Development, Publishing, video games

Climate Change: Games hardware cycles to be disrupted by the new mass market consoles

August 2007

In an industry where change is continual, there has been one constant for decades – new generations of console arriving every 5-6 years, stimulating waves of investment and innovation. But there are signs that this predictable tidal motion of investment in technology, with console releases largely synchronised with a market leader and consumer sales surging to heady peaks and perilous troughs, might be disrupted next time. Signs of climate change abound.

Sony’s multi-billion dollar investment in Blu-ray and Cell, the high starting price point of PS3 and longer expected sales curve, SCE’s financial impact on Sony Corp and the metaphoric sepuku of Ken Kutaragi suggest that replicating such investment next time will be at least difficult if not economically unsustainable. The traditionally long PlayStation shelf-lives, which offset earlier loss-making years, could be elongated even further for PS3 as Sony seeks to recoup its record initial investment from a market it no longer dominates. It is clear that the difference between PS3 and its successor won’t be as dramatic as last time: a viable new HD format is unlikely for the foreseeable future, and semi-conductor limitations continue to deliver increasing complexity and diminishing returns in processing power. God of War 2, possibly PS2’s best game yet, arrived 7 years after the console’s launch; getting the best out of PS3 may take just as long. Future Sony generations will be more iterative and evolutionary than the last revolution, and Sony’s cycles will not dictate the industry’s pattern of growth as they have in the past.

Nintendo’s Wii is a cheaper, less advanced and more accessible platform for all concerned. The Wii is not a fad that will peter out like the GameCube, but nor will it, in our view, reach PlayStation longevity. Nintendo has been unafraid to rebase its addressable market regularly, having released four different handheld platforms in seven years. It’s even possible Nintendo’s management may be tempted to bring a higher power, competitively priced Wii 2 to the market just as PS3 comes within reach of the mass market.

The tidy procession of this generation has already been disrupted by Microsoft’s relatively early launch. Microsoft is looking for measures to keep its lead. 18 months after launching 360, the souped-up Elite is already on the market, faster than other console hardware revamps historically, suggesting an accelerated and more iterative cycle. The technology inside PlayStation 3 probably has years more shelf-life than its equivalent inside the 360. Growing pressure on DVD’s capacity to store today’s huge games might in a few years force Microsoft to turn to HD-DVD as a games medium, which would effectively dissect its market resulting in further cycle disruption. While Microsoft will no doubt support 360 longer than Xbox, it’s already out of sync with Sony and Nintendo, and there’s every chance it will speed 360’s successor to again win a perceived timing advantage over Sony.

Nintendo has increased pressure on competitors to reach new audiences, a call which Sony has already successfully, and Microsoft largely unsuccessfully, heeded. 360 seems stuck with hardcore branding and software, classic old-school interfaces, and marketing which sidelines the mass market as the wives and sisters of its primary hardcore audience. Breaking out of that silo will prove difficult and as the market moves on, pressure on Microsoft to reinvent its console to become more mass-market friendly will build.

Evidence of this changing climate is already emerging. This cycle has proven unique thus far, with a radically changed market prospects for each manufacturer, Sony in the unfamiliar position of playing catch-up and with studios and publishers forced to support a far larger number of commercially viable games platforms than before. Though still driven by hard-nosed decisions based on software attach rates and sales momentum, each console manufacturer’s cycles looks likely to become increasingly out of sync with each other, characterised by smaller iterative releases. This may well result in easier technology learning curves, smaller hardware cycles, less pronounced industry cyclicality and smoother industry growth overall. However, for publishers this changing ecosystem questions the viability of major cross-platform releases for an increasingly fragmented market. Conserving R&D resources will become increasingly important as the industry’s seasons are disrupted.

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