NPD has said that software sales have been on a decline since 2008 and the same is set to happen this year. Whilst digital plays a huge role in offsetting the decline it’s clear by looking at Physical + digital totals that total revenue generated is not growing this generation. This article will look deeper into why last gen was so successful in growing the console market compared to this gen which is set to see a decline in users and stagnated growth in revenue generation from both software and hardware.
A lot has changed from Generation 7 to Generation 8 and I expect these changes to have an impact on hardware and software sales this generation. I strongly believe that the 8th generation of home video game consoles will see a much smaller market than the 7th generation did and will sell a maximum of 150 million consoles worldwide by the end of 2019 compared to the 7th generation which sold almost 250 million units during the same time period. Of course I am talking worldwide here but I do expect to see this trend apply to the US as well. (See graph below)
The seventh generation started in 2005 with the Xbox 360 which started off slowly and actually tracked lower than the original Xbox initially, however a number of factors allowed the Xbox 360 to take off and eventually become the cumulative sales leader in the USA taking over the Wii which released a year later and pretty much doubling the sales of PlayStation 3 which released at the same time as the Wii.
The factors for the Xbox 360’s success were down to Microsoft improving on the original Xbox’s faults. Firstly they built a console that they wouldn’t have to sell at a loss but was still at a great price and more importantly cheaper than the PS3, secondly they created a lead over the PS3 and Wii before they launched which allowed for more third party support on the system and eventually a number of third party exclusives and even former PlayStation exclusives to launch on the system. Thirdly they marketed the console well and demonstrated its strengths such as the online capabilities; if you wanted to play online then Xbox Live was the best place to play and the only place to play if one of your friends had an Xbox 360. Finally the Xbox 360 never really took off in the USA but always remained ahead of the PS3 due to the year head start, however the launch of Kinect doubled the install base pretty much straight away and the 360 appealed to a casual audience with the success of this peripheral.
The PlayStation 3 failed to capitalise on the success of the PlayStation 2 and this was mainly down to the high launch price. Despite the new technical advancements of the console, only hardcore fans bought the console on day 1 and sales were abysmal for the first year with heavy competition from Microsoft’s Xbox 360, Nintendo’s Wii and even Sony’s own PlayStation 2. It wasn’t until a price drop that the console actually started to sell somewhat decently even matching 360 sales during some months in 2008/2009 in the USA. However the console was a pain to develop for and the games were few and far between and usually on 360 first. The online, whilst free, built a poor reputation and the console didn’t have a unique selling point to consumers that the Xbox 360 didn’t have as well. Ultimately the console wasn’t a huge failure but it wasn’t a success either and unlike Kinect, all that Move did was maintain sales, not grow them.
The Nintendo Wii was indeed a revolution and there were 4 main factors to its success. The first was price, the console launched considerably cheaper than its competition whilst still providing a power increase over the GameCube. Secondly the console introduced unique features such as motion controls and backwards compatibility which resonated with Nintendo fans, core gamers and casual gamers. Thirdly the first party support was top notch through bundled games and third party support was a supporting factor early on. Finally the console appealed to everyone and did what Sony had tried to do what the PS1 and PS2 wanted to do, attract all types of gamers from core to casual from day 1.
The 7th generation console install base grew 44% over 6th gen to 111 million units in the USA which was somewhat of a surprise as the previous console generation had already grown by more than 50%. The 7th gen saw a role reversal with Nintendo and Microsoft doing better than Sony by far. However demand for the Nintendo Wii dropped away quickly after PS3 and Xbox 360 launched their motion control devices to extend sales, this method worked well for both Sony and Microsoft and the PS3 and Xbox 360 maintained their high sales much longer into the generation which was something that hadn’t been seen before when you consider that both the PS3 and 360 were still retailing at over $200. This really does come down to the motion control extension and the fact that there were no new consoles. It’s why the 8th gen saw huge opening sales for all 3 consoles.
It’s clear that the 8 year cycle for the 7th generation lasted a lot longer than the standard ~5 year cycle because Nintendo introduced a number of new audiences to gaming early on and wanted to extend that for as long as possible and maximise profits by creating more software for them to buy. Secondly, development times and costs had sky rocketed for game development and developers and publishers were having to delay games and the longer cycle allowed them to recoup losses. This point also applies to Microsoft and Sony who had to wait a lot longer into the gen before they became truly profitable. Thirdly the 7th generation was longer due to the rise of online gaming and services such as Netflix, all three consoles were marketed as entertainment systems and the aim was to sell to non gaming families as well but it would take a while for the cost of the consoles to come down to somewhere more affordable for this market.
