By Yi-Wyn Yen

All those years playing the video game Madden NFL has paid off for Electronic Arts CEO John Riccitiello. To succeed in the video game industry, Riccitiello suggests taking a playbook from the popular sports game. Learning to react quickly, trusting his team, and admitting defeat are some of the lessons he’s applying to EA’s (ERTS) new strategy.

Riccitiello is shifting the focus of the company from publishing licensed video games to making its own titles. Earlier this month EA acquired independent developers, Pandemic Studios and BioWare, for $860 million to bulk up its library of original, high-quality games.

Madden NFL’s game-play has also been valuable to surviving in the gaming business. During a recent gathering at Berkeley Haas School of Business, Riccitiello talked about four lessons he’s learned since he joined EA as President in 1997.

Embrace change even if it costs a lot. A half century ago the three major networks — ABC, CBS, and NBC — were so dominant that they resisted change. Thirty years ago the three networks had more than 90 percent of the television market. Today, the big three account for less than half. “They were extremely arrogant,” Riccitiello says. “They viewed the rise of cable as being insignificant.

Riccitiello says the $31 billion gaming industry will suffer if it doesn’t start to reevaluate its business model. Game executives at Sony (SNE), Microsoft (MSFT) and Activision (ATVI) must answer some tough questions in the coming years, like how long they can expect consumers to pay $59 for a video game. Riccitiello predicts the model will be obsolete in the next decade.

“In the next five years, we’re all going to have to deal with this. In China, they’re giving games away for free,” he says. “People who benefit from the current model will need to embrace a new revenue model, or wait for others to disrupt.” As more publishers transition to making games for online distribution, Riccitiello says he expects EA will experiment with different pricing models.

Don’t let detractors define you. Riccitiello blames the media for characterizing video games as more violent than images shown on cable TV on a typical Sunday night. He compared video clips of violent scenes from Kill Bill, CSI and 24 to games like Gears of War, Halo 3 and Grand Theft Auto. “Our industry is exceptionally well-controlled. Every game gets rated” by the Entertainment Software Review Board, he says. “The desire by the media to censor games amazes me.”

Admit your mistakes. Riccitiello concedes he failed to turn premium online-gaming service EA.com into an industry-changing product in 1999. The site launched an interactive spy thriller game in 2001 called Majestic, which featured rich, dazzling graphics that were accessed over agonizing slow dial-up modems. “It was a great idea, but it was way ahead of its time,” he says. “We spent several hundreds of millions and frankly, when it failed it took a little bit of me with it. EA’s investors weren’t going to wait five years to see it right. I had to admit my mistake and move on.”

Put your trust in visionary people. The failure of Majestic didn’t stop Riccitiello from putting faith in EA vice president Neil Young, who created the game. Shortly after, Young negotiated a deal to make the Lord of the Rings franchise, which has brought in $725 million in sales since 2004.

Riccitiello is also banking heavily on two innovators to launch big first-party games. Will Wright, the creator of Sims, is working on his highly-anticipated followup, Spore, which is expected in early 2008. And Alex Ward, a game developer who believes crashing cars can be more fun than driving fast, will release EA’s Burnout Paradise in January 2008. Says Riccitiello, “I met Alex in an English pub, and I made a judgment that he’s going to be a mega hit.”

By Jeffrey M. O’Brien

Gaming powerhouse Nintendo (NTDOY) announced late last week a revamping of its Nintendo of America marketing department. Out go SVP of marketing George Harrison and VP of marketing Perrin Kaplan. In come the former head of marketing at Yahoo (YHOO), Cammie Dunaway, and Shigeyuki Takahashi, the former head of Nintendo Research. Dunaway will serve as EVP of sales & marketing, reporting to NOA president Reggie Fils-Aime, aka “the Regginator. ” Takahashi, the new EVP of special assignments, will consult the marketing department while trying to expand the company’s North American business.

The timing is auspicious, considering that Advertising Age just awarded its Marketer of the Year award to Harrison, Kaplan and senior director of consumer marketing Robert Matthews for their work hawking the DS and Wii. But the company had to see this coming when it decided last year to move the NOA headquarters from Redmond to Silicon Valley. (There’s an invite-only grand opening party this Thursday, btw.) Word is the duo, as well as 90% of the marketing staff, refused to leave the Pacific Northwest.

