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If you enjoy reading this site, you might also want to check out these Think Services sites:
 Game Career Guide (for student game developers.)
 Indie Games (for independent game players/developers.)
 Finger Gaming (news, reviews, and analysis on iPhone and iPod Touch games.)
 GamerBytes (for the latest console digital download news.)
 Worlds In Motion (discussing the business of online worlds.)
 Game Set Watch (the Group's alt.game weblog.) |
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Analysis: 'The New Reality of the Video Game Console Business'
by David Cole
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September 11, 2009
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[In this opinion piece, DFC Intelligence analyst David Cole warns that the console business is under threat from a "rapidly increasing" amount of low-cost gaming options and a five-year cycle that no longer applies.]
The news in 2009 has not been entirely positive for the video game industry. Sales are down in what was once considered a growing, recession proof industry. Of course, the mentality is to look at short-term sales as an indication of a major change in consumer behavior. This raises the question: has consumer behavior suddenly undergone a radical change in 2009? As a short answer, DFC Intelligence sees nothing so far in 2009 that indicates a major shift in consumer or industry trends.
There are some major concerns for the future of the industry, but they would exist even if first half 2009 sales had shattered records. It is first important to note that comparing monthly sales on an annual (or even month to month) basis is simply not a strong indicator of market trends. This is especially true when looking at the first nine months of the year. In any given month sales can swing dramatically with the release of a single major title, or the absence of a major title.
These swings are not as noticeable in the last three months of the year because there is a much higher concentration of sales from October to December. However, the rest of the year can fluctuate dramatically. Furthermore, sales in the first half of the year are not a good indication of second half sales. Sales can be weak in the first half and set records in the holiday season, or vice versa.
Paying attention to short-term sales trends tells us very little about what will happen in the next few years. However, this is not to say there are no fundamental concerns with consumer spending on games and how it will impact industry growth. On the contrary, from a macro perspective, DFC has two major concerns for the video game industry:
1) Consumers have a rapidly increasing abundance of choice among low cost games and other entertainment products and;
2) The five-year console model that has driven industry growth in the past is currently not working for Sony and Microsoft.
When DFC published its first game industry report in 1994 the market was dominated by expensive to produce cartridge-based games. Game prices routinely ranged from $50 to $70-plus. DFC argued that this price level was not sustainable. Some games provide two hours or so of entertainment while others could provide 40 to even 100 or more hours of play value. Clearly as the market matured it would head towards a wide price range indicative of the relative entertainment value of each individual product. DFC’s prediction was that, as technology lowered the cost of manufacturing and distribution, game prices would run across a vast spectrum of prices from $5 to as much as $100. While our thinking was not necessarily flawed, DFC was sure wrong about how long publishers were able to maintain a premium price on non-AAA content. Yes, with the introduction of the CD/DVD medium and the PlayStation brand, prices did start to head towards the $40 range. However, with the launch of the latest systems, manufacturers remarkably were able to drive prices beyond $50 towards $60 and more. Sales in 2007 and 2008 smashed all records.
Of course, we still argue that what we said in the mid-1990s still holds true. The game industry needs a broader range of price points that are more indicative of the relative entertainment value a product provides. A game that gives 100 hours of entertainment may not be worth 50 times a game that can be finished in two hours. However, clearly charging $60 for the former and $10 for the later seems more natural than charging $60 for both.
In today’s marketplace there is currently the flexibility to do a wide range of pricing. Digital distribution, brought about by increased broadband penetration and increased client side storage, has made it possible to cost effectively distribute products at the sub-$20 price range. The new consoles allow for distribution of games in the $5 to $20 range. In many cases these products provide just as much entertainment value as the full $50+ retail games.
The competition from competing products is really starting to have an effect on the overall game business. This includes not just sub-$20 digitally distributed games, but also rental and used games. Furthermore, free online games, social networks and services like YouTube all compete for consumer time, even if they don’t put a major dent in the wallet. If you can easily play something for free why pay for it?
Of course, the game industry has always faced competition from other entertainment products and historically the industry has done a great job at creating exciting new products that spur sales to new heights while convincing consumers to pay a substantial premium for products. However, the reality is that much of this excitement has historically revolved around major new hardware that gets consumers in a spending lather. Just about the time a system is building up a nice catalog of value-priced software along comes a new hardware system that everyone must have. To a large extent this excitement is what opens consumer’s wallets.
