[Opinion] The sunk cost fallacy of Consoles and why they’ll likely die out as we know them today

Published: 08/25/2011, Last Updated: 08/25/2011

Most people who know me know why I’m not a fan of Consoles; but I figured I should probably explain myself more fully to those who don’t. I’ll pitch my ‘metric-system’ concept for Gaming in a future post. Suffice it to say that my approach is based on the following line of thinking. First; imagine that you needed a special TV to watch HBO’s Game of Thrones, then another TV to watch ShowTime’s The Tudors, then in order to watch the Super Bowl you needed … yes.. yet another TV. This is exactly what we’re dealing with in the Games Industry today and it’s pretty ridiculous when you stop and think about it.

First the sunk cost fallacy:

I just recently read an article about one of the big Console Manufacturers (which I’ll refer to as Mfgs) financial results. They reported quarterly revenue reaching over a billion; but after all costs netted less profit than what some PC games will take home in a month. The math pointed to roughly a 2% margin of profit. Ironically this was an awesome year for them based on their performance over the last decade! In a word – ouch. However; to be fair, it’s not just this one Console Mfg that’s been struggling. I think the argument could be made that they all are but for varying and different reasons. Remember; its not always about how much revenue you generate, but what you take home that matters most.

This begs some deeper questions and scrutiny. Are Consoles really that profitable? When they are – who stands to gain the most? If one follows the money, and we should, I think the results would astound most people. The academic approach here would be to 1) find someone dumb enough to pick up the costs of building the box and bleed some money to them. (No dummies yet - thankfully). 2) don’t do much from a 1st party side (Where costs & expenses tend to be higher) but instead convince 3rd party that they’re getting some value, charge a royalty (aka tax or toll) for the ‘privilege’ of bringing your content to a proprietary platform. Sounds great doesn’t it? Well… not for most developers. This line of thinking has a very long, and distinguished, trail of dead ISVs bodies who bought into the hype. A good portion of those who didn’t die were acquired or subsumed, gave up controlling interest in their intellectual property (IP). This in my definition is like giving up the keys to the kingdom and is where the real value resides. NEVER give up a valuable IP.

Hype? Most likely. Based on performance we have to wonder if the emperor’s have any clothes. For all the propaganda spread about PC Gaming dying the reverse has been true. There have been two Consoles that died in the last decade and PC Gaming is quite frankly steaming along and picking up even more momentum than before. Does anyone think that the ISVs who made content for those two dead Consoles are happy about it? However; there are deep pockets indeed with the belief that there is money at the end of the proprietary rainbow by trying to migrate, or cannibalize, PC Gamers over to x, y, or z Console. When all is done and said there will be some interesting articles written about the Post Console era.

Second why they’re a dying breed:

Again – there were 2 Consoles that died in the last decade. We’re likely to see history repeat itself again in this decade.
The future of Consoles? There isn’t. Ask yourselves this. Are Consoles looking more like PC’s; or are PC’s looking more like Consoles? Which of the two devices existed first and which is in the best position to exist and evolve moving forward?

Why are so many consumers beholden to them? The combined 7th Generation of Consoles (Wii+360+PS3) manufactured is something north of 180 million units to date. The ‘active’ Install base though is more likely hovering around ~120-140 million consumers. This is still pretty substantial no matter how it’s sliced and diced; just remember to roughly divide by 3. I think it boils down to 1) Ease of use. Consoles just work. 2) Cost of ownership. They’ve become rather cheap and will likely continue to do so to be competitively priced against PCs (Laptops/Slates/Desktops) which continue to also drop in price. What is more fascinating to me though is the question that isn’t asked so often. Why don’t we have an easy to use, friendlier User Interface for PCs? It could be argued that Apple (if you consider them a Personal Computer) tends to deliver friendlier UI’s. I just think it’s a crime we haven’t seen this on PC’s yet. Seriously; it’s not that hard. For example look at what the open source community delivered UI-wise for all the hacked Xbox 1’s; while multi-billion dollar conglomerates can’t deliver something as compelling? Really?

I believe that in the quote unquote “Post PC Era”; which is another overly used phrase, we’ll also see a “Post Console Era” in lock step. Here are my top predictions, most of which leads up to the forcing function to obsolete & accelerating the death of Consoles.

1) More Gaming will move ubiquitously to the cloud.
a. *Impact* Why do we need a proprietary device if the game plays on the Web?
b. *Impact* Since most games that play on Consoles aren’t largely latency bound this will eat at the margins necessary to fund future Consoles.

2) More Gaming will continue to adopt free to play.
a. *Impact* This has been working very well for PCs; but not likely to pan out so well for Consoles? Why? Due to the low attach of F2P on Micro-transactions you need a very large TAM to make it sustainable. PC’s have around 600 million households to tap into. Whereas Consoles, which are lucky to exceed 50 million households. Free to play is far more interesting, and flexible from a consumer’s standpoint, when faced with $50-60 dollar game price tags.

3) Piracy and Secondary Sales are a double whammy against Consoles
a. *Impact* Consoles, which are primarily subsidized by the games, are doubly at risk with secondary sales and the rise of piracy. Secondary sales should really read more like Secondary, Tertiary, Quaternary, & so on sales. Also; one today can simply, and legally, loan a library of games to their friends.

4) Globalization or Cost is King. (Take your pick)
a. *Impact* There are several countries coming out of an emerging status and maturing. Their middle classes are expanding and they have more money to spend and consume. However; there is still a huge disparity in their disposable income rates. A PC, SmartPhone, and TV will continue to be prioritized.
b. *Impact* Globalization takes our TAMs from 10’s of millions to 100’s of millions. There’s a multiplying effect going on here that cannot be under estimated.

5) PC, SmartPhone, and TV being prioritized (Repeating intentionally)
a. *Impact* One would think the Console Mfgs know about this? They do, and some are very likely going to seek ways to bring their ‘proprietary tax system’ over into these devices next. Stay tuned for future announcements on this front people. I can guarantee we’ll start seeing the tip of this iceberg over the next 18 months.

As you can see there are quite a few things mentioned in just these five predictions that are going to make it tough for Consoles to continue to exist as we know them. Consoles to survive will have to make some dramatic and sweeping changes to stay relevant.

In closing:

At this point some people might be wondering why I’m so dead set on proprietary? I admit there are some advantages; nothing after all is 100% bad. Proprietary devices can offer very rich and compelling experiences. A co-worker proposed a potentially better compromise, and term, between completely open and proprietary that he calls a ‘managed’ experience. I’d lean towards a better managed, but more open ecosystem any day over something that is 100% locked down and proprietary. Be that as it may the reality of the situation is as follows. You the consumer bought the content. It is yours and you should be able to access it on the screen of your choice with the least amount of hassle and least amount of nickel and diming along the way. The UltraViolet (from DECE) initiative, but for games, might not be a half bad approach. Isn’t it high time that we as consumers started scrutinizing this a little more?

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