On the eve of the Electronic Entertainment Expo (E3) in Los Angeles, the interactive game industry is enjoying record sales growth, driven in large part by mass retailers.

In 1999, the interactive game industry posted high scores.

Sales of video game and PC software increased 11 percent from $5.5 billion in 1998 to $6.1 in 1999, according to the Washington, DC-based Interactive Digital Software Association (IDSA). More than 215 million computer and video games were sold last year, a 19 percent increase over 1998 sales levels. The entire electronic entertainment category took in between $7 billion and $7.5 billion in 1999, surpassing theatrical box office revenues for the first time.

"Growth in 1999 was driven almost entirely by the video game software market" says Matt Gravett, a game analyst for Reston, VA-based PC Data.

Software publishers are fighting for market share in this extremely competitive market. According to PC Data, Nintendo was the leading software publisher, with a market share of 25.3 percent in unit sales and 25.5 percent of revenue. Rounding off the top five are: Sony (including 989 Studios), Electronic Arts, Midway and Acclaim. In the PC game arena, Havas Interactive claimed the top spot with a unit share of 16.8 percent and a dollar share of 15.7 percent, followed by Electronic Arts and Hasbro Interactive.

While reaching record levels in 1999, the market is expected to be relatively flat this year, according to industry observers. This year looks to be a transition period, with growth expected to explode again in 2001 and 2002 as Sony, Microsoft and Nintendo launch their next-generation systems.

"We anticipate continued growth in 2000, though not at the explosive levels of the previous five years as the industry glides through a transition to new video game console systems;' says Doug Lowenstein, president of the IDSA. "From a sales standpoint, historically, as we transition from one hardware generation to another, there is a dip in software sales as demand for software for the retiring platforms wanes before the installed base of new machines can fill the void. It's natural for there to be a pause, but the long-term outlook is for sustained, high-level growth."

Mass merchandisers are playing a bigger than ever role in the industry. As gaming has moved over the last few years from a niche market to a mass market audience, mass retailers have stepped up their participation in the category. In addition, as the current crop of video game systems has matured, pricing on the hardware and software has reached more mass market levels. The role of mass retailers should continue to grow as many of them extend their brands to the e-commerce space, says Lowenstein.

"I think overall, mass merchants are driving the mature video game business--the PlayStation, N64 and the emerging Dreamcast sales," says Jeff Nuzzi, director of retail marketing for Los Angeles-based Fox Interactive. "Typically, on a product's launch, like we saw with Dreamcast last fall or the PlayStation in 1996, software specialty retailers get the day-one,...