The dirty secret of the game industry is that the console hardware manufacturers have helped subsidize much of the industry by spending billions to develop and market hardware platforms that drive such a large portion of consumer excitement and spending. The most profitable platforms for third-party publishers have been those from Sony and Microsoft. Nintendo has offered a third option, but the Nintendo business model has not been as successful for third-party publishers.
The problem the industry faces is that the current console model is broken for Sony and Microsoft, the two companies that drive the model today. The old model of introducing a new generation of consoles with vastly improved graphics every four to five years is simply not sustainable. The costs to do so are simply too expensive. Sony and Microsoft need a new model or one more along the lines of Nintendo. In the next few years, this stark reality is likely to have a major impact on third-party publishers that have a strong dependence on Sony and Microsoft platforms. At the very least, it is becoming clear that Sony and Microsoft cannot afford to launch a brand new console every five years or so.
The bottom line numbers for Sony and Microsoft’s game business are not pretty. From fiscal 2007 to fiscal 2009, Sony’s game division showed an operating loss of well over $3 billion. Meanwhile, during the period from 2004 to 2009, Microsoft’s Entertainment & Devices Division has lost over $4 billion. Much of this loss can be attributed to the cost associated with launching a new console system that is sold at a loss. The reality is Sony and Microsoft really need their hardware systems to have a true 10-year lifecycle so that initial costs can be amortized.
Both Microsoft and Sony have a long-term vision that their game boxes will eventually provide a whole host of entertainment services. The problem with that vision is both companies are still caught up in the arms race of the video game console business. It is extremely expensive to launch a new game system every few years and build an installed base from scratch. But game consumers have been trained to constantly demand a new game system and that is what drives much of the market.
For Sony and Microsoft, it simply makes little business sense to launch a new game system. They need their current systems to last as long as possible so that they can actually make some money. What makes business sense for Sony and Microsoft is to focus on getting costs down, offering new (and profitable) services to their existing systems and looking to build renewed consumer excitement via new form factors and incremental additions like Project Natal for the Xbox 360.
So what does it mean for the game industry if Sony and Microsoft are no longer spending billions to drive consumer spending on a major new hardware product? On the good news side, when consumers don’t have to plunk down $300-plus on new console hardware it means, at least in theory, they have that much more money to spend on software. However, this pure economic view ignores consumer psychology. Consumers love things that are exciting and new and that is huge driver of consumer spending. In the absence of a major new product, consumer spending will most likely settle to fairly predictable levels, or that extra cash could migrate to other platforms such as the iPhone, or other entertainment media entirely.
The game industry cycle has been driven in large part by new console launches. New game systems have consistently spurred consumer spending to new record heights, right at a time when the established systems are starting to decline. DFC has run best and worst case scenarios for the current generation game systems and in all scenarios, they show a decline in sales over the next several years. Furthermore, with these systems, a growing portion of consumer spending will continue to shift to catalog product, used games and rentals.
In short, without a major new console system to pump up consumer enthusiasm the game industry faces an inevitable decline. Other platforms like the PC and mobile systems are expected to keep growing, but not enough to offset the decline from the existing console systems.
Of course, there will always be room for major blockbuster products. Even in the absence of new hardware we can expect a handful of new must-have titles every year that far outpace the rest of the market. However, the gap between the haves and have-nots will continue to widen. Companies that have been dependent on getting consumers to buy non-AAA titles are the ones that will suffer the most.
DFC Intelligence has always been a big proponent of the how the console model builds consumer excitement and creates a stable ecosystem for developers and consumers. However, we have always felt that prices in the console market have been artificially high and, in the long-term, unsustainable. The PC and mobile markets have lacked the leadership provided by the console manufacturers. Largely because of this, game sales for these platforms are far below what they should be given their installed base. In the mobile market a market leading company like Gameloft can talk about having over 300 games it can sell to an addressable market of 2 billion consumers. However, Gameloft’s annual revenue from all its products is less than the revenue from a single hit console game.
The traditional console model works great for most of the industry. However, in recent years, it hasn’t been working for Sony and Microsoft. Unfortunately these are the two companies that are driving that model. Nintendo pulled away from the traditional console model with the Wii. The emphasis on long-lived “activity” games like Wii Sports, and personal improvement titles such as Wii Fit, have attracted many mainstream consumers who don’t necessarily purchase games on a regular basis.
For Nintendo, the business model for launching a new console system every five years could still work because they focused on keeping overall hardware costs low by not pushing the technology barrier. Does this mean Nintendo may be the first to launch a new system by 2012? That would be a first for a company with a market-leading platform. Then again, doing so could also really put competitive pressure on Microsoft and Sony.
