Posted by Tiberius Jonez
email
tiberiusjonez@gmail.com
The following excerpt was taken from the final paragraph of
a story I wrote in November 2007:
'My belief is that by 2010, Microsoft and Sony will own a roughly equal 35% share of the gaming market, with the Wii holding a solid 30% market share. My reasoning is pretty simple; different management philosophies will determine the outcome for everyone. The real showdown comes in 2011-2012 when the next "Next Generation" begins.'
-Tiberius Jonez, Editor of GameJonez, Nov 5, 2007
FIRST OF ALL, I LOVE GAMES!
It's no secret that I love gaming. It is my favorite source of entertainment. When done right, gaming has the potential to offer up an amalgam of experiences unlike any medium to come before it. What other form of art or entertainment can you think of that has the potential to deliver an "audience" all the feelings of having been entertained, inspired, moved, tested - not just mentally and physically, but morally and ethically and still leave room for the simple reward or pain of victory or defeat?
Videogames are also an incredibly flexible medium. These complex experiences can run their course in the span of a few minutes or be sustained over a period of days, weeks or even months, allowing for infinite creative possibilities. What other medium can do all this? I challenge you to name one, because I can't.
I think there are two things that fundamentally distinguish videogames from other forms of entertainment. For one, videogames are possibly the only medium of entertainment where the audience is an active participant in the entertaining without ever having complete control over the outcome. And secondly, no other medium stimulates more senses. At any given moment, a good game may be simultaneously stimulating your eyes, ears, sense of touch, cognitive and problem solving abilities, emotional core and even your psyche. With all that going on, I
don't know how many neurons must be firing simultaneously in your brain, but I imagine a cat scan would look like a Kansas thunderstorm. To be sure, games today can be incredibly engrossing, but the medium does have it's fair share of problems, and they begin with...
MONEY, MONEY, MONEY, MUHHH-NEEE!!
It's true, the experiences videogames can give us are far richer in many ways than anything else out there. Unfortunately, I see several forces conspiring together to create an environment where we, as gamers, may have to be far richer to continue playing them.
I believe the gaming industry is at a crossroads of economics and content. To understand what I'm talking about, you have to first understand just how expensive it is to make games these days and how these guys make any money at all. So, let's take a look at a current example.
Activision's highly anticipated game
"Destiny" from
Halo developer Bungie, will be released on current
and next generation consoles and will feature continuing development that will span ten years. To say the least,
Destiny is an extremely ambitious project. The estimated budget for the initial release is slated at $140 Million, and that's assuming no significant delays or problems along the way. According to the
contract between Activision and Bungie,
Destiny will be released first on the Xbox 360/720, and then the PS3/4 and, because of it's colossal budget, it will need to sell approximately 5 million copies just to break even. By comparison, within 24 hours of being released, Activision's last
Call of Duty: Modern Warfare game sold approximately 6.5 Million copies in the U.S. and U.K. alone. So, while I suppose it's technically possible
Destiny could sell that many copies, you have to bear in mind that COD is a very well established franchise with a huge, loyal and rabid fan-base, and while Bungie does have an established track record of success, that was with the
Halo franchise as an Xbox exclusive;
Destiny is a brand new intellectual property (IP) being released on both platforms with no established track record on which to base expectations.
What do all those numbers really mean? They mean that at some point developers have to pass the cost of development onto consumers to maintain their bottom lines and deliver profits to their investors. Games now cost $60 and the pricing structure of the next generation of games has yet to be revealed. With development teams for next gen games numbering as many as 500 people, some analysts are predicting prices as high as $100 for a single game! If history is any indication, I seriously doubt prices will skyrocket that dramatically, but $70 seems like a reasonable expectation. Here's why...
