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As E3 approaches, video game industry is at a turning point

Sam Yeh | AFP | Getty Images

While sales of the PlayStation 4 and Xbox One are moving at a rapid clip, a sense of transition looms over the video game industry these days — and the imminent kick-off of E3, the gaming industry's annual trade show in Los Angeles, seems to be emphasizing that.

Cumulative sales of the Xbox One and PS4 are more than 40 percent higher than their predecessors after 30 months in the market. Nintendo's Wii U, though, has largely been a non-factor this generation. Virtual reality is getting lots of media attention, but everyone in the industry warns it will be years before it's anywhere close to mainstream. And the industry's two biggest publishers have opted against hosting booths at E3 itself.

"E3 will have a distinctly different feel to it this year," says Michael Pachter, managing director of equity research for Wedbush Securities.

E3 in 2015 was all about big games. "Fallout 4," "Star Wars: Battlefront," "Halo 5," and the long-awaited return of "The Last Guardian" (which was first introduced in 2009 and has been MIA ever since). This year, the show will be more centered on hardware.

Sony and Microsoft are both expected to roll out updated versions of their console systems. Pachter says it's unclear whether Microsoft's new hardware will be significantly more powerful than current versions of the Xbox One. He does, however, expect Sony to introduce an upgraded PS4 that's optimized for virtual reality and 4K gaming, both of which would require notably stronger computer and graphics processing chips.

Additionally, Sony will showcase its PlayStation VR headset. And Oculus, HTC and Samsung will also have a presence at the show for their recently-launched virtual reality headsets.

"Virtual reality is still several years away from being something that's mainstream," says Eric Handler, senior equity analyst at MKM Research. "I think companies are going to lay the groundwork at E3. It's still in the stage of trying to show people what the possibilities are."

Amidst this hardware focus, however, Nintendo has said it will not divulge any details about its looming new system, code-named NX, which is due to launch in early 2017. Instead, the company is taking an all-or-nothing approach to E3 this year, focusing on a single playable game: "The Legend of Zelda". The Wii U version of the anticipated game will dominate Nintendo's presence. (The game will also be a launch title for NX.)

E3 itself will be a different looking show this year, as Electronic Arts and Activision, the industry's two biggest publishers, have both opted against hosting booths. EA, instead, will host a competing, open to the public show across the street. Those moves have raised questions about the future of E3 and whether it is losing its position as a tentpole event for the video game industry.

New Xbox console may be on the way

Analysts are split.

"I don't want to downplay E3," says Handler. "There are still going to be a number of games that people will want to see."

Pachter, though, says he's worried EA's separate event, as well as others hosted by publishers outside of the E3 time window, could hurt the industry.

"EA is trying to have the best of both worlds, but as one of the industry's largest players, its abandonment of the E3 floor threatens the well-being of the industry itself," he says. "If EA's choice creates a template that others follow, E3 will suffer mightily in future years."

Pachter said he's less concerned about Activision's decision to largely bypass the show, saying the company has a lighter lineup of titles this year and he expects them to return to E3 "in force" in 2017.

Of the game publishers at the show, Take-Two Interactive Software and Ubisoft will likely receive additional attention with EA and Activision largely absent. Take-Two has moved into EA's prominent floor space, greeting showgoers as they enter the Los Angeles Convention Center's South Hall. That company will showcase "Mafia III" and "Sid Meier's Civilization VI".

Ubisoft, which is in an ongoing battle for control of the company with Vivendi, will showcase the sequel to "Watch Dogs," "Tom Clancy's Ghost Recon Wildlands," "South Park: The Fractured But Whole" and a new intellectual property. The company will also shine a spotlight on "Eagle Flight," its PlayStation VR title.

While the E3 show floor doesn't open until Tuesday, June 14, E3 unofficially begins two days prior. On Sunday, Bethesda and EA are holding media event to unveil new games (EA is expected to showcase its next Star Wars game at its event). On Monday, Microsoft, Sony and Ubisoft all hold press conferences.

Although there might be concerns about the health of E3 itself, analysts say they remain bulling about the industry in general.

"I think the industry is in a very good place," said Handler. "It's evolving very differently than it was a cycle ago. People are playing fewer games, but they're spending more time with those game and they're spending more on those games [though downloadable content]. Today, it's about people spending $100 on the game rather than $60 on the game."