In a massive 207-page report on the interactive entertainment industry for 2007, Wedbush Morgan Securities analyst Michael Pachter notes that while "the main driver of console hardware sales is the quality and quantity of the underlying available content," the high definition format war between HD DVD and Blu-ray could be a key factor in determining the console war outcome.
"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. 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 explained.
"We expect the dominant console at the end of the next cycle to be the Sony PlayStation 3 (PS3), primarily due to our assessment that Sony will win the high definition DVD format war," he said. "However, we expect Microsoft's Xbox 360 to enjoy a first mover advantage for the next two years, capturing approximately 44% of U.S. and European combined next generation hardware unit sales by the end of 2007. We forecast the PS3 and Nintendo's Wii to capture approximately 21% and 35%, respectively, of the next generation hardware market in this same period. We forecast the Wii to take the lead in 2008, with 39% market share, and expect the race to even out in 2009, with all three console makers capturing between 30 – 37% of the overall market.
"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%. We believe that this is essentially a dead heat, and each manufacturer will have sufficient market share to generate significant profits. These estimates do not include market shares in Japan, which we expect to be dominated by Nintendo (51% through 2011) and Sony (44%)."
Looking at the overall health of the industry, Pachter is forecasting the combined U.S. and European software markets to grow at a 16.1 percent CAGR from 2007 to 2009. WMS estimates that the addressable market opportunity for U.S. software publishers is a whopping $17.7 billion in 2007.