SOME PERSPECTIVE
Historically, videogames have actually been quite inflation-resistant when compared to other forms of entertainment, especially movies. In 1981 I paid $2.00 to see a matinee showing of
Raiders of the Lost Ark the weekend it opened. That same week I used my hard-earned snow-shoveling cash to buy
Atari Football (screenshot below - yeah, that was actually supposed to represent football - and we were happy to have it!!) for the Atari 2600...which, as you can plainly see is one of the most simplistic games you could ever imagine by today's standards, and I paid $50 for it back then. Thirty years later a movie ticket in my area costs between $12 to $24 depending on whether you want to see a standard flick, a 3-d show or an IMAX film. So, let's just take the standard flick; an increase from $2.00 to $12.00 is an increase of 600%. Video games going from $50 to $60 in the same period represents an increase of only 20%...an absolute bargain by comparison...even more so when you compare today's
Madden NFL to that Atari atrocity. I think I'm more than getting my extra ten bucks worth of product. If you had to pay $60 to see a movie, I suspect you'd skip the opening of the next big summer blockbuster. So, how have game prices stayed relatively flat for so long?
 |
Atari Football - $50 in 1981
VS
Madden NFL 2013 - $60 in 2013 |
In the early 80's video games were exploding! They were new, exciting and represented the cutting edge of technology, but in many cases, the games were being churned out by "teams" of one or two people in a day or two for a few hundred dollars. So, as you can imagine, Atari and other developers had ridiculously HUGE profit margins built into that $50 price point, and people were happy to pay it. Nowadays, developers are lucky if they make $2 or $3 per game after all their costs are factored in, and game retailers typically pay $55 for a new game that they sell for $60. Their real profits come from used game sales. Game developers also don't have the luxury of the additional revenue streams afforded movie studios, like DVD sales, cable and public T.V. royalties, On Demand access fees and more.
And so we come closer to the point of this whole story...what all this means to console makers, specifically Sony and Microsoft, and why I believe this is the last generation of consoles we'll ever see released. To understand where we're going you have to first understand where we are and what these two mammoth companies are trying to accomplish.
WHERE DO THE PLAYERS STAND TODAY?
In 2012, Microsoft reported earnings down $1.1 Billion from the same period a year earlier, but I wouldn't feel too sorry for them,
they still reported a net profit of roughly $6.4 Billion, and with an interesting footnote; the Xbox division reported $98 Million spent for research and development
in the final fiscal quarter alone, a clear indication that they've been seriously ramping up R&D efforts for the Xbox720. As creators of Windows, the most popular computer operating system in the world, Microsoft could literally afford to view their Xbox division as a hobby if they wished. They could pull up stakes today, leave the gaming space entirely and hardly feel it; but don't worry if you're an Xbox fan, Microsoft isn't going anywhere. Their plan, spelled out by Bill Gate's with the release of the original Xbox, was then and remains today to gradually transition the Xbox hardware from a gaming-only console to a unified "set-top box" that would eventually allow consumers to control everything from the lights and thermostats in their homes, to their use of the internet and all other audio/visual entertainment with one device, using only their voice as a controller; and
Forbes agrees with me. Solid evidence that their plan is working came recently when Xbox live reported that 2012 marked the first year that the majority of people connecting to Xbox Live were doing so to take advantage of services other than online gaming.
Sony entered the current generation of consoles as the undisputed industry leader. It was estimated during the last generation of consoles that Sony's Playstation 2 controlled an overwhelming 70% of the global console market. However, due to a series of strategic missteps with the PS3 and perhaps by underestimating their competition,
as I predicted in 2007, their lead has all but vanished and, depending on whose numbers you trust, they now find themselves in a virtual deadlock with Microsoft with each company now controlling roughly 35 to 40% of the market with a floundering Nintendo claiming the rest with the Wii and the
thus-far disappointing Wii-U.
In stark contrast to Microsoft's $6.4 Billion profit of a year ago, Sony reported a staggering LOSS of $4.8 Billion in the Sony Computer Entertainment division alone...that's a swing of more than
$10 Billion between the two companies!! Sony's electronics division hasn't been helping much by barely breaking even for the past 5 years. Sony as a whole reported a net profit of $404 Million.
Bloomberg recently reported Kazuo Harai, Sony's new Chairman, wants to generate 70 percent of revenue and 85 percent of operating profit in Sony's electronics from games, digital media, and mobile devices by March 2015. To say Sony has a lot riding on the PS4's success would be a massive understatement. While they are down-playing it publicly, internally, Sony execs know this might be their last best chance to make SCE profitable once again. The very survival of Sony Computer Entertainment could be on the line and the changes they've made in their approach so far with the PS4's release vs the PS3's release reflect a keen awareness of their precarious situation. From firing Ken Kutaragi, to announcing their console first, to embracing a more developer friendly x86 architecture with the new hardware, Sony is attempting to correct past mistakes in hopes of, at the very least, maintaining a level playing field between themselves and Microsoft.