Unfortunately, Nintendo’s business model does not leave as much room for third-party publishers. From a macro perspective, the game industry’s biggest issue is how can Sony and Microsoft become profitable enough to continue to invest in product innovation. Furthermore, can Sony and Microsoft become profitable in a way that still allows room for third-party publishers to profit from their respective platforms? The answer to those questions will in large part determine who profits from the growing number of global consumers looking to spend their entertainment time and budget on games.
This article was reprinted with the permission of DFC Intelligence.
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They have both stated that this isn't a 5 year console cycle and that they will be delivering more diverse price points through their Digital Distribution channels (ie PSP minis, and $15-20 PSN Network only titles like Fat Princess and XBLA's Shadow Complex, plus 3rd Party successes like Battlefield 1943).
Glen
http://www.zenfar.com
Yet when I go to buy games I see Oblivion at $20-30 right next to a bunch of games that are $20-30 that I know are rental games... Also Oblivions price fell quicker than most games with a short single player campaign and mediocre multiplayer...
The problem is 'Age' and 'Single player' seem to be the value determiner. Everything starts high and then drops based on age and initial sales. What ends up happening is people will just ignore games they know are going to drop fast. Look at the Wii! Why pay $50 for anything 3rd party? It is going to be $40 or $30 in a few months easy. It hurts early sales, and gives every one an impression it is inferior.
Third parties need to start at their fallen rate to begin with...
And I agree with the part the enthusiasm weens off the longer the console life is.
Maybe DFC should look at the japanese games industry.....its shrinking faster than the titanic and the west drifting into that direction.
@Randy Overbeck
Those motion controllers aka gimmicks won't solve nothing. Remember the 32X, Virtual Boy, Activator, EyeToy, Powerglove, and Mega CD, all which was going to do something special gaming? Well Sony's motion controller and Natal will have a seat next to them.
It's hard to say what makes a game AAA or worth $60, but play time is not it. I'd rather play a melt your face awesome game for 8 hours than 40 hours of absolutely lackluster mediocrity. I think gamers can see value based on things like solid game mechanics, interesting level design, attractive visuals, gameplay depth, etc. But to try to quantify games "value" based on length is going the wrong direction, just like the bullet point feature obsession.
I hate that 2K thinks that the way to justify asking gamers for $60 to continue in the world of Bioshock is giving them online multiplayer. Or Bungie says that some storytelling innovation in the campaign for ODST--"A new campaign!--and Firefight--a new multiplayer mode!--justify a $60 price tag for an expansion pack. COD:MW2 looks to be giving a whole new, totally immersive storyline with genuinely new experiences for the gamer. That to me is what makes it a AAA sequel worth my $60.
The point I was trying to make is that add-ons neither work or sell and we have history to prove it. Secondly, I don't expect any developer to seriously invest in these devices because they essentially repersent a form of financial risk no developers are willing to take on. I mean just look at the arcade joystick, how many developers outside SEGA,Namco and Capcom who supports them?
It's gonna get messy. It's messy now, but hoo-boy!
I spent over 200 hours on Oblivion, but over 300 hours on Every Extend Extra Extreme. So which one is worth $60 and which one is worth $10?
Oblivion, by the way, was one of the slowest to drop in price, not the fastest. The thing just kept selling and selling.
This problem is the same in the music field. Why is Duffy $16.99 and Beethovenn $3.99 for six hours of music? Quality? Heh. Quantity? Dbl heh.
There are people who will pay full price for almost any game. If you bring your game out at $39.99, you lose the opportunity to sell it to those few people who will pay $59.99 for it. In most cases, peopel either want it or don't, so dropping it twenty bucks only decreases the money in your pocket. It would barely affect sales.
Seriously, how many of you wouldn't have bought Banjo Kazooie at $59, but since it was only $39, you went ahead and bought it? Very few of you, probably. You either wanted it and got it, regardless of price, or you didn't want it no matter WHAT it was priced.
Put it this way, the PS2 launched in 2000, a whole year AFTER the Dreamcast. The PS3 launched in 2006, 6 years AFTER the PS2's launch.
That said, this opinion piece is really only applicable to Microsoft what with the growing amount of evidence that we're receiving on Ars Technica and several other hardware/gaming related sites.
The ones who ARE driving this stupid 5 year cycle are really Nintendo and Microsoft. Think about it, NES ==> SNES ==> N64 ==> Gamecube ==> Wii. And we all know that Microsoft released the 360 some 4 years after the original Xbox was released. Seriously, get your facts straight.
