The Battle Of The Consoles: From Atari’s 2600 To Microsoft’s Xbox – THG.RU

Introduction

There’s been a lot of talk about Xbox, and GameCube, and even more speculation about the technology inside the box. However, the console wars are not going to be won based purely on technology. There’s a long history of cyclical win and lose peaks and troughs for companies that have tried to stay the course in this business. Nintendo stands alone in having survived a number of generations of innovation and still managed to remain a contender in the market. Dundee Securities analysts David Hodgson, Dr. Jeff Rabin, and Katherine Down have delivered this unique assessment of The Console Wars.

Atari 2600: That Was Then (1977)…

XBOX: This Is Now (2001)….

With the introduction of Microsoft’s Xbox (Nov.15th) and Nintendo’s GameCube (Nov.18th), we’ve been inspired to provide a short review of the history of the video gaming industry, which, amazingly enough, is now larger than the worldwide motion picture industry, with a market expected to reach 60 million units.

Gaming has been one of the major factors driving the performance increases of PCs, 2&3D graphics and sound that we have witnessed during the last 30 years. In 1998, for example, a high-end graphics chip might have 7 million transistors. Today, it [S1]has 60 million, providing several orders of magnitude more processing power. By comparison, Intel’s P4 has about 47 million transistors.

With so much hype surrounding these gaming consoles in recent weeks, we thought it would be interesting to take a look at the earnings potential for both ATI and NVIDIA. Although we explore this further in our report, below we’ve included a quick summary of what the latest-generation gaming consoles will do for the bottom line at the world’s two leading graphics chip companies (all dollar and EPS amounts in millions of U.S.$).

With this month’s launch of the two most advanced domestic computing consoles ever witnessed – Nintendo’s GameCube and Microsoft’s Xbox, with graphics-processing power supplied by ATI and NVIDIA respectively, each in their own way going head to head with Sony’s Toshiba-powered PS2 – we would like to take a brief look back at the history of gaming and the technologies that it has helped foster, as well as the new consoles that use them. We’re of the opinion that, to see where things are going, it is best to first understand how we got here.

Console History

Below, we’ve listed the dates of the introductions of various consoles, from 1972 to the present. Who can forget the often heated debates regarding the virtues of Atari 2600 vis-а-vis the upstart Mattel Intellivision? Those same debates are going on right now, but the focus has shifted to PS2, GameCube and Xbox.

From ‘Tennis for Two’ to ‘Oddworld’: Even Computer Games Have Traditions

We discern there to be three rival gaming traditions: two of them, text adventure and arcade, merging to become the first person shooters of Max Payne; and the latter tradition of simulation leading to Microsoft Flight Simulator 2000, Gran Turismo and even Munch’s Oddworld.

And it may be difficult to believe now, but the first video game was developed at the Brookhaven Laboratories in 1958 by William A. Higinbotham and Robert V. Dvorak, the former an alumnus of the Los Alamos Project, to enliven the dreadful open houses held there.

‘Tennis for Two’ was played on a five inch oscilloscope and you could not win or lose because no score was kept. Even so, Version 2.0 came out the next year, a larger screen was used, and ‘Tennis-for-Two‘ became the success of the open house. Who says engineers don’t know how to have fun?

Much to the everlasting chagrin of Higinbotham and Dvorak, the games came free: it was the machine that cost. (The business model was like Gillette selling handles for the price of a Stealth Bomber and giving away the bombs, we mean, blades.)

The nerds of the MIT Rail Road Club, not to be outdone by the Geeks of Brookhaven, however, went on to invent a game called Space War. A whopping 9k in length, it debuted on the brand-new PDP1 and was the precursor to the arcade classic Asteroids. Space War, truly, was the first first-person shooter console game.

Parallel with the rise of the onscreen console-based game, however, came the text adventure. The granddaddy of them all, again, produced at MIT by another gang of geeks, was called ‘The Underground Adventure.’ Written by Willie Crowther in 1972, it ran on the Boston University Mainframe. Primitive at best, in 1976 Don Woods rewrote it and made it available on ARPAnet, where it became very popular, bogging down the Internet, in its infancy. Dave Lebling and Marc Blank took up the cudgel in 1977 after writing a new programming language called MDL, or Muddle. Obsessed with Dungeons and Dragons, Lebling, Blank and a new guy Anderson, wrote what they called Zork. (They would have called it Dungeon, but that name was already taken.) Zork featured ‘the great underground Empire’ as ruled by ‘Lord Dimwit Flathead the Excessive,’ and was populated by fearsome ‘Grues.’

