How does Apple plan to sell large quantities of iPods this holiday season in a depressed market already saturated with MP3 players?

By repositioning them as high-end game machines.

That's the message coming through loud and clear from Cupertino, not only in those ubiquitous TV ads proclaiming the iPod touch "the funnest iPod ever," but in a series of public pronouncements from executives usually content to let Apple's products speak for themselves.

Apple marketing guru Greg Joswiak last month called the touch "the future of gameplay" (link). Tech evangelist John Geleynse on Friday proclaimed it a "game console" in the same league as Sony's and Nintendo's (link).

Even CEO Steve Jobs entered the fray, telling the Wall Street Journal last month that the iPhone and the iPod touch "may emerge as really viable devices in the mobile games market this holiday season" (link).

It's an interesting switch in marketing strategy, made just before what should have been — in normal economic times — the biggest selling season for both digital audio players and hand-held game machines. Now it's a scramble on both fronts, and the players are a little desperate. Even, maybe, Apple.

When it first came out, Apple billed the iPod touch as an iPhone without the phone — a portable media player and a mobile Wi-Fi Internet device without the monthly bill from AT&T.  But it also came without AT&T's (T) subsidy, which pushed the touch's average retail price into the mid $300s and kept its quarterly sales — after an initial burst last December — in the 2.0 to 2.3 million range.

With a price cut in September and, equally important, a wave of thousands of games written for the iPhone yet playable on the iPod touch, Apple sensed a new opportunity.

But going up against Nintendo and Sony while maintaining the fat margins to which it has become accustomed required that the company perform a neat trick: it had to flip the usual video console business model on its head.

Nintendo (NTO.F) and Sony (SNE) use the Gillette razor/razor blade strategy: they sell their hardware as cheaply as possible — often at a loss — and make their profit on the games, which typically sell for anywhere from $19.99 to $39.99.

Apple (AAPL) makes nice profits on the hardware and leaves a few crumbs on the table for third party software developers, whose games typically sell for $0.99 to $9.99, if not for $0.00. (See Trouble in the (99-cent) App Store.)

Here's how the three machines — and their top-selling games — stack up:

Analysts are split on whether the strategy will work. Kaufman Bros.'s Shaw Wu is bullish; he believes Apple will sell 21 million iPods this quarter — almost as many as it sold last year. The normally bullish Gene Munster at Piper Jaffray is bearish; he doesn't expect Apple to sell more than 18.6 million units, down 16% from 2007. (See iPod holiday sales: Hot or Cold?)

Hand-held gaming is a brutal business and Apple is not the first company to try to break in. The field is littered with the carcasses of portable game systems marketed, priced down and ultimately abandoned. For a gallery of machines past and present see below the fold. (Source: here.)

Trying to pick the winners in '08? Watch these three conferences.

In January, politics has Iowa, New Hampshire and South Carolina. Tech has DEMO, Macworld and the Consumer Electronics Show.

Just as primaries and caucuses define the year’s political landscape, these three big technology trade shows compete to introduce trends that will shape 2008. Each show has its own personality and its own surprises – and its own part in influencing whether a few months from now we’re all clamoring for new iPhones, wireless HD home theaters, or the next challenger to Facebook.

Apple's iPhone announcement at Macworld stole the buzz last January, and for the rest of the 2007. Image: Apple

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Which show will prove most influential?

Though there’s just one company at the heart of it, don’t bet against the Macworld confab in San Francisco, where Apple (AAPL) unveils its latest strategies and dares the digital world to answer the challenge. Apple has always gotten attention – after all, super-showman CEO Steve Jobs could sell candy to Willy Wonka – but the company’s recent momentum helps, too. Apple happens to be the hottest thing in technology right now, with a lineup that includes the trendy iPhone, profit-minting iPod and resurgent Mac.