Opinion piece or not, this is incredibly sloppy journalism.
How is this only applying to Microsoft? Sony and Microsoft are embarking on a typical red ocean strategy and are at each other throats. Price cuts! Price cuts! Price cuts! Yet the price cuts aren't driving sales up. The value of the consoles is diminishing. They're not expanding their markets the way Nintendo is.
"The ones who ARE driving this stupid 5 year cycle are really Nintendo and Microsoft. Think about it, NES ==> SNES ==> N64 ==> Gamecube ==> Wii. And we all know that Microsoft released the 360 some 4 years after the original Xbox was released. Seriously, get your facts straight."
I don't think he was saying that Sony itself is driving a 5-year console cycle. What he actually said was:
"The traditional console model works great for most of the industry. However, in recent years, it hasn’t been working for Sony and Microsoft."
The traditional console model he is referring to is more graphics/horsepower/features/online features/hard drives, etc. He is talking about models, not cycles. There is a distinction.
Besides, if you're going to analyze cycles that much, why don't you do further analysis and see that the NES was supported well into 1993. I don't think that Nintendo necessarily wants a 5-year console cycle. After all, the Wii remote was originally developed as a peripheral for the GameCube to extend the console's life cycle to something like 8 years. 5-year cycles just seem to a reality of the past video game market because of competition.
"Opinion piece or not, this is incredibly sloppy journalism."
It's not really journalism; it's an opinion piece. I don't think this guy holds himself out to be a journalist. He is an analyst.
But this opinion piece is actually a complete 180 by Cole and a total cover up for what he said years earlier.
Let us look at what Cole actually said back in 2006:
"So much emphasis has been put on the new control system that it often seems the controller is the platform,” says Cole. “It would probably not be a good thing for Nintendo if the Wii is defined mainly by its controller. The risk is that consumers have fun with the Wii controller for a few months, but the fad passes and they move back to their tried-and-true gameplay methods on a competing system."
Sorry Cole, but we haven't forgotten. You're too little, too late. And you deserve no credit for the unoriginal statements you're making now.
Sean Malstrom beat you to the punch long ago.
None of the major entertainment companies elsewhere think of themselves as being in the business of making video equipment (film/tv), audio equipment (music), or what have you. They think of themselves as content producers. They don't even bother with that nonsense. You don't see Warner Bros fighting with Paramount over who has the best DVD player. It would be stupid.
Same here.
The model worked pretty well for console gaming for decades. There was a recent HD DVD format war in which exclusive titles were claimed (Sony Pictures?). The PS3 hardware was basically the deciding factor for Blue-Ray. It's been obscure, but I think if hardware demands had been the same for movies, you'd see the same proprietary mess. I'm grateful that's not the case.
If it's stupid, what isn't? Remote gaming? PC? Should Nintendo get out of the gaming business or divide itself because its hardware is profitable? To be clear, I'm not asking this in an accusatory manner. If someone says something's bad, I want to know what they find good.
>How is this only applying to Microsoft? Sony and Microsoft are embarking on a typical red ocean
>strategy and are at each other throats. Price cuts! Price cuts! Price cuts! Yet the price cuts aren't
>driving sales up. The value of the consoles is diminishing. They're not expanding their markets the way
>Nintendo is.
True, we call Nintendo's strategy as "disruptive strategy" in IT Entrepreneurship; the strategy targets a greater common denominator that would like to join in the video gaming realm but haven't found it appealing in many ways. It's sort of like what the Chinese are doing by flooding their own market with cheap microwave ovens that aren't of the build and quality as the ones made by GE and other manufacturers.
>I don't think he was saying that Sony itself is driving a 5-year console cycle. What he actually said was:
>"The traditional console model works great for most of the industry. However, in recent years, it hasn’t >been working for Sony and Microsoft."
>The traditional console model he is referring to is more graphics/horsepower/features/online >features/hard drives, etc. He is talking about models, not cycles. There is a distinction.
I understand that there is a distinction, problem is, Cole is clearly talking about console cycles. What would be the point of this exercise of talking about console models if its lifespan doesn't make it beyond the launch of a new "model"? Read this again:
"For Nintendo, the business model for launching a new console system every five years could still work because they focused on keeping overall hardware costs low by not pushing the technology barrier."