By 1979, widely distributed and collectively built, the game was over a megabyte. Commercial life called though, and the three designers formed their own company, called Infocomm. They were not happy being an entertainment company, however (that was for kids and kids had no money), and made the worst decision of their life, to go into business software. Their product was a natural language database called Cornerstone. It sank like a stone, and with it sank Infocomm.

Parallel to the efforts to market their business software, programmers started to deploy graphics on their machines, and text-based adventures lost their shine, though the idea of the immersive dungeon lived on.

Then Along Came Doom

Doom was released upon an unsuspecting world on December 10, 1993 and sold over a million copies, even though most of it was available as shareware. What was so good about Doom? In Doom, the two principle traditions of gaming, dungeon text adventure and graphic shooter, were combined, and they were combined well. Indeed, no one had seen the like done before with 256 colors, 320 by 200 display, and a hopping 66 MHz 486 with 4 megabytes of RAM. And so began the cult of the Graphics and Soundcard, where the latest simply wasn’t fast enough. But what was even better about Doom was that it was multi-player. You could either play against computer-generated foes, or skip them all together and play networked deathmatch. Moreover, it worked and worked well. The Lan Party began.

Doom: That was then (1993)

Halo: This is Now (2001)

Doom basically created a paradigm shift in the way gaming was played. Free blades (with reduced levels) got you hooked, better blades you were willing to pay for kept you begging for more, and suddenly a market for add-in sound and graphics cards opened up. People were willing to pay and pay and pay for the handles! Doom begot Quake, and Quake begot Max Payne and Halo; suddenly, there was a huge market for graphics and sound cards – cards ostensibly manufactured to improve the gaming experience, but whose uses were more widespread.

“Games lubricate the body and the mind.”
-Benjamin Franklin

A huge capital influx came into these very specialized chip manufacturers. From 3Dfx with the Voodoo, that arguably got everything going, to Yamaha. There were nearly 50 manufacturers of 3d graphics products in 1997. Now, realistically, there are only three – being, of course, ATI, NVIDIA, and Intel. Bit players include Matrox, Trident, SiS, ST Microelectronics and Via. In the first quarter of 1998, the majority of the market (71%) was dominated by a multitude of suppliers other than ATI and NVIDIA. During the third quarter of 2001, less than four years later, ATI, NVIDIA, and Intel make up 76% of the total desktop graphics chip market.

At the same time that most graphics chip companies were being squeezed out, the size of the overall market was growing at a fantastic rate. Not only is the pie split between fewer players, but the size of the pie is substantially larger, as shown by the chart below. In 1998, an estimated 115 million desktop graphics chips were shipped, compared to almost 170 million chips for 2001. By 2005, this number is expected to close in on 300 million graphics chips.

Consoles Versus PCs

However, there has always been a debate between what plays best-consoles versus PCs. The difference is greater than you think, with PCs sporting big hard drives and non-standard controllers, consoles placed in living rooms and connected to TVs, computers in 2nd bedrooms with big monitors on desks. Which brings us back to the three consoles now vying for space in our living room, the first almost indistinguishable from the PC, the second straddling the two, and the third the only pure-play gaming console. These are, respectively, Microsoft’s Xbox, Sony’s Playstation 2, and Nintendo’s ATI-powered GameCube.

Source: Dundee Securities Corp.

A Comparison Of The Console Specifications

The GameCube is cute and small. No question. The Xbox is large, very large. Microsoft even had to reduce the size of the controller for the Japanese market. Nintendo’s GameCube, by contrast, will fit in a child’s backpack, which, by the way, is the idea. Even the disks for the GameCube are small, with Nintendo sporting a 3″ mini disk (the better to foil pirates?), while the PS2 and Xbox are using standard-sized and standard-formatted DVD drives. To a certain extent, this is being reflected in the MSRP of the consoles, with the GameCube selling for US$199.99 and the Xbox and PS2 for US$299.99. It is unknown how much Microsoft is losing on each Xbox, but it is suspected that they are losing at least US$100 per box, as well as spending US$500 million on marketing. Again, we have the Gillette model of doing business. Give away the handles, make up an arm and a leg on blades, we mean, um, games.