Though Apple’s iPhone announcement at last year’s Macworld was arguably the most-hyped electronics debut ever, the product itself didn’t disappoint. So everyone will be watching the stage on January 15 to see if Jobs & Co. can do it again in 2008. The thriving Mac rumor ecosystem expects thin, flash-based laptops, a major software update for the iPhone, and movie rentals on iTunes. Bottom line? If Apple has anything to say about it, 2008 will be all about feather-light wireless devices sporting powerful software and video playback.

But first, the rest of the tech titans will have their chance to steal Apple’s thunder. Next week at the mammoth Consumer Electronics Show in Las Vegas, luminaries such as Microsoft (MSFT) Chairman Bill Gates, Intel (INTC) CEO Paul Otellini, and Comcast (CMCSA) CEO Brian Roberts will meet in the desert to share their vision of the future with more than 140,000 attendees and exhibitors including Hewlett-Packard (HPQ), Research in Motion (RIMM) and Sony (SNE). A major theme this year: delivering high-definition entertainment to homes, cars and phones.

For tech journalists and industry insiders CES is half hell-hole, half wonderland, with the world’s coolest cell phones, cameras, HDTVs, game systems and in-car electronics spread over 1.8 million square feet of leg-cramping exhibit space. This is the show where many people got their first glimpses of advances like futuristic OLED displays, digital home theater and home automation systems. But it’s also a stage where tech execs make big promises that don’t amount to much.

At the other end of the spectrum is an event that draws just a few hundred people. At the end of January, some of the freshest new ideas in tech will be on display at DEMO, an invitation-only gathering outside Palm Springs. There, veteran tech analyst Chris Shipley stages the tech biz version of Survivor, where a closely guarded roster of innovative startups (and a few big companies) gets a few minutes to demonstrate a breakthrough new product or service in front of an elite audience of venture capitalists and corporate kingmakers.

Much of the DEMO fare isn’t for the mass market – you won’t see the next Nintendo Wii unveiled here. Instead, these are the technologies that Silicon Valley insiders often acquire or imitate, and incorporate into their own arsenals. (Intuit (INTU) a few weeks ago announced plans to buy former DEMO presenter Homestead Technologies for $170 million, and HP last year bought former DEMO presenter Bitfone for an undisclosed sum.)

So DEMO might not be big, but it’s hot. And if you really care about which way the tech industry is headed, it makes sense to pay attention to January’s little show, along with the San Francisco Applefest and the Las Vegas Gadgetfest.

Shoppers headed online in droves on Cyber Monday, according to the latest stats: 32.5 million visitors entered virtual stores, up 10 percent from a year ago.

Nielsen Online, the Internet measurement firm, said that eBay (EBAY) was the top destination, drawing nearly 11 million visitors. Next were Amazon (AMZN), with more than 7 million, and Wal-Mart (WMT) with about 5 million.

And consumers gave their credit cards a workout. ComScore said shoppers spent $733 million online on Monday, a 21 percent gain from the same day a year ago.

Microsoft’s Zune: The sequel (Photos 1-4)

What were the herds buying versus the week before? Think gear like Apple's (AAPL) iPod and Nintendo's (NTDOY) Wii. Consumer electronics and games saw the most growth, followed by music, video and books. This was yet another bit of news that bodes well for Apple; Nielsen's Black Friday numbers showed the company's web site surged past Dell's (DELL) to become the computer maker most visited from home PCs on that popular shopping day. Nielsen estimated that 1.4 million people visited Apple.com, up 111 percent from a year before. Dell's traffic rose 29 percent, to 1.3 million.