>Besides, if you're going to analyze cycles that much, why don't you do further analysis and see that
>the NES was supported well into 1993. I don't think that Nintendo necessarily wants a 5-year console
>cycle. After all, the Wii remote was originally developed as a peripheral for the GameCube to extend
>the console's life cycle to something like 8 years. 5-year cycles just seem to a reality of the past video
>game market because of competition.
By 1993, I already had an SNES with one of those floppy drive adapters that my cousin got for me. By 1993, the original NES was dead as far as anyone cared seeing as how there was a complete lack of marketing support for games released on the NES. Yes, Japan continued to manufacture the NES well into 2003, but by that time there weren't any developers left who would continue to support the NES.
I don't know if it's even fair to mention the GameCube as a viable console considering that there were hardly any 3rd party support for that console, especially not after the N64. I consider a console's life-cycle to be marked by the level of first and third-party support for the console. While it is true that the PS2 is pretty old right now, it's also true that it still enjoys a lot of third party support for the platform. Put it this way, Madden 10 on the PS2 alone outsold Madden 10 for the Wii. >_>
>It's not really journalism; it's an opinion piece. I don't think this guy holds himself out to be a
>journalist. He is an analyst.
Does it matter that much if we call it journalism or opinion piece? I thought that what mattered most are the facts that were used to further an argument/opinion. In Cole's line of work, I'm more surprised that he didn't bother to check his facts at all before pushing his claims. It isn't surprising then that he's gone a whole 180 from what he mouthed off on.
Again, I don't understand what you're talking about with the cycles either. There is no point in blaming 5-year cycles on Nintendo and Microsoft alone. Sega, Sony and other companies had a lot to do with it. Why release an SNES unless there's competition from a Sega Genesis and a PC Engine? Besides, the quote you cited doesn't even deal with your assertion. Cole said that Nintendo could (not desires to) stick to a 5-year cycle. He's probably right. I bet Nintendo could stick to a 5-year cycle. It doesn't mean that they will. The quote is irrelevant.
So the NES probably died around 1993. Bid deal. 1985-1993 (In the U.S.). Does that in any way make the PS2 unique because it survived past a 5-year cycle?
The GameCube is not a viable console? Now you're just being irrational. Sorry, but the GameCube, from what I recall was the only profitable (hence extremely viable) console last generation.
But let's take your viability argument into consideration and apply it logically. Anything selling around the GameCube level is not viable. The GameCube sold nearly 22 million units. The Xbox has sold 24 million units. Under your theory, the Xbox is not viable.
My memory may be a bit fuzzy, but I think third party support may have been equal to or greater than that on the N64. Madden 10 sales don't show us much at all. Multiplatform games didn't sell that well on the GameCube. Recurring theme here.
"Does it matter that much if we call it journalism or opinion piece?" Hey, I'm just using the words you chose. You said it was journalism. If you want to modify your statement be my guest.
I'm not here to really defend Cole, but I just don't understand your arguments. What do you want to prove him wrong about? Cycles? All he said was that Nintendo could do another 5-year cycle.
That's exactly it, but the thing is the tools for our entertainment source advance so quickly so it is hard to ignore. All of this stuff will be solved in time. Once gaming is something that everyone does much like everyone watches movies and we reach a visual peak then there will be a lot less talk about console cycles and the technical stuff behind the scenes and more talk about the actual entertainment content.
A recent exception was the Beta/VHS war, and the more recent HD/Blu Ray one. But even in that most recent battle, you can see how fast the players recognized that it was counter-productive to get into a huge battle over dominating standards. Why? I don't know. Maybe it's a belief in the back of the engineers' minds that there is an actual magic in those media that should be supported - and squabbling over the details just isn't worth it.
The movement to standardize - instead of entering these long, tiresome "wars" to figure out who would "win" out over who else - meant these media could advance to command mainstream significance. Personally, I find it draining and tiresome that the topic of games is so constantly dominated by tedious gossip over which console is beating which, instead of which new game designer is making a difference out there.
If you believe a console shouldn't be $500, then tell that to those gamers who were willing to pay $600 for a Neo.
Anyhow personally I don't have a problem with a console costing $500+ because that price tells me there is more to that console than just the box.
As for the $60 for a game, in reality its nothing a but a rip-off to consumers. Now I understand that developers have to make a living, but $60 is keeping alot of games from moving at retail and you can add the fact its counterproductive to growth.
If anything its a shame how the gaming industry isn't learning from the mistakes the music industry when it come to content pricing but instead is embracing their mistake. If anything in a perfect world the cost of game software would be in the area of $25-30.