Given the company’s runaway success, a tripling of first-half profits and revised earnings guidance for the year, some think Dunaway has landed the easiest job in the world. But not all is rosy in Nintendo land. For starters, working at the U.S. arm of a Japanese company can be a nightmare. Kaplan, who had been with Nintendo for 15 years, was by all appearances a master at communicating with the mothership in Kyoto. What’s more, Microsoft’s (MSFT) Xbox 360 outsold the Wii in September thanks to the much-anticipated launch of Halo 3. (Sony’s (SNE) PS3 remains an also-ran). And then there are the continued inventory shortages. What’s a marketer to do when there’s no product to sell? She can push the games, sure, but has to be careful about creating too much disappointment among would-be Wii owners who can’t find a unit to buy.

And then there’s the growing concern that Wii is a fad. Everyone (hard-core gamers, mainly) who has said so from the beginning has been proven wrong. But I’ve watched my own habits and have lately become concerned for the company. I’ve never been an avid gamer, but immediately saw the appeal of the Wii (conveyed so expertly in the bundled title Wii Sports). Lately, however, the console has been getting little use and my household has returned to non-gaming status. Dunaway has to figure out a way to get me back up off the couch — which my wife and friends can tell you is definitely not the easiest job in the world.

By Yi-Wyn Yen

The Nintendo Wii won’t be the only family-friendly game console on store shelves this holiday season. On Tuesday, Microsoft unveiled the Xbox 360 Arcade, its answer to the hot-selling Wii.

The $280 Arcade is relatively cheap (like the Wii), has a wireless controller (like the Wii), and comes with a packaged set of games (like the Wii). The new, low-end Xbox is also being heavily marketed as the “family-friendly” gaming machine. But will the Arcade capture the same audience as the Wii?

“Breaking through will be difficult. I think Nintendo’s got that crowd nailed,” says IDC analyst Billy Pidgeon. “Microsoft can widen its demographics, but it’s still identified as being part of the traditional core gaming demographic. Nintendo’s done a great job stepping outside that market.” Pidgeon called the Arcade “an aspirational product” for younger kids who want an Xbox because the older, cooler kids play the console.

Nintendo has admitted that it won’t be able to ship enough of its $249 consoles to meet U.S. demand this holiday season. But a competitively-priced Xbox Arcade may not win over consumers holding out for a Wii, says Pidgeon. “I can see some people settling for the 360, but it’s still $30 more. And for the mass market, that can be a big factor.”

Microsoft’s (MSFT) move to capture a broader audience comes amid the company’s campaign to position itself as the premier console for hard-core gamers. Last month’s release of Halo 3 helped push Xbox sales ahead of the Wii in September. It was the first time this year that the Xbox beat the Wii in a single month.

But the mass appeal of the Wii and software titles like Guitar Hero have begun to change the landscape of the console market. Xbox has built its success as the console of choice for hard-core gamers with a lineup of titles like Madden NFL 07, Halo 3, Bioshock and the highly-anticipated Mass Effect, due out in November. Now the software giant is going after the masses by packaging classics like Uno, Pac-Man Championship Edition and Boom Boom Rocket into the Arcade.

“Microsoft knows it has to have a broader church,” says David Gosen, CEO of mobile gaming company I-Play, who previously ran the marketing and sales division of Nintendo Europe. “They’re looking at other content like TV and casual games. They’re waking up to be mass market versus niche market.”

Microsoft (MSFT) finally got the bragging rights it’s been looking for all year. Its Xbox 360 has defeated the Nintendo Wii — at least for the month of September.

For the first time this year, Microsoft sold more consoles in a single month than the red-hot Wii. Hard-core gamers just had to have the new Halo 3, and the Xbox 360 was the only console that could play it. Anticipation of the late-September release of the new game drove 528,000 Xbox sales in the U.S., edging out the family-friendly, low-budget Wii, which sold 501,000 units in September, according to figures released Thursday by the NPD Group.

And how did Halo 3 do?

The third and final title in the massively popular 3-game series not only crushed all other video games in September, it set a new record for first-day sales in any entertainment medium. Microsoft, which released the fierce, first-person shooter on Sept. 25, moved 3.3 million copies in the 12-day measuring period that ended Oct. 6. Halo had already grossed $170 million worldwide in the 24 hours after its release, setting a record for the highest grossing opening day in entertainment history, according to GamePro.