The Cyber Monday numbers:

 Top 10 Fastest Growing Product Categories Ranked by Week-Over-Week Growth (U.S.,

 Home & Work)

  +---------------------------------+-------------------------------+

 | Categories                      |  Unique Audience Growth from  |

 |                                 |     11/19/07 to 11/26/07      |

 +---------------------------------+-------------------------------+

 | Consumer Electronics            |             72.5%             |

 | Toys/Videogames                 |             72.0%             |

 | Books/Music/Video               |             63.1%             |

 | Apparel                         |             55.3%             |

 | Home and Garden                 |             45.6%             |

 | Computer Hardware/Software      |             42.1%             |

 | Shopping Comparison/Portals     |             32.4%             |

 | Jewelry                         |             23.1%             |

 | Retail                          |             13.2%             |

 | Flowers and Gifts               |             12.6%             |

 +---------------------------------+-------------------------------+

 Source: Nielsen Online, Holiday eShopping Index

 Top 10 Online Retail Sites* on Cyber Monday vs Black Friday (U.S., Home & Work)

  +-----------------+----------+------------------+----------+

 | Cyber Monday    | 11/26/07 | Black Friday     | 11/23/07 |

 | Sites           | UA (000) | Sites            | UA (000) |

 +-----------------+----------+------------------+----------+

 | eBay (EBAY)     |  10,799  | eBay             |  10,837  |

 | Amazon (AMZN)   |  7,225   | Amazon           |  6,932   |

 | Wal-Mart Stores |  5,165   | Wal-Mart Stores  |  4,509   |

 | AT&T (T)        |  3,879   | Target           |  4,071   |

 | Target (TGT)    |  3,393   | AT&T             |  3,781   |

 | Circuit City    |  2,824   | Best Buy         |  3,125   |

 | Dell (DELL)     |  2,673   | Circuit City     |  2,563   |

 | Best Buy (BBY)  |  2,363   | Dell             |  1,965   |

 | Overstock.com   |  2,154   | JCPenney         |  1,652   |

 | Sears           |  1,698   | ToysRUs          |  1,626   |

 +-----------------+----------+------------------+----------+

 Source: Nielsen Online, NetView

 *Based on Nielsen Online, MegaView Online Retail list.

Microsoft (MSFT) mostly saw modest increases in traffic to its online properties in the third quarter, with gaming, technology, real estate and search leading the company's growth.

The latest numbers from Nielsen Online show that the category for Microsoft's Xbox 360 console, which is battling Nintendo's Wii and Sony's (SNE) PlayStation 3, was the fastest-growing online property for Microsoft compared to a year ago. Most important for the company though, its search business ranked in the top-five fastest-growing categories, a trend that will help Microsoft better compete with the likes of Google (GOOG) and Yahoo (YHOO) for online advertising.

A financial edge from edgy PC design (Photos 1-7)

Overall online traffic increases were small, however. Traffic to the Microsoft parent company increased three percent year over year, from a three-month average monthly audience of 115.9 million unique visitors in Q3 2006 to 119.1 million unique visitors in Q3 2007.

Microsoft's Top 5 Fastest Growing Channels (3-Month Average Monthly Unique

Audience)

+-------------------------+---

-------+----------+--------------+

| Channel                 |  Q3 2006 |  Q3 2007 | Q3-Q3 Growth |

|                         | UA (000) | UA (000) |              |

+-------------------------+----------+----------+--------------+

| XBOX                    |    1,116 |    1,724 |          55% |

| MSN Tech & Gadgets      |    1,626 |    2,215 |          36% |

| MSN Astrology           |    1,110 |    1,457 |          31% |

| MSN Real Estate         |    2,941 |    3,805 |          29% |

| MSN/Windows Live Search |   39,856 |   51,525 |          29% |

+-------------------------+----------+----------+--------------+

Source: Nielsen Online, NetView

Master Chief image: Microsoft

Leave it to Master Chief to save the day. U.S. video game console sales more than doubled in September compared to the year before, and it had everything to do with Halo 3, the game in which he's the star.

According to data from NPD Group, Americans purchased 1.37 million game consoles last month, up from 613,500 a year ago. The most popular machine, selling 527,800 units, was Microsoft's Xbox 360, the only one that can play Microsoft's (MSFT) Halo game. A close second was Nintendo's Wii, at 501,000 units.

