The Console Markets Dirty Little Secret

I'm always baffled by double standards; and with what's occurred in the Console industry over the past few years has been no exception. 

Typically I'd make a comparison between the Console and PC gaming markets but this time around will forego that to keep this topic a bit more focused and succinct. So what am I referring to?  In short: there's been a pretty devastating vacuum left by Nintendo amongst the big 3 Console Mfg's over the past few years with their release of the WiiU.  Yet... we hear little to nothing about the 'Death of Console Gaming'.  So why is this?

When you dissect the information that's out there, both publicly available, cross-checked with other research analysis, I've come to the following conclusions, & or theories as applicable.

  1. There are 3 Big Console Manufacturers (Mfgs) being of course: Microsoft, Nintendo, & Sony.  I believe the biggest competition isn't just merely between each other; but also against the previous generation.  In other words - it's critical for them to re-cannibalize their pre-existing user base.  Not an entirely easy thing to do if there's little to no differentiation occurring in the games that warrants any type of an upgrade.
  2. More players getting in on the game?  So Amazon just released their Console, we have the Ouya, etc that from all appearances don't seem to be revolutionizing the market....yet.  However; can something like Oculus also be construed as yet another Console-like platform to support? At the end of the day there are only so many developers out there, and finite amounts of marketing budgets.  It'll be interesting to see what impacts, if any, these other platforms will have over time.  Also; in some circles, some people view Valve's Steam Machine as being more 'Console' than 'PC'; so it'll be interesting when that also hits the market in force as everyone vies for mind/dollar-share in the Living Room & beyond.
  3. What happened to all those Wii/WiiU users install base?  My personal theory is that a ton of these users migrated over to gaming on Tablet form factors. (iPads, & Android based Tablets)((Yes.. SmartPhones might also be playing a big part; but I believe that's had a more 1:1 impact on the existing HandHeld Gaming Market)).  The significance of all this is pretty huge given that in the 7th Gen Console race Nintendo was easily 1/3rd or more of the "Console Users Install Base".  When something like ~100m Wii's have sold, yet barely an estimated ~5m WiiUs, something is definitely going on.  Those users definitely went somewhere; and judging by the current sales #'s of the 8th Gen Consoles (PS4, & Xbox One), they certainly haven't stayed in the Console Market.  Those dollars, and mindshare, have gone elsewhere.

Some other potential culprits for the exodus occurring away from Consoles to other gaming platforms also comes down to the following:

  1. Consoles by their nature are the antithesis of being an 'Agile' platform. 
  2. Consoles struggle in industrializing, and emerging markets primarily because of 1) Cost, and 2) as a Consumer Electronics Device - they are quite limited.  Often merely being a 1 or 2 trick pony in overall functionality.  So what's the point? Why waste your money?
  3. Piracy is on the rise in big ways on Consoles.  <-- Another dirty little secret of the Console industry. 
  4. Due to the smaller volumes, and unit sales #'s of Consoles relative to PC's, they will never be able to match the scale of economy necessary in order to truly take advantage of the Free To Play business models in meaningful ways.  You need massive scale to pull that off appropriately.
  5. Consumers have become more 'mobile' over time and are increasingly choosing compute devices that are easier to travel with.
  6. Developers are becoming less enamored with Consoles over time and paying the exorbitant royalty fees.

So there you have it.  Some of my thoughts about what's going on in the Console industry. Nintendo has left a huge vacuum; and its still very speculative that a Console lifted ban in China will do much for either Microsoft or Sony.  Especially given the performance of Consoles in markets like S. Korea.  Not to mention that there's already been a long time black market for Consoles in countries like China already.  So do they really net much?  I for one believe it needs some closer cross examination. I'll even go so far as to say that we really ought to start thinking beyond 'fixed function' type devices like Consoles, as it can often imperil those same companies that produce them.  The sunk cost fallacy of dumping billions of shareholder dollar value for such a limited device seems a bit more short sighted, if not antiquated in thinking. 

Curious to get your thoughts on the matter!

 

 

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2 comments

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mad\mployhar's picture

Great perspective Eyal!

Yep... referring to the criticism; not really where I was going with it.  Yes... both PC Mfgs & Console Mfgs have to re-cannibalize don't they?  In essence...you want a repeat customer if at all possible.  Where I was really going with it comes back to my key point that I believe the biggest competitors they have are actually themselves.  Not necessarily a bad thing.

Regarding the comment about the tablets & those Nintendo users.  Amongst my friends with kids - I've seen a ton of this migration first hand. If that's any indication of what's happening more broadly then I believe it's fair to include it as a theory of where some (n) proportion of those users have gone. 

As for the sales of the Consoles.  So far.. not really true.  I didn't include the raw spreadsheet in my findings; but I did post a historical sales model up on the OGA website here: http://www.opengamingalliance.org/member-benefits/research/  Titled 'Life to Date Sales of Consoles'.  The Forecast you see for the 8th Gen believe it or not is actually a very bullish model for them.  I think they only match or exceed those #'s if they're able to get any traction in China.  Time will tell I guess.

As for you comment about the phones - absolutely!  I expect to see a lot more of that over time as software usages continue to migrate from the bigger PC's to more mobile devices such as Tablets & Phones.

Great comments & insights... again.. thank you for sharing them.

Matt

I don't think it's fair to criticise console makers for "re-cannibalising" their existing user base when Intel has practiced exactly that for many years. There's absolutely no good reason to upgrade a 5 year old PC. At least if you believe that new gen games don't offer anything new.

As for the Wii users, those I know fall into two camps: some just stopped playing. They were the ones, like my father, who bought the Wii for Wii Sports and stopped using it just like he stopped using his treadmill. The others, like me, are simply content to continue playing on the Wii. I personally have added an Xbox 360 for Kinect, and my kids enjoy both the Wii and Kinect games. So at least based on this anecdotal evidence Wii users haven't moved elsewhere, they either stopped playing games or stayed with the console.

And why assume that they moved to tablets? Tablets are good replacements for larger PC's (I've personally moved mainly to gaming on tablets), providing good playability in adventure, RPG and strategy games. Thanks to Bay Trail based many PC games can be played directly on a Windows tablet. Tablets are mediocre at action gaming, but they can do it to an extent. But Wii style games? Active games? Party games? How would tablets replace that? I think that people who played such games either stopped playing them, continued playing on the Wii or moved to Wii U or Kinect.

All in all though current gen consoles are said to have sold better than previous gen consoles at the same time frame, so it doesn't look like they are going away soon. In the long run, I think they'll go away. Wirelessly dockable phones make the most sense to me as home entertainment devices (and as productivity devices).

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