If you consider it from a certain angle, nothing about the modern console market makes sense.
Last year, Sony and Microsoft launched two machines, the Xbox One and the PlayStation 4, which are expensive to produce and really expensive to buy. They are designed to last a decade, but already the architecture inside them is dated compared with current generation PCs; furthermore, they're competing in a consumer electronics market where mobile phones have introduced an annual generational turnover. Nothing lasts a decade anymore.
There is a feeling among industry pundits and analysts that the specialist console business is dying. The argument is that smartphones and tablets, devices which offer simple and compulsive games to a new generation of digital-native casual users, have had such a disruptive effect on the sector that nothing else can ever work properly again. In March, TechCrunch ran an article entitled The Console Market Is In Crisis, which used NPD sales figures from 2007 to show how culminative console sales have dropped dramatically:
Whatever the exact truth of the new generation of consoles sales – and it is still certainly early days for the PS4 and Xbone – it looks pretty clear that the console market overall has a big problem: aka the C-word, market contraction.
It’s not just new flagships failing to sell as well as new consoles used to; previous generations of consoles are evidently not sustaining long-tail sales as once they did either. Sales of the PS3/360/Wii are declining at an alarming rate compared to the transition from the prior outgoing platforms (PS2/GC). Those consoles stuck around selling in larger numbers for longer than their current-gen equivalents so there’s a wider market collapse going on.
Collapse? That's decidedly apocalyptic. But then days later, the blogger Eric Johnson quietly pointed out that the TechCrunch figures were US-only, were restricted to one month of sales and were skewed by the runaway success of the Wii, which was something of a phenomenon, a historic one-off. He had another look at those sales figures, and he came up with something very different when analysing the performance of the PS4 and Xbox One as compared with their respective predecessors:
Let’s look at not just a month, but their first three months on the US market, from a mid-November debut through January of the following year.
The Xbox 360 racked up 326,000 US sales in November 2005, 281,000 in December 2005 and 250,000 in January 2006, for a total of 857,000. The Xbox One, meanwhile, sold 909,132 units in November 2013, 908,000 in December 2013 and a rumored 134,000 in January 2014, for a total of 1.95m.
How about PlayStation? The PlayStation 3 scored 197,000 US sales in November 2006, 490,700 in December 2006 and 244,000 in the US in January 2007, for a total of about 931,700. Specific numbers for its successor, the PlayStation 4, have been more tightly locked down online but we know that it outsold the Xbox in November, lost in December and moved a rumored 280,000 in January. Given that it’s currently outselling the Xbox One worldwide by about 6m to 4m, let’s guesstimate the total was also at least 2m.
In effect, both Xbox One and PS4 have doubled the opening three-month sales figures of their immediate forebearers. And this is a crisis?
Let's look at the most recent figures. Sony has sold 7m PS4s since last November's launch, while Xbox One has shipped 5m Xbox Ones. That's in four months. According to Sony's own financial records, it took almost a year for PS3 to reach 6m sales – and the figures for Xbox 360 are similar. Sure, the launch climate was different back then – PS3 had a stuttering international rollout due to issues with its Blu-ray drive, but if we're going just on figures, things are looking OK for the new machines, aren't they?
"There are a lot of strong opinions out there on the demise of the console market," says Piers Harding-Rolls, head of games at research specialist IHS Technology. "I think a balanced analysis correctly identifies that the market landscape has changed a lot from the last generation, but what is clear is there is still a sizeable audience for high-end TV-based games experiences. While the sector is increasingly ripe for disruption – it has remained relatively untouched unlike the specialist handheld sector – until there are alternative connected TV devices or more powerful tablets that give comparable experiences, the incumbent consoles still have a role to play."
Meanwhile, one of the potential interlopers on the specialist console scene has crashed and burned in quite spectacular style. When the Android-based console Ouya rocketed on to the crowdfunding site Kickstarter in 2012, making almost $9m, analysts wondered if this machine may make a dent in the sales of the big consoles. After all, it was cheap at $99, it had cool indie credentials and it was based on an open Google operating system which should have meant lots of software support. Suddenly "micro-consoles" became a thing and we had rivals such as the GameStick and Nvidia's Project Shield arriving in quick succession.
But when Ouya finally launched, the reviews were muted and the mass of dedicated games never materialised. Indeed, it has recently been disclosed that the best title on the system, Towerfall, sold just 7,000 copies. In March, Ouya announced that it would be shifting focus away from hardware towards becoming a sort of Android-based platform for smart TVs and set-top boxes. "What makes Ouya is not the physical hardware, but the fact that it is made for games built for a TV," said founder Julie Uhrman to The Verge. But then, why would developers choose to restrict their titles to a subset of the Android market when they could simply write games to support a range of devices and platforms? Meanwhile, GameStick is struggling and Nvidia is very quiet on Project Shield. And PlayStation 4 and Xbox One seem to be doing OK.
