Videogame consoles, typically, spend about five or six years in the spotlight, before stepping aside for the next generation. The current cycle, though, is now entering its seventh year - a longevity that many analysts and publishers blame for the malaise that has affected the shares of game makers.
Video game consoles, typically, spend about five or six years in the spotlight, before stepping aside for the next generation. The current cycle, though, is now entering its seventh year - a longevity that many analysts and publishers blame for the malaise that has affected the shares of game makers.
Sony (Tokyo Stock Exchange: 6758.T-JP), on Feb. 20, is expected to unveil the PlayStation 4, its entry in the next generation battle. The system is more than the start of a new cycle, though; it's an essential step in rebuilding Sony as a corporation.
"In many parts of the world, [Sony] is bordering on irrelevance compared to where it was 12 years ago," said P.J. McNealy, CEO and founder of Digital World Research. "There's still a core market segment that loves the brand, but that market share is shrinking. They need to raise their base."
Sony president and CEO Kazuo Hirai rose to the top through the PlayStation division - and he has declared the game console as one of the three pillars the company will rebuild itself on (along with mobile and digital imaging).
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The PlayStation 2, which made its debut in 2000, is the best selling console of all time - moving more than 150 million units. The PS3 has fallen short of those numbers, though. (Research firm International Data Corporation estimates life to date worldwide sales currently stand at around 77 million.)
"This was a very disappointing cycle for them," said Eric Handler, senior equity analyst of MKM Partners. "They definitely lost market share. ... Their whole marketing message at the time was 'we're the most powerful machine' but what the Wii showed us was ... people want to buy a console that has the most entertainment value. Machine strength isn't the Holy Grail. So they've got an opportunity here to show they have an interesting, compelling product."
Entertainment value is a phrase that gets thrown around a lot in the video game industry. Console manufacturers use it to justify the sometimes-high prices of their systems, arguing that they're much more than game machines. Sony has been particularly fond of it - even as critics howled at the initial $600 price tag on the PlayStation 3.
But with the evolution the videogame industry has gone through this generation (with the rise of mobile gaming as a viable competitor and free to play games), value is something that's bound to be on consumer's minds as they shop for new systems.
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That puts pressure on Sony to not only demonstrate the new capabilities of the PS4, but to keep the cost at a palatable level for consumers.
"They need to show that they've figured out social, that they've figured out free to play, that they've figured out a value proposition that doesn't start at $600 and they need to figure out what their brand means now," McNealy said.
The initial introduction of the PS4 will impact companies beyond Sony, of course. Nintendo shares could be affected if the system seems to noticeably dwarf the capabilities of the Wii U. And Microsoft (NASDAQ: MSFT) investors will be watching closely as that company prepares to introduce its next generation console as well.
One stock to watch also is GameStop (NYSE: GME). Rumors of Sony (and Microsoft) including technology that could block players from running used games on their new systems have been swirling for months. And while analysts doubt those whispers will prove true, they say it's something investors will be monitoring.
"There are very interesting implications for GameStop and whether we're going to have a gang war between retailers and the console manufacturers," Handler said. "Are they going to put in a stopgap measure so you can't play used games on these consoles? Obviously, that has huge implications for GameStop next week."
(Read More: The Most Anticipated Videogames of 2013 )
The videogame sector as a whole has been climbing slowly recently. And the major publishers - Electronic Arts (NASDAQ: EA) , Activision (NASDAQ: ATVI), Take-Two Interactive Software (NASDAQ: TTWO) and Ubisoft (Euronext Paris: UBI-FR) all stand to gain from a fresh console cycle. Handler, though, has a favorite from that core four.
"I like how Activision is positioned," he said. "Call of Duty was the top franchise this console cycle and that should carry over well into the next generation. ... But what I really like about Activision is if they can get the Bungie game ['Destiny'] out in time for the holidays, what better way to take advantage of a new console cycle than with a new franchise from a developer that is one of the top three in the business?"
(Bungie is the inventor of the "Halo" franchise - and signed 10-year publishing pact with Activision in 2010.)
Some bears are likely to dismiss the unveiling of the PlayStation 4 as a last gasp of a dying breed. Critics argue that the age of home consoles is coming to an end - pointing to things like the slow start for Nintendo's Wii U and the rise of smartphone and tablet gaming as evidence.
But bulls counter that systems like the PS4 have evolved - and will continue to evolve - into something that's about more than video games. And that, they say, ensures they will continue to find substantial audiences.
"There's a rush to pronounce consoles dead," McNealy said. "But that's just not going to happen. We have at least one more hardware cycle. Just as a phone is no longer just a phone, a console is no longer just a console. These devices will still be worthwhile and it will be a nice package to get entertainment into the home."
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image: © Michel Ngilen