This is now a three horse race with the GameCube, cheapest of the lot, set to appeal to the pre-teen set with Nintendo’s strong franchise in Pokemon. The PS2 somewhat straddles the line between being a straight gaming console and maintaining some PC aspirations. (In Japan, Sony has made a Linux package for it.) With Xbox, Microsoft effectively erases the distinction between PC and Console by selling a PC that operates better than any console, or PC, for that matter, and is only lacking a keyboard.

What are Microsoft’s plans for the Xbox? Microsoft won’t say, which has only led to further speculation. Right now we may understand the Xbox as a superb hardware console that has yet to show its stuff in our living room. But it will starting this month, as it takes on the incumbent, Sony’s Playstation 2, which has a loyal following and excellent software, but also has certain limitations, the largest being the lack of an integral hard disk. What about the GameCube? We see it aimed at a somewhat different market, continuing to target its captive gaming audience. As far as longer-term aspirations to use the console as an entertainment hub with broadband connectivity go, this shall be a contest between Microsoft and Sony!

Here’s what Steve Ballmer, Microsoft’s CEO has to say about it:

“We know we have to succeed but there is a broader concept there that we will pursue at some point,” Ballmer said, “You can say, is it the of the road or is there a bigger play? And the answer is yeah, there’s a bigger play we hope to get over time.” (Source: Reuters)

NVIDIA: Xbox Contribution

The only Xbox supplier (including Microsoft) who is likely to make a ‘material’ profit from this console is NVIDIA. By assuring Microsoft it could build the brains of this box in the defined time frame, and negotiating a US$200 million advance, NVIDIA pulled off a hell of a coup. We would estimate that the interest income generated from this advance funded much of the chipset’s development. In addition, the lack of associated overhead with regard to this chipset ensured that absolute profitability (despite below-corporate-gross margins) would be strong. In fact, we believe NVIDIA generates operating margins north of 20% on the Xbox chipset. On an absolute basis, we believe NVIDIA earns operating income in the range of $10-13 per chipset.

ATI Technology: GameCube Contribution

ATI’s deal to provide the graphics engine for GameCube is starkly different from the NVIDIA scenario. Similar to the relationship Nintendo had with MIPS (MIPS-Q) for the N64, ATI enjoys a royalty model. (The manufacturing of the graphics engine, called Flipper, is by Japan’s NEC.) We estimate ATI will receive $2.20 per console and an additional $0.50 per software title. We believe the GameCube will generate approximately $0.09 in EPS for ATI in fiscal 2002. Moreover, ATI has the ability to leverage the technology developed for GameCube into ancillary markets. We are excited about the future with regard to this initiative.

Nintendo claims to have sold 500,000 GameCubes in the first week. That translates into $7.5 million in royalty revenues for ATI in the first quarter of next year, and $34.5 million for the whole year.

Summary

While it appears that NVIDIA is likely to generate a higher level of absolute profitability from its Xbox supply agreement with Microsoft, the console market gives a beneficial boost to ATI as well, which has been struggling with its margins for the past 18 months. In addition, it pushed both firms to develop technology that can be leveraged back into other markets. Both solutions emphasize integration, a necessary skill for a world increasingly focused on minimizing form factors. As semiconductor process advances, it isn’t unreasonable to expect these types of solutions to end up in consumer electronics and PC-like devices.

We expect video gaming to continue its breakneck growth pace, due to rapidly improving content and the ability of developers to take advantage of the new technology. GPUs are the single most complex semiconductor devices out there (in terms of transistor count), and the pace of development shows no signs of abating. A combination of decreasing die size, increasing bus bandwidths through innovative new bus architectures, lower costs of memory, and ever creative programmers eager to wrest that last little bit of performance, will make it an exciting future. It ain’t over yet.