And those numbers tell only part of the story. Sony (SNE) sold 119,400 PlayStation 3s, and 215,000 PlayStation 2s, for a combined 334,400 units. And though portable game systems weren't included in the overall console tally, Sony's revamped PlayStation Portable sold 284,500 units, making it the month's most popular Sony system.

Microsoft’s Zune: The sequel (Photos 1-4)

Overall, it was an even stronger month for the video game business than analysts expected – and that's brightening the prospects for the year as a whole.

"Although we've been confident for many months now that the industry was poised to realize its best year ever in terms of revenue, the results in recent months makes me even more bullish," said NPD analyst Anita Frazier. "I believe the U.S. video games industry will realize somewhere in the range of $17 billion to $18 billion for the year."

Below, software and hardware numbers from NPD:

Source: NPD Group

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Source: NPD Group

—

Source: NPD Group

The studio that created the popular Halo video game franchise is leaving Microsoft (MSFT) to gain creative freedom, potentially delivering a blow to the software giant’s image among gamers.

Halo is the most popular software franchise for Microsoft's Xbox 360 console, and it achieved $300 million in sales in the week after Halo 3 was released on September 25. Because the game is exclusive to the Xbox platform, it helped boost hardware sales for Microsoft; the Xbox 360 also beat the Nintendo Wii in sales last week for the first time this year.

• Microsoft’s Zune: The sequel (Photos 1-4)

Microsoft confirmed the split in a press release this morning.

Rumors of a split between Microsoft and game studio Bungie had been circulating on gaming enthusiast sites for several days, after 8BitJoystick broke the story on a Seattle Post Intelligencer blog. The blog writer said he got this e-mail tip:

So heres my big secret. You should google Bungie + Microsoft + separation this week.

You know that big ol BILLION dollar franchise Bungie has created for Microsoft, to show their appreciate Microsoft is letting Bungie leave. Of course Microsoft gets to keep all rights to the Halo franchise, but as today Bungie no longer part of Microsoft. Ask anyone who works there to search the global address book, they're no longer in there. Microsoft was supposed to release the press release today but if they wait till the 10/6 the impact wont effect the quarterly results. However today is the actual official date and the day the NDAs expire, however you still didn't hear this from me.

Apparently MS just wants Bungie to make Halo for the rest of their natural days, and Bungie doesn't like how MS is constantly trying to "handle" everything they do; the way they market their games, the way they interact with their fans (basically the fact that they do appreciate their fans), and how stingie they are with the profits (comparable to the rest of the industry). So as of today they are their own independent entity. They'll probably make Halo 4 for Microsoft, however hey are also free to create new intellectual properties for whatever system they want. (Even though they prefer the xbox platform)

What a way to say thank you.

In one example that might illustrate the reason for tension between Microsoft and Bungie, screen shots surfaced on the Internet this week showing what appears to be an unreleased version of Halo developed for Nintendo’s popular DS handheld gaming system.

Some in the gaming community have speculated that Microsoft was unwilling to release the game and risk giving ammunition to a rival’s gaming platform.

With Bungie as a separate entity, it would have more power to decide how its future games are marketed and on what platforms, including those from Nintendo and Sony (SNE). Bungie was an independent studio until Microsoft bought it seven years ago for about $40 million. Before it was acquired by Microsoft, Bungie was known for creating games for several platforms; its Marathon game, a precursor to Halo, was popular on Apple's Macintosh computers. For more details on the Bungie/Microsoft split, see this Kotaku interview.

The release from Microsoft:

REDMOND, Wash. — Oct. 5, 2007 — Microsoft Corp. today announced a plan for Bungie Studios, the developers of the "Halo®" franchise, to embark on a path to become an independent company. Microsoft will retain an equity interest in Bungie, at the same time continuing its long-standing publishing agreement between Microsoft Game Studios and Bungie for the Microsoft-owned "Halo" intellectual property as well as other future properties developed by Bungie.

