dropped to $3.3 billion last year from about $5 billion in 1993, according to analysts.
"The home PC is making inroads into the console market," says Gary Gabelhouse, Fairfield chief executive.
Although sales of the new 32-bit game machines are expected to triple this year to 3 million, that's still minuscule compared with the 35 million 16-bit machines shipped during the early 1990s. By comparison, there will be 27.8 million multimedia computers in American homes by the end of this year, according to market researcher Dataquest, up from 19.8 million last year.
Microsoft has established a significant presence at E3 for the first time this year in an effort to promote its Windows 95 operating system as the ultimate gaming platform. Even without the prodding, the PC has emerged as a strong contender: Of the 1,700 new titles expected to be shown at E3, 61% will be for the PC, compared with just 24% for the various console platforms.
Still, even the PC platform is no safe haven for game developers. Since the typical PC owner buys only half a dozen CD-ROM titles over the lifetime of the machine, total sales of entertainment titles remain sluggish. Moreover, the flood of investment in multimedia in recent years means there are now 3,000 CD-ROM titles competing for shelf space.
"There was too much money spent on mediocre products," says Bing Gordon, exective vice president at Electronic Arts.
One result of the excess supply is that distributors and retailers have become extremely powerful players in the industry, with enormous say over which products make it to the consumer.
"Large distributors are squeezing CD-ROM developers," says Chris Weaver, president of Bethesda, a Rockville, Md.-based multimedia company. "The economies have shifted against developers and publishers."
In both the PC world and the video game business, marginal producers are being edged out.
"The [industry] has had two mediocre Christmases now, and they can't afford a third," says Pat Ferrell, chief executive of Infotainment World, publisher of several game magazines and a sponsor of E3.
On the hardware side, most observers expect the Atari Jaguar and 3DO game platforms to fade away. Some even predict that one of the big three console makers could be forced out of the race.
"We've always said that there is only room for two survivors," says Jim Whims, executive vice president at Sony Computer Entertainment.
On the software side, hundreds of game developers will probably be forced to turn to larger companies to survive.
A wave of consolidation is underway all across the computer software business, and entertainment software firms are hurriedly buying and merging.
Still, when the smoke clears, the survivors could be left with a healthier market.
"There will be a Gestalt emerging from all this sound and fury that the market is alive and well," says Robert Holmes, president of Acclaim, a leading game developer based in Long Island, N.Y.
Nintendo, which has $2 billion in the bank to make sure it is one of the survivors, figures things are already looking up. Peter Main, marketing vice president at Nintendo, points out that industry sales showed a 10% uptick in the first quarter of 1996 over the year before--the first such increase in years.