Will that continue? That is the real question. A developer friend told me recently that you can pretty much discount the first 5m sales of any big console platform – those are the hardcore, early adopters; they'll buy the latest Sony or Microsoft machine as a matter of course. The real test comes after that – the real test is the 40-100 million extra consumers you need to attract in order to have a successful machine. It is all about momentum.
Why down may be up
In March, research firm StrategyAnalytics released a report on the future of the games industry. Below its headline proclamation that the total games industry will grow by 10% in 2014, hitting $62m, there were some downbeat facts on the console sector. The document points out that around 28m consoles were shipped globally in 2013, half the volume shipped five years ago, and it provides this table to illustrate how the market has shifted:
Here is another one that shows how the console's share of the market has shrunk:
But then, StrategyAnalytics does not see in this a Doomsday scenario. "The missing piece is Nintendo," says Eric Smith, analyst at the firm, repeating a now familiar mantra. "The Wii U cannot recapture the Wii’s success because many of those gamers have moved on to tablets and smartphones for casual and kids games. Handheld consoles like PSP, PS Vita, and 3DS are suffering a similar fate and denting the overall console market in the process.
"Still, it’s a little premature to start writing obituaries. Microsoft and Sony broke console launch records in 2013 shipping a combined 7m units in six weeks, demand for the PS4 is forecast to outstrip supply until mid-summer, and Xbox One will be launching in over a dozen countries later this year. There is a lot of life left in this nascent generation and we expect that core gamers will gravitate to PS4 and Xbox One as more exclusive titles and innovative features of the new generation are exploited."
Another way to look at the current games industry is that the arrival of disruptive platforms is about the expansion of the whole market rather than the contraction of the console sector. Smartphones have brought whole new audiences into the medium, normalising the idea of adults settling down to half an hour of gaming in the evening rather than watching Eastenders or going on Facebook. As Smith puts it: "With hundreds of millions of new mobile gamers being created every year, traditional console vendors need only to convert a marginal percentage of them to reap big rewards."
Video game consoles are much more multifaceted these days too. Xbox One's brave(ish) new(ish) world of interactive TV services and on-demand content may have fallen flat with hardcore gamers, but perhaps it will resonate with more casual users as they seek alternatives to aging set-top boxes and cumbersome DVD collections. Furthermore, we have the prospect of virtual reality entertainment on the horizon – and it'll probably be the consoles that offer the most robust and reasonably priced solutions (although Valve may still have a role to play with its Steam Machine concept).
And even micro-consoles may have a role – just not the role we thought they would back in 2012. "I don't see much broader commercial opportunity for small independent players such as Ouya," says Harding-Rolls. "But if large consumer electronics vendors commit to a more developed games offering across general connected TV devices or indeed towards their own Android consoles – as we are seeing from Amazon in the US and Huawei and ZTE in China – then there is grounds for more optimism around the ability of these devices to pick up home gamers. Certainly China will be an interesting market to watch with regards to adoption of both the Huawei and ZTE Android consoles as there is no official console market there of note at present."
Revenge of the killer apps
What we have seen with the two big mainstream consoles this time round is a much more cautious approach from game publishers. Games website Kotaku recently ran an interesting piece on how this is the weirdest console transition ever, because many of the biggest profile releases are last-gen (Assassin's Creed IV, Tomb Raider), or actual upscaled ports of old titles (The Last of Us); plus, the Xbox One's supposed killer app, Titanfall, looks almost as good on Xbox 360.
Forget smartphones for a second, this could be the real danger for Sony and Microsoft. If third-party publishers remain nervous about slinging their support behind the new machines, if they keep hedging their bets with cross-generational releases, they risk bringing about the scenario they fear: poor consumer take-up of the latest platforms. This year's E3 event in Los Angeles really has to provide a few more exciting battles than Titanfall v Infamous: Second Son to keep the momentum going.
Smartphones and tablets have disrupted the market, but disruption isn't necessarily annihilation. The one thing certain to kill a console is the lack of software diversity; the lack of experiences that people want to have and talk about and share with friends. The game's the thing, and this should never be overlooked in the analysis of financial figures. If Sony and Microsoft manage to unveil truly fascinating and thrilling new titles at E3, titles that genuinely rely on the power on the next-gen machines, they can certainly hold off that much-predicted mobile gaming apocalypse for a few more years.
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