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The market for video game consoles is usually dominated by two or three major players. At present, the most popular consoles are Sony’s (SNE) PlayStation 3, Microsoft’s (MSFT) Xbox 360, and the Nintendo Wii. In addition, Sony’s PlayStation Portable (PSP) and Nintendo’s DS are portable models. The Nintendo Wii has perhaps proven most successful since its 2006 release, though the launch of the PlayStation 3 Slim model (discussed below) appears to have boosted this console’s results.

The video game industry is intensely competitive, and subject to rapid technological change. Console developers must introduce a new platform every few years if they want to remain competitive. The current generation of game consoles came to life in late 2005, and will likely last another few years. The industry exhibits cyclical characteristics, with the introduction and initial consumer acceptance of new gaming consoles fueling growth in revenues. In the years leading up to launch, producers send out system development kits to software developers, so that the new console has a healthy slate of titles upon its release. Consoles are usually introduced around Christmas time, to maximize revenues. New systems are often unprofitable during this stage, though, as console makers may sell the units at prices below cost to obtain market saturation. Profitability often improves over time, as development costs decline. The middle of a console’s life cycle can perhaps be considered its golden age. By this point, technical issues may well have been fixed, and developers have likely produced superior games. This is important, as the success of new titles can also spur sales of popular game consoles. However, revenues may begin to suffer as a console moves toward the end of its life cycle, as consumers defer purchases in anticipation of the release of a new hardware system. Even so, old consoles and their associated software are often produced for years after the introduction of a new system.

The introduction of the PlayStation 3 Slim console in September has met with success, selling over one million units during its first three weeks on sale. This unit is smaller, lighter, and consumes less power than earlier models. The popularity of this new model augurs well for sales of PlayStation 3 games released this holiday season, and may well help to extend the life of the PlayStation 3 platform several more years.

It usually takes several years from initial development of a new console to the launch of that system, as producers test for reliability and game developers must create titles for the new console. Console developers are probably working on the next generation right now. That said, there is currently little concrete information about the next generation of video game consoles, and we don’t anticipate any launches in the near future. Still, the new systems will most likely be introduced sometime over the next five or six years.