Gaming the Market; Videogame makers are struggling to cope with the once-every-five-years transition to new platforms.

Byline: N'Gai Croal (With Kay Itoi in Tokyo)

Alex Ward shouldn't have a care in the world. After all, the lauded creative director of Criterion Studios is about to fly to Hawaii for some well-deserved R&R, having just completed a pair of very distinctive videogames for two very different consoles. The first, Black, stretches the capacities of Sony's aging PlayStation 2 with a first-person shooter featuring a level of interactive destruction unprecedented in the genre. Then there's Burnout Revenge--a flashy racing game for Microsoft's just-released Xbox 360--which allows gamers to post their most spectacular car crashes online to be viewed and rated by others. But today, on the eve of his departure, Ward wonders how his games will fare in a market straddling consoles both old (the six-year-old PS2) and new (Xbox 360, which shipped last November). "What I worry about the most is the mind-set of the consumer," says Ward.

He's not alone. As the $25 billion game industry undergoes its once-every-five- year transition to new machines, the business is shifting from a steady climb in revenues to a nausea-inducing roller coaster. Why? Because even though existing consoles have a massive audience for publishers to exploit--100 million PS2s, 24 million Xboxes and 20 million Gamecubes at last count--avid gamers are easily seduced by the promise of the latest souped-up consoles. So they tend to put off buying software for the old hardware and save up for the new. That leaves game developers and publishers in a tough spot: making titles for the new consoles is expensive, and not enough have been sold yet to recoup costs. And with analysts like Michael Pachter of Wedbush Morgan projecting a 3 percent drop in North American and European revenues over the next year, standing pat simply isn't an option.

The first step in navigating the transition is for developers to be a lot more shrewd when crafting games for an increasingly jaded audience. With Black, Ward and his team decided to go retro: they stripped the shooter genre back to its essentials--guns and destruction--and built a single-player game where the levels aren't simply a static backdrop, but shatter and crumble as the player empties one ammo clip after another. The game recently debuted at No. 1 in the United Kingdom. For his racing game Burnout Revenge, --which had already been released for current consoles, Ward felt that merely improving the graphics wouldn't be enough to match gamers' assumptions about how much ...