August 27, 2008 / 6:09 AM / 11 years ago

Era of exclusive video game deals ending

LOS ANGELES (Reuters) - Rising development costs might force console makers Microsoft Corp (MSFT.O) and Sony Corp (6758.T) to publish more video games themselves, as independent studios avoid exclusive deals for blockbusters.

Sony Corp's PlayStation 3 (PS3) game controller is pictured at a Sofmap electric store in Tokyo May 14, 2008. REUTERS/Yuriko Nakao

The fortunes of the hardware makers have turned on whether they can attract exclusive hit video games, driving fans to buy their consoles. But increasingly, the companies behind the PlayStation 3 and Xbox 360 will have to fund their own games if they want publishing rights to a game their rivals cannot get.

Konami Corp’s (9766.T) June release of “Metal Gear Solid 4,” a game franchise exclusive to Sony’s PS3, helped narrow the gap between Nintendo Co Ltd’s 7974.OS Wii console and the PS3. The units of PS3 consoles sold hit a record for a non- holiday month, according to NPD research group.

But Wedbush Morgan video game analyst Michael Pachter forecasts that independent studio exclusives such as the “Metal Gear Solid” series will disappear from store shelves as soon as next year.

“The cost of making a game is so high that you need to recover it by selling a lot more units,” said Pachter. “You can’t give up half the market by selling exclusives.”

A software maker has to foot a bill of about $20 million to $50 million to make a game.

Sony has traditionally beaten Microsoft at securing popular game franchises for the PlayStation console. Take Two Interactive Software Inc’s (TTWO.O) “Grand Theft Auto” series and Eidos Interactive Ltd’s “Lara Croft: Tomb Raider” games both originally were tied to the PlayStation.

But “Grand Theft Auto IV” was launched simultaneously on the PS3 and Xbox in April. Microsoft dealt another blow when the company announced during July’s E3 video game industry conference that the upcoming “Final Fantasy XII” game by Square Enix will be released for the first time on the Xbox.

The “Final Fantasy” franchise had been a PlayStation-only exclusive since 1997.

“It’s a trend we’re excited about, but not completely surprised about if you look at the installed base and attached rate (of customers to the Xbox),” said Microsoft spokesman David Dennis. “Third party (publishers) are looking at the same things we are and they want to put games into as many people’s hands as possible.”

Exclusive games are not only pricier for independent studios to make than in the past, but analysts say it’s hard for them to commit to one console since the Xbox 360 now rivals the PS3 for sales, unlike in previous generations.

The Xbox 360, with a year’s head start in sales, has sold over 19 million units globally compared with 14 million PS3 units, according to data from the two companies. U.S. sales of the Xbox 360 and PS3 are 10.7 million and 5 million units, respectively.

“The lack of a dominant console means it’s too difficult (for software makers) to give up on a console,” said BMO Capital Markets analyst Ed Williams. “With the PS3 or Xbox 360, you don’t have a clear winner like the PlayStation 2 or PlayStation were.”

With exclusive games fading, console makers will have to depend on games developed within their own studios instead.

“The reality of exclusives is that they will become far more infrequent. The way hardware companies have to offset that is through enhancing the quality of games coming through their own studios that will drive customers to buy their own hardware system,” said Williams.

Lazard Capital Markets analyst Colin Sebastian agreed that Microsoft and Sony would focus more on making games. He identified Microsoft’s flagship “Halo” franchise as one of the company’s biggest blockbusters that will continue to spike sales of the Xbox.

“People were buying the Xbox in anticipation of Halo 3,” Sebastian said of the game’s release last September.

Sony expects that its studio’s release in October of “Little Big Planet” will be positive for PS3 sales during the fall and holiday season.

Still, some analysts say exclusives are not gone for good. Software makers can also give a head start to one console. Microsoft has secured the September release of “Rock Band 2” by Electronic Arts, Harmonix and Viacom Inc’s VIAb.N MTV Games, on the Xbox — months ahead of versions for the PS3 and Nintendo Co Ltd’s 7974.OS Wii console.

“Relationships with console manufacturers is important to all third party publishers,” said Sterne Agee analyst Arvind Bhatia. “Deals are being done less and less, but they’re not dead.”

Reporting by Jennifer Martinez, Editing by Peter Henderson and Andre Grenon

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