The critically acclaimed Xbox 360®-exclusive "Halo 3" achieved $300 million in global sales in its first week. Released on Tuesday, Sept. 25, "Halo 3" is the fastest-selling video game ever and already one of the most successful entertainment properties in history.

"Our collaboration with Bungie has resulted in 'Halo' becoming an enduring mainstream hit," said Shane Kim, corporate vice president of Microsoft Game Studios. "While we are supporting Bungie's desire to return to its independent roots, we will continue to invest in our 'Halo' entertainment property with Bungie and other partners, such as Peter Jackson, on a new interactive series set in the 'Halo' universe. We look forward to great success with Bungie as our long-term relationship continues to evolve through 'Halo'-related titles and new IP created by Bungie."

"This exciting evolution of our relationship with Microsoft will enable us to expand both creatively and organizationally in our mission to create world-class games," said Harold Ryan, studio head for Bungie. "We will continue to develop with our primary focus on Microsoft® platforms; we greatly value our mutually prosperous relationship with our publisher, Microsoft Game Studios; and we look forward to continuing that affiliation through 'Halo' and beyond."

Bungie Studios will remain in its current location in Kirkland, Wash.

Microsoft (MSFT) is poised to ship new Xbox 360 consoles featuring chips made with IBM's (IBM) 65-nanometer process, reports Dean Takahashi of the San Jose Mercury News. The machines will not yet contain 65-nanometer graphics chips from ATI (AMD), he says, but they could still be more stable than the consoles on the market today, which have suffered from overheating problems.

Microsoft's troubles with the current Xbox 360 design have given the company's game division a black eye lately. Rampant engineering problems have caused some of the consoles to overheat and lock up; Microsoft has said it will take a charge of more than $1 billion to deal with repairs. The company also said today that some of its Xbox 360 Wireless Racing Wheel accessories have reported that the item can overheat and spew smoke when plugged into an electric socket.

Still, the Xbox 360s with the new 65-nanometer design, code-named Falcon, could pose some challenges for Microsoft, Takahashi says:

Arguably, the Falcon-based machines will be inherently more stable. Machines that use them will probably have fewer thermal issues. Those machines should be more reliable, logically speaking. But that is conjecture. I haven’t seen one of these Falcon-based machines and no one can say whether they are in fact more reliable.

So if you wait to buy an Xbox 360 that has the Falcon board in it, then logically you’re making a smart move. You’ll be buying a console that will last longer and have less risk of failure. …

But here’s the problem for Microsoft. They have a lot of inventory of the older 90-nanometer machines. … It has to sell these machines out before it starts selling the Falcon-based machines. That means that a lot of consumers are going to be buying machines that don’t have the highest quality.

Meanwhile, Sony's (SNE) PlayStation 3 has had its own challenges; its high price (starting at $500) has kept many consumers

at bay, perhaps helping Nintendo's Wii console to establish itself as the mass-market favorite.

Bad news out of Redmond today: Microsoft (MSFT) not only has heat problems with the Xbox 360 console itself – problems that have caused the company to take a billion-dollar writedown – but now it has a heat glitch with an accessory as well. The Xbox 360 Wireless Racing Wheel can overheat and start smoking when it’s plugged into a wall outlet, the company says. Microsoft is providing a free retrofit to fix the problem, and no injuries have been reported.

The biggest loss here is to Microsoft’s reputation. It’s not so much a matter of the wheel itself – it sells for $119 on Amazon.com (AMZN) and has a sales rank of 366 in the video games category, so it’s not a huge seller. But if gamers were concerned that Microsoft doesn’t know what it’s doing when it designs hardware, this latest problem adds fuel to the fire. (Pun intended.)

