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Future Markets

SimExchange founder Brian Shiau on the challenges of predicting trends in the videogame market.

There are many ways to forecast trends and outcomes in the videogames market - and as a result, there are often many different predictions made. Many industry analysts have long been forecasting that the PS3 will ultimately dominate this generation, despite a series of hiccups in the run-up to launch and the Wii's strong performance out of the gate.

A Research and Markets report released in early January predicted PS3 sales of around 75 million by 2010. The following month, Screen Digest's Ed Barton concluded that "PlayStation 3 will hold the largest market share by 2010, with the Wii a distant third."

Wedbush Morgan's Michael Pachter took a different approach, forecasting that the Wii will be perceived as the leader while its sales lead during 2007. But, he went on to argue, its sales will drop in parity with Xbox 360 as the price differential narrows.

According to Pachter, Xbox 360 will be leading in total sales and will appear to be the winner by early 2009 - but by the end of the year, Sony's dominance in the high-def format war will position it as the perceived winner. Pachter admits that it is difficult to make projections very far ahead.

The simExchange, the prediction market for videogames, was launched to shed more light on the forecasting process and offer a new way of tracking market shifts and trends. Since November 2006, it has been trading virtual stocks to aggregate market perception and predict the global lifetime sales of each console.

In recent months, since the PS3 and Wii launched, market trading has consistently predicted that the Wii will take the lead by far this generation, with around 62 million units sold. The figures for Xbox 360 and PS3 sales are forecast to stand at around 49 million and 44 million units respectively.

But that was before March 23, when PlayStation 3 launched in Europe and trading began to heat up. PS3 predictions rose sharply to hit 55.38 million units as traders began pricing in a very successful launch in Europe.

As of now the PS3 is edging past Xbox 360, with sales estimates put at 57.57 million units and 54.57 million units. Wii is also on the up, reaching 73.37 million. At the close of yesterday's trading, the global market share prediction for this generation stood at 31.03 per cent for PS3, 29.42 per cent for Xbox 360 and 39.55 per cent for the Nintendo Wii. These forecasts are based on the aggregation of information through trading the simExchange video game prediction market.

Analysts use sophisticated growth models based on comprehensive demographic studies - so why should the forecasts of a prediction market matter? Well, studies have shown that prediction markets are at least as accurate, and sometimes more accurate, at predicting future events than an individual expert's analysis.

Predictions on the simExchange are formed by participants buying a game's virtual stock if they believe the prediction is too low, and selling the game's virtual stock if they believe the prediction is too high. This allows the prediction market to aggregate the analysis, interviews, surveys, first-hand accounts, and other information from thousands of participants.

Participants who improve the prediction are rewarded by earning virtual money on the trade, providing them more resources to express stronger opinions on future trades. Participants who weaken the prediction lose virtual money and have less resources to express more opinions. This process eventually aggregates the information of the most accurate predictors and discounts away the information of inaccurate predictors. But how do simExchange predictions compare to those made by analysts?

Lazard Capital Markets analyst Colin Sebastian had predicted March sales in the US to be flat. On the other hand Michael Pachter was expecting growth, forecasting Wii sales at 400k, PS3 sales at 165k and Xbox 360 sales at 250k units in the US. Pachter also predicted that the DS would sell 250k and the PSP would sell 210k.

Trading on the simExchange the night before NPD's release had pointed to slight growth over February, expecting Wii sales of 385k units, PS3 sales at 144k and Xbox 360 sales at 231k. The figure for DS stood at just under 493k, while for PSP it was 180k units.

As it turned out, the PSP prediction was almost exactly right while DS sales hit the 508k mark. Around 130,000 PS3 units were sold, along with 259,000 Wiis and 199,000 Xbox 360s.

The simExchange now plans to launch a series of futures contracts for predicting monthly sales in a bid to provide industry watchers forecasts for incremental growth throughout the year.

A prediction market is not a perfect oracle and is only as intelligent as the pool of informed participants from which it aggregates its predictions. As Pachter has said, it is still early in the console generation. Currently the simExchange is confirming Pachter's belief that the Wii will be perceived as the early winner. However, as more information emerges, it is priced into the simExchange stocks - and only time will tell if the predictions provided by the market will also shift.

Brian Shiau is founder of the simExchange.

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