Five things that put the console business at risk of falling like the PC market

A recent article by Horace Dediu of Asymco points to the demise of the fixed and portable console business with the advent of the smartphone, concluding that Gaming, as a business, cannot be sustained as a platform independent of a general purpose computer. As if to echo this opinion, Nintendo stock dropped 8% on Monday as it failed to re-enter the Nikkei index.

Mike Wehner posted on TUAW that Smartphones would have little effect on console gaming as we know it. His argument centers around low sales being part of the natural 5-7 year end of lifecycle of the current generation of game consoles, and that couch-based console gaming is a completely different game experience that that of playing Angry Birds on a smartphone.

Dediu may not have built the most decisive case to demonstrate his theory, but I believe he is more right than not, and people like Mike are not anticipating the full effects on the console business of the tidal wave of smartphone/tablet gaming.

The console business is at an inflection point that is similar to that of the PC industry a couple of years ago.In 2009 I gave Msft a thorough analysis of the impact of mobile and cloud on the productivity software market. I warned Msft that while Office would remain king of its hill, users (and competitors) were running around the hill, emboldened by the freedom and flexibility of the smartphone. The PC was on the verge of losing its prime position as best platform for productivity as users were being productive using different tools and processes through their Smartphone.

It seems unavoidable that consoles will have a similar fate – they will remain the best big tv-connected entertainment system. But Smartphones and tablets are running circles around consoles, capable of offering increasingly sophisticated games just about anywhere, including from the sofa in front of the big TV.

Here are 5 things that can contribute to console gaming’s disruption:

1) The rate of growth of the console installed base is too low to fend off mobile gaming

The current generation of consoles totals around 250 million units shipped (all manufacturers). The previous generation was at around 200 million. That is only a 25% total growth over a 7 year lifecycle, or about 3.5% growth per year. Contrast that 50 million console installed base growth to the growth of smartphone, that in the US alone grew from a base of 88 million to 170 million units between 2010 and 2012! Apple last week announced that they have shipped 700 million iOS devices in 6 years. Apple alone…add to that the hundreds of millions of Android devices, and you have a volume of mobile devices that is 10x that of consoles.

2) The tidal wave of smartphones is pushing down the share of couch gaming minutes on consoles

It is simple math, by having to share couch playtime with smartphones, the console see their share of playtime drop. And it is very likely that the volume of console playtime is also under pressure (ie. smartphone couch playtime cannibalizes console playtime). As we see in the PC world, when a technology loses user focus, purchase patterns follow, impacting growth, revenues and profits. Consoles will continue to sell, but growth is going to be very hard to sustain, and if total volumes decrease the console ecosystem will no provide enough oxygen for three contenders to survive and thrive. Some will have to exit or all will operate in very difficult financial conditions.

3) The console business model is obsolete

Recouping the investment on the console hardware by having to sell multiple $60 games purchases is obsolete in a world of smartphones sold at a profit (to carriers who pay the subsidy or to consumers full price unlocked) upfront and games available between $9.99 and $0.99, with a great many games using the freemium model. The smartphone gaming model puts the most pressure on the most sensitive part of the console business model – the necessity to sell multiple $60 games with each console to make money. Assuming that the major console game franchises (Call of Duty, Halo, Mario, etc) can sustain their enormous sales volumes at a $60 premium, over time, things get more and more iffy for less grandiose titles that can more easily be substituted by their equivalent on a tablet or smartphone, at a fraction of the cost. If the repeat purchase of premium priced games slows down, the whole console business model becomes unsustainable.

4) The console hardware engineering model is obsolete.

Console manufacturers lock their engineering specs for 5 to 7 years cycle, partly to keep the platform stable and facilitate game development but mostly to allow sufficient time to recoup the engineering and initial cogs subsidies. Smartphones and tablets get refreshed every year, for a substantial boost in graphics and processor (and other technologies) capabilities with each new generation. Consider that in the 6 years (~ 1 console cycle) since the launch of the original iPhone, Apple has boosted the iPhone CPU performance by 56x! All the while, the CPU of the Xbox 360 on sale today has the same processing capability as the one launched 8 years ago in 2005! This engineering cycle puts the console at a performance disadvantage, it also makes it much harder for consoles to offer new gaming experiences based on technologies made available after their market introduction.

5) The two principal value propositions of the dedicated game console are obsolete

As home PCs were becoming ubiquitous in the late 90s, the console maintained their position by providing two key benefits over PCs: simplicity and comfort of use. Playing a console game was a matter of turning the console on and plugging the game in. And the consoles were connected to TVs in front of sofas, providing a comfortable setting for gaming. By comparison, playing a PC game required using mouse and keyboards to navigate the Windows interface, manage graphic and audio drivers, all the while sitting at a desk in an office-like setting.
Smartphone and tablets have not only taken these two console advantages away, they’ve even made them better. Tablets and smartphones are essentially always-on, they do not require disks or cartridges to access games, they can be played in a sofa…or a bed, a car, a plane…essentially anywhere!

Disruption typically comes at the expense of an industry, but to the benefit of the end users. Clearly, couch gaming is doing very well. Kids and gamers continue to enjoy playing sitting in a sofa, solo or with friends, offline or online. What has changed is that consoles have to share that sofa time with smartphone and tablets that have proven to be very good entertainment platforms.

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