From Microsoft's announcement:

The action is being taken after Microsoft was informed of a very small number of incidents of a malfunction in the Xbox 360 Wireless Racing Wheel, in which a component in the wheel chassis may overheat and release smoke when the AC/DC power supply is used to energize the wheel. There have been no reported incidences of fire, personal injury or property damage resulting from the component failure in the wheel.

Owners of the Xbox 360 Wireless Racing Wheel should stop using the AC/DC power supply until they have obtained their retrofit. They may continue to operate the wheel using battery power.

Owners of the Xbox 360 Wireless Racing Wheel should visit http://www.xbox.com/support or call Microsoft at (800) 4MY-XBOX (469-9269) to register for the free retrofit and protect against the potential hazard described above. Instructions, if necessary, will be provided with the retrofit. Microsoft is notifying and will be coordinating its response activities with the relevant regulatory agencies such as the U.S. Consumer Product Safety Commission. This may affect delivery dates.

Will this latest setback give an advantage to Sony’s (SNE) Playstation 3 and Nintendo’s Wii? Too soon to tell. Hard-core gamers are the ones most likely to pay attention to the racing wheel problems, but they’re also the most likely to forgive Microsoft for product glitches.

Product defects could become a big problem for Microsoft, however, if they mar the launch of its Halo 3 game next month. Reports on game enthusiast sites have indicated that the Xbox 360 is most likely to overheat when it’s playing graphically intense titles, and Halo 3 is sure to fit the bill. If thousands of people buy Xbox 360s to play Halo 3 only to have their machines die, Microsoft’s generous repair policy might not be enough to appease them.

(1/10) There's more to today's gaming business than the war between Nintendo's Wii, Microsoft's (MSFT) Xbox 360 and Sony's (SNE) Playstation 3. PC makers like Hewlett-Packard (HPQ), Dell (DELL) and Apple (AAPL) have jumped into the fray, using the most powerful chips from Intel (INTC) and Advanced Micro Devices (AMD) in their arsenals. Then there are the portable systems – like Sony's PSP, above, and new phones from Nokia (NOK) and others. So get ready, gamers and investors. There's fun to be had, and billions of dollars to be made ….

|| NEXT>>

(Photo: Sony)

Microsoft (MSFT) and Sony (SNE) placed big bets that gamers will pay more for muscular consoles that deliver hyper-realistic, fast-paced games – that's what the Xbox 360 and PlayStation 3 are all about. From a look at a recent list of the top-selling games in North America, though, that bet doesn't seem to be quite right.

The list of the top 10 games for the week ending August 11 from VG CHARTZ is dominated by titles for Nintendo's Wii console and DS handheld – Nintendo has 7 of the top 10 titles.

Further supporting the "graphics aren't everything" idea: The PS3 and Xbox 360 titles to make the list are Guitar Hero games, which tend not to be graphically demanding. In Guitar Hero, players typically use a guitar-shaped controller to try to play songs accurately. The gameplay experience is similar to that for the Nintendo Wii, a console that uses a motion-sensitive controller.

The tide could turn

More intense titles did show up further down the list. The Electronic Arts (ERTS) title NCAA Football '08 for the Xbox 360 came in at #11, and the PS2 version was at #14.

All of this could change, of course, in the coming months as the holiday season approaches. Microsoft next month will release the latest installment of its Halo game series, a graphics-rich title that has already done more than 1 million pre-orders, making it the most anticipated game of all time. And if such games spark sales of the Xbox 360 and PS3, that could boost demand for the games that run on those consoles.

The full list:

1. (DS) Pokemon Diamond/Pearl

2. (Wii) Wii Sports

3. (Wii) Mario Strikers Charged

4. (Wii) Wii Play

5. (PS2) Guitar Hero Encore Rocks the '80s

6. (DS) Megaman Star Force

7. (PS2) Guitar Hero II

8. (Wii) Mario Party 8

9. (DS) Nintendogs

10. (X360) Guitar Hero II