video games

The Generation Game

May 2010

A number of industry figures have expressed their belief that the games industry will not see another major new generation of consoles. Their hypothesis is that the future of console hardware lies in steady evolutionary footsteps and increasingly open platforms rather than the large-scale proprietary technological leaps that have periodically punctuated the last 30 years. They often argue that the investment required by Microsoft and Sony in competing at the cutting edge is simply too onerous and no longer economically viable. They also often highlight the rapid rise of server-based gaming and its lower client-side hardware requirements. Should such a change take place, it would have a truly profound impact on the games industry. Developers would be forced to re-appraise their approach to content, tools and middleware development. Publishers’ financials (and share prices) would no longer be slaves to cyclicality. Consumers’ buying patterns would be profoundly altered. Given that console software sales represent over $25bn/annum, there is much at stake. But how likely is this game-changing prediction to take place?

Clearly, only the console manufacturers and their close industry confidantes know at this stage. However, I believe that we will see a major new generation of hardware launched in the next 2-4 years and that proprietary consoles will still be on sale in 10, even 15 years time. Here’s why. 

Console manufacturers invest in proprietary hardware for one overriding reason: control. Having complete technical and legal control over their own platforms allows them to justify levying fees for every game disc manufactured and unit distributed digitally. These fees typically subsidise lower hardware retail prices which drives demand for both hardware and ultimately software. They are acceptable to publishers as a result and make the console manufacturing business model viable (in the long term, at least). It is difficult therefore to envisage Nintendo, Sony or Microsoft relinquishing control over their own hardware and easy to see continued investment in proprietary technology and closed platforms to maintain their fee justification.

Whilst Nintendo has opened up the casual console games market, the bedrock of both Sony and Microsoft’s strategy remains the hard-core gamer, a species that is fewer in number but considerably more valuable per player. These gamers’ purchasing decisions are driven by various factors but they are unique in expecting continual improvements in game technology sophistication. For Sony or Microsoft to drop out of the technology arms race that feeds this consumer demand would be to retreat from the hard-core market (as Nintendo has so successfully done albeit under duress). This would represent a huge strategic risk for the exiting company and give the survivor a monopolistic market dominance. Microsoft and Sony are tied together in this arms race, whether they like it or not.

But could the console manufacturers simply move to smaller, iterative but still proprietary and cutting-edge hardware releases every 1-2 years rather than $2-$3bn blown on a single platform every 4-6 years? Superficial features (like smaller form factors, larger HDs) and interface innovations (e.g. Natal, Move) have been used for several generations to extend platform longevity but these are not really console iterations; they do not fundamentally improve the specification and performance of the underlying platforms. As Sega found with the Mega-CD, the idea of iterating platforms gradually is flawed in three critical ways: player fragmentation, development resistance and consumer confusion.

Whilst the installed base of consoles only ever increases, the active player base follows a parabolic growth curve which, after many years and at its peak, can reach up to 50-60 million players for a single console (c.50% of PS2’s installed base). Games publishers tend to experience their greatest individual and collective software sales during this period usually recording their best financial results too. In contrast, they often go into loss during the platform transition years when the active user bases bottom out. More frequent iterative hardware launches would fragment the addressable market of active players into smaller silos of those with and without the new hardware. More importantly, it would prevent the overall active user base gaining a sufficient critical mass to support the sort of software sales the publishers need to compensate both for climbing per-title development costs and more broadly for the transition-based down years.

Developers make significant up-front investments with the advent of a new platform to build best-of-breed technology and amortise this cost over as many titles and for as long as possible. Moving to iterative hardware could severely disrupt this – developers would have to make those up-front investments on a more regular basis and be less able to get to grips with the new technology and amortise this cost. They would end up having to create multiple versions of the same game and would likely still end up prioritising the lowest common denominator, the original platform, as it will have the largest installed base. This would contribute to the inevitable player confusion and annoyance when faced with multiple hardware requirements to access different functionality within the same game as well as the marketing challenge of highlighting what those requirements are.

The console hardware market is undoubtedly undergoing substantial changes: the demography of gaming has broadened hugely, Microsoft and Nintendo aim to extend their current platforms’ cycles (driven, in part, by increasing cosmetic and interface innovation), digital distribution is becoming increasingly prevalent. However I do not believe that any of these will alter the continued use, in particular by Sony and Microsoft, of the traditional model of periodic major new platform launches. And for that, games developers and publishers should be very grateful.

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