Nintendo took the distant No. 2 and 3 spots with 282,000 copies of “Wii Play with Remote” and 224,000 copies of “Legend of Zelda: Phantom Hourglass.”

“We knew Halo was going to be a blockbuster and that it was going to move a lot of consoles,” says Xbox spokesman David Dennis. “This is exactly what we expected. We said at E3 [in July] that we have the best holiday lineup compared to our competitors.”

Wii woes for the wee ones this Xmas

The Xbox is in a good position to give the Wii a run for the top spot for the whole year. Two weeks ago Nintendo said it would not likely ship enough Wiis to the U.S. to meet holiday demand. Meanwhile, the Xbox continues to ride the Halo effect, and Microsoft’s lined up another potential hit game, Mass Effect. The highly-anticipated Xbox exclusive heads to stores on Nov. 20.

Sony (SNE) has shifted its retail strategy to catch up with Nintendo and Microsoft. Yesterday it slashed its price of the PlayStation 3 by $100 to help boost declining U.S. sales. In July, Microsoft dropped the price of the entry-level Xbox by $50 to $349, and U.S. sales jumped 56% the following month. Sony hopes to do the same. It sold 119,000 PS3s in September compared to 131,000 consoles the month prior.

The top-line version of the PS3 will cost $499 compared to $599, and a new cheaper version will go on sale for $399 on Nov. 2.

“Lowering the price is an important first step for Sony,” says Colin Sebastian, an analyst with Lazard Capital Markets. “From a consumer’s point of view, $399 is a lot better than $499. But Sony still needs to find compelling software. It has to find a killer app the way Xbox has with Halo 3 or Wii Sports for Nintendo.”

Last month at the Tokyo Game Show industry conference Sony outlined a strategy by working better with third-party gaming publishers to bulk up its lineup of games.

Uh-oh. Microsoft might be getting its ears Xboxed—again. Six days after Microsoft (MSFT) and the makers of its latest videogame blockbuster, Halo 3 split up, the software giant learned it might lose an exclusive deal with a developer that’s about to release another potential Xbox 360 hit, Mass Effect.

Though EA’s $860 million purchase of Pandemic Studios and BioWare, the makers of the science-fiction action thriller Mass Effect, won’t affect Microsoft this holiday season, EA indicated that it would be preserving its options to port the highly-anticipated video game over to rival platforms. During a conference call with analysts yesterday, EA CEO John Riccitiello said that Microsoft will release Mass Effect on Nov. 20, and BioWare will retain the intellectual property rights. That means the game could be open to the Sony (SNE) PlayStation and Nintendo Wii platforms for its next two sequels.

“We’ve been on record in the past as saying we want that whole trilogy to be on the 360,” BioWare cofounder Greg Zeschuk told GameDailyBiz. However, “we can’t predict the future.”

A Microsoft spokesperson said it would discuss the matter with EA and BioWare in the following weeks.

Analysts predict it’s only a matter of time before EA frees the role-playing game from Xbox’s shackles. “The way that EA does business, I would definitely assume that BioWare titles will be open to other platforms. As far as development resources go, that dilutes Microsoft’s opportunities,” says Billy Pidgeon, an IDC analyst.

A Microsoft spokesperson says that the company relies on its entire games portfolio to drive revenue, but there’s no doubt that Xbox sales have benefited from its exclusive hit titles. The first week after Halo 3’s release saw Xbox 360 sales double. Since it launched in Nov. 2005, Microsoft has sold 6.3 million consoles in the U.S. through August, according to NPD Research. Thanks to Halo 3, the console’s monthly sales for September is expected to out pace the popular Wii. That would be the first  time this year.

Microsoft hopes that the release next month of Mass Effect will similarly boost console sales. “Exclusive titles are very important,” Pidgeon says. “It’s not only the thing that differentiates consoles, but there’s also a style of play in the game that’s inherent to the console it’s being specifically made for.”

Last week the Redmond, Wash. software giant announced that Bungie game studio, the makers of the Halo series, was leaving Microsoft to be independent. Microsoft still owns the rights to the first-person shooter franchise, but the split will give Bungie more creative freedom and more choices in developing future games on other platforms. That’ll mean Microsoft will need to line up more exclusive deals to feed its console.