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Sony kicks off Xmas frenzy
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October 24, 2000: 6:07 p.m. ET
PlayStation2 launch will ignite sales, awaken a slumbering industry
By Staff Writer Chris Morris
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NEW YORK (CNNfn) - After more than 18 months of hype, Sony's eagerly anticipated PlayStation 2 hits stores - and, subsequently, living rooms - across America this Thursday. Demand for the console, however, is astronomical and the odds of getting your hands on one this week if you haven't pre-reserved months in advance are about as good as beating Spyro the Dragon on your first try.
For gamers, it's all about the machine. Offering high-quality graphics and a slew of titles, the PS2 brings the arcade to your sofa. For retailers, it's all about profits. For investors, though, Thursday's launch means the end of dry spell. Video game stocks, which have been suffering on Wall Street for the past year or so, are about to come into favor again, analysts say.
Sony's the obvious winner, but with the dawn of the PlayStation 2, there are a number of other companies that may soon be re-embraced by investors.
"I think you will  get a spike because of the PlayStation 2," says Michael Wallace of UBS Securities. "The business doesn't really start to turn until next fall, but the market will start to take note [immediately]."
One of the instant - and ultimately biggest - winners might be Electronic Arts (ERTS: Research, Estimates). EA has bet big on the PS2, developing six titles that will launch with the console. By year's end, it will have 10 to 12 games for the system on store shelves. Wallace has set a 12-month target of $65 for the company's shares. EA closed Tuesday down $5.38 at $50.
"EA's got more PlayStation 2 titles than anyone else," he says. "Long term - they're going to benefit."
Electronic Arts says the focus on the console was deliberate - and is key to the company's long-term plans.
"I think it's going to translate into big market share through 2001 and possibly through the life of this console," says Jeff Brown, director of corporate communications for Electronic Arts.
EA is not the only software company that's expected to see its stock price climb as the next generation console wars heat up. Wallace also recommends THQ (THQI: Research, Estimates), setting a target of $45, and Activision (ATVI: Research, Estimates), which he gives a target of $25. THQ closed Tuesday at $24.12 while Activision ended at $14.25.
 "Both are cheap on an earnings basis and both have a lot of PS2 and next generation development going on," he says.
He's not alone in his picks. EA, THQ and Activision are also the picks of Bear Stearns' Marina Jacobsen and Arcadia Investment's John Taylor. Both, however, declined to give their targets for the stocks.
It's important to keep in mind, though, that a single platform doesn't necessarily make or break a video gaming company. Taylor says there are five things investors have to look for to make the most of their money:
- The software company should have the ability to create and establish brands. Publishing a wide variety of titles is good, but if none of those captures the reader's imagination and spawns sequels, the company is churning too much money.
- The financial strength to bridge sales until next generation console units start to dominate the market. Having a killer title doesn't mean a lot if there are only a few million console units available. Ask anyone who specialized in software for the Sega Genesis (one of the biggest failures in the console industry's history).
- A strength on the PC gaming side. This goes back to bridging sales again. If a company can lean on PC gamers as the console market slumps, it is much more flexible and likely to ride out storms.
- Retail clout. If a company can't get its titles on store shelves, it doesn't matter how good it is.
- Global organization allowing it to leverage its development dollars.
The PlayStation 2 is expected to do more than simply help the share prices of video gaming publishers, of course. With its inclusion of a DVD player and Internet capabilities (among other features), experts feel it marks the beginning of a new era in home entertainment. Rather than having separate machines to watch movies, play games and surf the Web, it will soon all be done from a single box atop your television. I  t's a battle that has become so important, it attracted the attention of Microsoft, which will try to challenge Sony's console dominance next year with the introduction of the Xbox.
Meanwhile Nintendo, unwilling to cede the pure gamers, will roll out its GameCube next fall, a device which is promising crystal clear game graphics but no DVD player and no other home entertainment features.
Related story: Microsoft takes Oddworld
Sony (SNE: Research, Estimates) is the horse to beat in the home entertainment battle, analysts say, but it stumbled slightly one month ago when it confirmed rumors it would only ship 500,000 PS2 units this Thursday, instead of the 1 million it had initially pledged. The announcement set off a flurry of whispers in the investing community, which wondered whether Sony might not be able to maintain the enormous market share it currently holds. Analysts scoff at these rumors.
The shortage, says Arcadia's Taylor "doesn't matter one way or the other. ... I see a huge percentage of these things sitting under Christmas trees for kids."
EA agrees: "In three months, no one's going to remember the delay in shipment and in that three months, EA is going to jump into the market share lead," said Brown.
Whether that proves true or not, there are bound to be some disappointed con  sumers Thursday. Demand for the PS2 is unprecedented. Toys R Us (TOY: Research, Estimates) Tuesday put out a press release warning that "Playstation 2 units will be in extremely short supply on the launch date." The company says it will not have any PS2 units available at its stores for customers who did not pre-order the console. However, it says, a limited number of units will be available through its Web site.
Fellow retailer Babbage's, Etc. ran an extensive pre-order campaign on its Web site, trying to urge customers to order months in advance. All totaled, some 200,000 people placed orders with the company. Some of those still won't see their machines for several weeks.
Meanwhile, Electronics Boutique (ELBO: Research, Estimates) said it's gearing up for the PS2 in a number of ways. Some stores will open at midnight, others at 7 a.m. Again, not everyone who pre-ordered the machine will get one the first day, but the company says it has already taken steps to keep frustrated customer at a minimum.
"When our allocation was cut in half, we called all our customers who had prepaid," said Joe Firestone, president and CEO of Electronics Boutique. "Some just wanted it before Christmas, others wanted it on the 26th, so we were able to work with them."
If there's any company that might take advantage of Sony's shipping shortage, it's Sega. Its Dreamcast console hit U.S. shores 13 months ago, earning critical acclaim, but boasting tepid sales. To prepare for the challenge of the PS2, Sega recently shifted its marketing to the online capabilities of the Dreamcast - and cut the console's price to $150 (as opposed to the $299 price tag on the PS2).
"I think the DC is in a position to benefit for the shortage," says Taylor. "Sega's key strategy now is to identify Dreamcast with online gaming ... If Sega can get that grounded, then I think the Dreamcast is in a position to stick around for a long time."
Wallace agrees that Sony's shortage might provide a short term bump for Sega, but is less optimistic about the console's staying power.
"I think Sega will sell a couple million [units] this cal  endar year and will get some of the traffic Sony would have had - but in the long term, they're not going to make it," he said.
Of course, in the long run, it's really not the hardware that sells a console gaming system - it's the games. And Sony has some strong ones coming out simultaneously with the PS2. Electronic Arts' "Madden 2001" and "SSX" have been getting a strong buzz in the industry. And Infogrames "Unreal Tournament" brings a PC gaming favorite to the console market. All totaled, the PlayStation 2 will launch with 26 games.
At the same time, the machine is also backward compatible with the existing PlayStation, meaning gamers can continue to play their current favorites on the new machine. And while there will be, at best, 1.5 million PS2s in homes this year, there are already some 25 million PlayStation consoles - a fact Taylor says is important to keep in mind.
So how's the gameplay on the PS2? Wallace, who got his unit Monday morning, said he dropped everything, went to the store and bought a few games to try it out. His verdict?
"I would say that the games aren't much better than the Dreamcast - but they will be." 
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