Will Sony's PSP Become the iPod of Gaming Devices?
By Geoff Keighley

(Business 2.0) – Landfills are loaded with the carcasses of videogame platforms that launched with great fanfare and promptly vanished. Remember Sega's GameGear and DreamCast, Atari's Lynx, or Nintendo's Virtual Boy? Grim as those disasters were, they were no surprise to anyone who paid attention to the most reliable barometer of a new platform's chances--game publishers. If a new platform doesn't sign up enough partners willing to supply it with games, you can bet it's toast.

With that in mind, it's easy to understand why Sony is so bullish about its new handheld gaming device, the PSP (for PlayStation Portable). It's the dominant console maker's first entry into the handheld market, and it takes a completely different approach from the currently dominant handheld, Nintendo's Game Boy. Instead of pricey cartridges, the PSP will use inexpensive minidiscs to bring PlayStation 2-quality graphics to the relatively primitive handheld market. When it was unveiled in concept at last year's E3 trade show, game publishers raced to get a piece of the action. Andrew House, executive vice president of Sony Computer Entertainment, reports that within 24 hours of the announcement, he was fielding dozens of queries from publishers eager for more information. "Everyone said, 'We're there on day one. Just tell us what to do,'" House recalls. So far, 89 companies have signed on. By comparison, when Nokia launched its N-Gage game-device-cum-cell-phone last year, it struggled to land five publishers. The N-Gage--no surprise--turned out to be a dog.

What made the early reaction to the PSP so extraordinary is that it was all based on a concept, a mere description--not on an actual device that people could hold and put through its paces. Now, as the industry gears up for this year's E3, the buzz is all about the real live PSP, which will make its formal debut at the confab on May 11 and hit store shelves in the United States by next March.

So why are game publishers, who've been burned before by all those failed platforms, so jazzed about the PSP? Because it perfectly fills a gaping hole in the market: the need for a handheld gaming device that's as hip as the iPod and that appeals to the over-18 crowd, now the majority of all gamers. Today Nintendo owns the $2 billion-a-year handheld market with its $99 Game Boy and sells 60 percent of them to kids under 18. Wedbush Morgan Securities predicts that so long as the PSP arrives at a reasonable price (rumored to be $199 to $299), it will spur 5 percent growth in the $10 billion videogame business in 2005. As for Sony, it could move 7 million PSPs in the U.S. market next year--twice the number of PS2s sold in the first year and three times the number of iPods sold to date.

To meet those high expectations, Sony has turned to the strategy it used to decimate its console competitors. With the PlayStation, Sony created a device that not only appealed to older gamers but also was the first system built around compact disc technology. The switch from cartridges to CDs transformed the game publishing business and paved the way for convergence features like CD audio playback and DVD movie support in the PlayStation 2.

The PSP promises to similarly transform the handheld business with its Universal Media discs. They're half the size of a CD with enough storage capacity to hold a whole music album or a full-length movie--convergence, anyone?--at a cost substantially below that of the Game Boy cartridge. Developing PSP games should cost half the $10 million it takes to develop a PS2 title, simply because handheld games are less complicated. That means publishers will be able to take riskier bets on new independent developers and unproven ideas. "This is going to create an art-house model for the industry," predicts Chris Charla of Backbone Entertainment, a small developer working on PSP software. On the corporate end of the spectrum, Electronic Arts, the world's biggest game publisher, has already committed to developing almost a dozen games by the PSP's launch. It has declared that the PSP (along with globalization) will be the biggest driver of growth in its business for the next five years. For a new platform heading into an uncertain and high-stakes market, that's the ultimate vote of confidence. --GEOFF KEIGHLEY