In the latest report released by former Susquehanna analysts Jason Kraft and Chris Kwak as part of their new 2K Advisors firm, the duo has projected that Sony will lose meaningful market share this generation, asking who will take this share – Microsoft or Nintendo – by how much, and how that market share will this impact each publisher.
All the momentum and majority market share Sony captured in the decade between the PlayStation's initial release and the launch of the Xbox 360, say the analysts, "appears to be unraveling with haste" with its launch of the PS3. Sony, they add, is "well on its way to ceding its throne in the console war," with Microsoft establishing its early lead with the 360, and Nintendo's Wii becoming the "crowd favorite with its ease of use, controller scheme, and affordable price."
"From a publisher’s perspective," Kraft and Kwak continue, "the biggest question in this console cycle is not whether in-game advertising will generate sufficient high-margin revenue to offset slowing growth in the console business, or whether Halo 3 and Grand Theft Auto IV are going to squeeze third-party titles. The biggest question certainly is not whether digital downloads of AAA titles will become real this cycle, because they won’t. This biggest question is this: What will the market share of the three console platforms look like in five years, and how will this impact each publisher?"
The analysts explain that while publishers "may want to future-proof themselves by developing games and porting to all consoles, they are at the mercy of larger forces," adding that "game development is a larger and longer undertaking than ever before."
"In many ways," say the pair, "EA’s sports franchises are what they are. While EA can adapt somewhat to the Wii and the 360, its sports franchises have been the dominion of Playstation owners. Whereas on the PS2, EA’s NBA Live outsells Take-Two’s NBA 2K by a big margin, on the 360, NBA 2K7 has bested NBA Live ‘07."
THQ's licensed Pixar and Nickelodeon franchises are not likely to attract an older audience just as Rockstar's output won't bring in the under-tens, the analysts say, and "until there is clarity on console market share (and possibly regardless of it), each publisher’s core franchises are at the mercy of each console platform’s identity and audience."
In response, 2K Advisors developed a new metric to study the games market, the Revenue Attach Rate (RAR), in an attempt to show "why Activision could benefit most from a market share bleed from Sony, why Take-Two and EA could be hurt most, and why THQ, contrary to conventional wisdom, does not incrementally benefit at all from a growing Wii market share."
By reducing any given publisher's global publishing sales by a given console's global installed base, the pair arrive at the revenue attach rate, a figure they say is more relevant than simple attach rate, primarily as it captures the price differentials in titles that traditional attach rate does not.
By observing the various trends over the last-gen hardware cycle across all platforms, Kraft and Kwak arrive at the following conclusions for the four major third-party publishers throughout this generation:
EA
GCN was a less revenue generative platform for EA. If Sony bleeds share, EA should hope the blood flows to Microsoft, as XBX was slightly better than PS2 at generating revenue for EA. However, given Nintendo Wii’s popularity to date, EA may have to port more Sports franchises to the Wii, more in the manner of Tiger Woods Golf using the Wiimote and less in the manner of Madden 07.
Activision
Activision should be indifferent to Sony bleeding share to Nintendo, as the PS2 and GCN were equally revenue generative for the publisher. Of all publishers, Activision would benefit most from a Microsoft victory this console cycle, as the publisher of Tony Hawk and Call of Duty generated nearly 2x the revenue on XBX as on PS2 and GCN. Guitar Hero could also drive Activision’s RAR higher, as this title retails for $80 (and higher) vs. $60 for other AAA titles. (That $80 could be higher with an extra guitar attached.)
THQ
THQ is truly the only console-platform-agnostic publisher of the Big-4. Contrary to conventional wisdom, THQ benefits no more or less if the Wii wins, the 360 captures dominant share, or the PS3 maintains share. No matter what the outcome of the console wars, THQ should be unaffected. This flies in the face of conventional wisdom which says that THQ is more levered to the Nintendo console platform. This is just not borne out by the data. Only if one includes handhelds is THQ more levered to Nintendo overall. However, purely on consoles, THQ is truly agnostic. We suspect this can be explained by the various franchises THQ owns, and the eccentricities of each console platform. For example, Full Spectrum Warrior, an exclusive squad-based shooter for the XBX, had a relatively high attach rate. On PS2, the WWE franchise accounted for the top-5 THQ titles in revenue terms. The GCN, while kids friendly, has a lower revenue attach rate given Nintendo’s first-party games dominate that platform and also because these kids-friendly titles have lower ASPs.
Take-Two
Take-Two’s fortunes were tied to PS2 and XBX. While many readers may be surprised to see Take-Two has the same weighted average RAR on PS2 and XBX, it should be noted that Take-Two released many XBX exclusive titles. On PS2, Take-Two released one material franchise exclusively: Grand Theft Auto. On XBX, Take-Two released nearly a dozen titles/franchises, the aggregate of which was material. Regarding GTA, exclusivity changes this time around, as GTA IV launches on both 360 and PS3 this fall.
In conclusion, the pair maintain that "it will be imperative for investors to keep in mind how the various moving parts (higher ASP, longer cycle, changes in attach rate, digital downloads and in-game ads, among others)" impact the revenue attach rate and that the formula itself "should become the defining metric for the video game industry."