FINDING AN IDENTITY
The biggest problem for Sony in the current generation is the fact that even though they entered the race a full year after Microsoft, they really did nothing to differentiate the PS3 from the Xbox360. As Forbes points out in their article, aside from a very few exclusive titles for both consoles, and the obvious differences between Xbox Live and PSN, for most consumers, both consoles occupied the exact same space and it was really just "a choice between blue pokemon and red pokemon."
But now I see a clear line being drawn in the sand between Microsoft and Sony that could actually end up benefiting everyone.
Sony made it clear with their "reveal" of the PS4 in February that they are getting back to focusing on games, games, games and eschewing many of the other entertainment features offered by the PS3 and Xbox 360. At the same time, recent rumors out of Redmond, Washington suggest that Microsoft has every intention of offering a powerful gaming system while continuing to advance their agenda of an all-purpose entertainment one-stop-shop of services that could eventually end the need for cable.
I see this as a possible win-win. If Sony is successful in reestablishing themselves as the best games maker on the planet, then they have a legitimate opportunity to regain their supremacy in that space.
If Microsoft were to successfully introduce a more inexpensive console that further expands their variety of entertainment offerings, while perfecting voice control and still being a good, if slightly inferior gaming machine to the PS4, they could fill a niche wholly separate from Sony. The end result could be a situation where consumers are adequately motivated to own both systems in order to have access to all the
combined features on offer.
The danger for Sony lies in Microsoft's advantage of knowing what the PS4 is going to offer processor specs-wise and possibly being able to simply one-up them. If they can do that then the PS4 would be in trouble indeed. And if the new Xbox's gaming specs are only slightly inferior to the PS4 but they offer a bunch of other features that consumers want, that could also bode poorly for Sony as consumers will often sacrifice a small difference in graphics if their is a perceived value-gain with everything else included in the package.
THE END IS NEAR...NO MORE CONSOLES AND NO MORE GAMESTOP
And finally, regardless of what happens in the battle to dominate this upcoming generation,
I believe this will be the last generation of true consoles for several reasons, and
I'm not alone. One of the "experts" that agrees with me is well-known Wedbush Securities Industry Analyst Michael Pachter, who also predicted in
2009 that there would be no more consoles after the Xbox360 and PS3. I didn't agree with that assessment at the time.
I had already predicted in 2007 we would have a PS4 and Xbox 720 and that by the time they rolled out, Microsoft and Sony would be virtually tied in market share; and apparently I was clairvoyant that day, because I was pretty much spot on with one exception; I thought the next gen would arrive a year sooner, in 2012.
Now it's 2013 and the environment surrounding the industry has significantly changed, thanks in large part to the one thing that is always toughest to predict; the astounding rate of technological advancement. With the continuing improvement of streaming technology, cloud processing and
Nvidia's GPU processor technology, six years from now it will literally be possible that the only hardware Sony and Microsoft will need to offer consumers is a controller(s) that will plug directly into your TV. The "consoles" will exist completely in the cloud.
One immediate result of this transition will be the almost-overnight destruction of Gamestop and all other brick and mortar videogame retailers, and trust me, nothing else would make Sony
and Microsoft happier. Whether they admit it publicly or not, stopping the sale of used games and ending piracy stand at the very top of both company's long-term agendas. Streaming everything solves both of those problems instantly while greatly reducing publishing costs.
No more consoles means no need to manufacture hardware for every consumer. Factor in the elimination of all the costs associated with production, servicing, warranties, packaging, shipping, energy and real estate costs as well as all the salaries and benefits of the employees required to run all those operations; in the final analysis, I just can't see how both companies can avoid coming to any other conclusion...producing more consoles simply no longer makes good business sense.
So, enjoy your physical discs while you can because I don't think you will see them anymore after this generation.
I would love to hear your comments below.
As always, thanks for visiting GameJonez. Game on!!
Rumors are flying that the percentage to retailers may be as low as 10%, which could effectively kill used game sales due to the fact that retailers would have very little incentive to go through all the work required to sell used games for such a small profit margin.
