New Consoles Raise Stakes For Video Game Industry (reuters)

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By Daisuke Wakabayashi and Yukari Iwatani Kane Thu May 19, 1:17 PM ET LOS ANGELES (Reuters) - The bright side of dying a horrible death in a video game is that resurrection is only a button hit away, but for game developers facing a steep upward spiral in costs, there may not be room for a second bad move.

Two companies with some of the deepest pockets in the world -- Microsoft Corp.(Nasdaq: - ) and .<6758.T -- are building new consoles, creating new levels of opportunity and risk for game makers.

At this week's Electronic Entertainment Expo, the video game industry's annual trade show known as E3, the immense cost of creating games with movie-quality graphics and unparalleled processing speeds was seen potentially wiping out some companies.

"Some developers are scared. They are as white as ghosts," said Ankarino Lara, a director of online gaming site GameSpot.

Within the next 18 months, Microsoft, Sony and Co. Ltd. (7974.OS) each plans to launch its next generation game console, Microsoft's 360, Sony's PlayStation 3 and Nintendo's Revolution.

That raises the technology bar for every developer in the $10 billion industry, and some may not be able to pay the hefty price.

The development cost of a high-end game, now about $10 million, could rise to $15 million to $20 million in the next five years, said Doug Lowenstein, president of industry trade group Entertainment Software Association.

"I think any developer or publisher without a lot of capital is not going to be very successful competing in the next five years of this market," he said. The industry defied one business trend, he added: "When we introduce new technology, it becomes more expensive to compete."

Even the world's largest game publisher Electronic Arts Inc. (Nasdaq: - ) said it is feeling the pinch on its earnings.

"If you look at the balance sheet and profit and loss numbers, it doesn't always look that pretty. We're spending an awful lot of money right now to do all the heavy lifting," said John Schappert, the head of EA's biggest game studio.

The ability to make those investments could ultimately widen the gap between big players like EA and a huge community of small privately owned developers ill prepared to handle the ups and downs of a hit-driven industry.

But that would just be a case of history repeating itself.

Once proud names like Japan's Hudson Soft, known for classic games like "Bomber Man" and "Bonk's Adventure," and U.S. publisher Acclaim Entertainment Inc. are cited by analysts as victims of the previous console cycle.

Konami Corp. (9766.T) agreed to acquire Hudson Soft last month, while Acclaim filed for Chapter 7 bankruptcy in 2004 after a series of disappointing software titles that failed to match the popularity of past hits, such as "NBA Jam."

SAY HELLO TO HOLLYWOOD

The cost of creating next generation games, and the risk of an expensive flop has drawn parallels to another pillar of the entertainment industry, Hollywood.

"It's going to become like the movie industry. Game publishers will spend big money. If something looks mediocre, then it will be killed even it's already in development," said Naoya Tsurumi, chief executive of Sega of America Inc.

But similar to Hollywood, good talent is in high demand.

Most major game publishers are out shopping for game developers that can maximize the power and speed of the new consoles along with the ability to create games that appeal to what is expected to be a larger, more diverse audience.

Activision Inc. (Nasdaq: - ) said it plans to increase the number of in-house game developers by up to 30 percent from 1,000 this business year.

"This industry has grown so quickly. There are not enough bodies out there to fulfill all the development needs," said Kathy Vrabeck, president of Activision Publishing.

Wedbush Morgan analyst Edward Woo, speaking at an E3 workshop, said in the search for creative talent, don't overlook another important personnel decision.

"A key member to add to the team is a very good accountant," said Woo. RECOMMEND THIS STORY Recommend It: Not at All Somewhat Moderately Highly Very Highly

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