I also believe that the Big 3 contributed to the decline of software sales in later years of the cycle due to not launching successors. Whilst core gamers were still purchasing games, casuals who had bought the 3 consoles were not inclined to buy games outside of main franchises such as Madden, Guitar Hero, Rockband and Singstar. However we know from the Wii that the casual market will eventually get tired of buying the same game for the same console and that’s why we saw these series (GH and RB) get axed. Casuals had already moved on to the next big thing or were still waiting for the next big thing. Ultimately, software sales for casual games declined due to over saturation and due to their being better and more convenient experiences available. Also there was the ever increasing cost of development for games and with less people buying these games it meant that publishers stepped on the brakes in regards to how many software titles were being developed and released each year. Some even went out of business because of this.
At the start of the 8th generation there was huge pent up demand for new consoles and each of the three new consoles had the biggest debut sales thanks to core gamers buying these consoles straight away. Right now console sales are tracking higher than last gen however we are already seeing a contraction in the market where the Wii U is dead, the Xbox One isn’t doing as well as it could and the PS4 is the strongest but ultimately won’t sell anything like the Wii as it doesn’t have the USP’s that the Wii had. Right now the PS4 and Xbox One are doing decently among the core and semi casual audiences but in order to grow the install base they will need to appeal to wider audience through the introduction of new innovative software titles, lower price points and unique features only found on console.
I believe that the potential market size for this generation will be a lot smaller than last generation due to three factors
– No successful extension tool
– Lack of unique software and price point to support
Since the launch of the iPhone, the consumer smartphone market has taken off and many have seen the potential in the gaming market on smartphones. It’s estimated that almost 1.5 billion smartphones will be sold to consumers this year with an install base of 2.2 billion smartphone users already. The Mobile Phone is the one consumer product that has really taken off and ultimately seen a 1:1 ratio between the number of mobile phone users and number of people on the planet. As smartphones get cheaper we’ll ultimately see the demise of non smartphone shipments and eventually everyone will have a smartphone.
Mobile gaming is growing in leaps and bounds with hit titles generating millions of dollars in revenue each day. There are many experiences that can be had on a mobile device that appeal to a very broad audience, games like candy crush come to mind. In this day and age a mobile is a necessity and as everyone has one they also have the opportunity to play games at no extra cost to their phone plan. Mobile is the place to be and right now there are thousands of new game titles being developed and published across Android and iOS for users to choose from, this is much more attractive for the casual user rather than a small selection of 150-200 titles per year on a games console that has a high start up cost and is less convenient to use. Most mobile games are free 2 play as well and the majority will never spend a penny on mobile games whilst others will but are not put off due to the low one off costs for virtual items. Consumers are more likely to purchase multiple items at a low cost over a long period of time rather than pay $60 upfront for a console title.
Mobile has already replaced the usage cases for handheld gaming and many core and casual gamers are satisfied with the types of games they can play on Mobile. Dedicated handheld sales have been decreasing each year and even the 3DS, the leading handheld console this generation, is tracking considerably behind its predecessor and even with a ‘NEW’ 3DS launch this year is on track to see lower sell in for 2015 vs 2014. The console games industry has always seen the majority of revenue generated from home consoles but handheld used to provide a significant amount as well. That handheld market is now almost dead and whilst Nintendo may release another handheld console I wouldn’t expect it to be as successful as the Nintendo 3DS.
The cost to develop a simple mobile game is very low and as the market is so competitive this is a huge plus for mobile developers as they can develop a title for as cheap as possible and reap the rewards instantly. For console the risk is high, the development costs can be high and whilst the competition isn’t as large as it once was it can still be easy to release a game that bombs on the market. Hence why now we’ve seen so many publishers focus on a AAA formula that sells to the mass market whilst most other developers are creating smaller titles that will be put on the digital store only as the sales will not be enough to warrant a physical release and will just cover the game costs.
Mobile games are successful due to the simplicity of the games, the addictive nature, and the illusion that the title is free to play. I strongly believe that mobile and tablet devices have affected traditional console sales and have even stopped people from buying a console because they already have a mobile or tablet capable of playing games that they enjoy. Also many others prefer the simplicity of mobile games and don’t want to play games with multiple inputs where it takes time to learn the controls, in fact many people like this don’t see themselves as gamers despite playing mobile games so much, there is a clear divide between casual mobile gamer mentality and core console gamer mentality. Mobile gaming is seen as more acceptable in the social space. But then of course there is cross over as well, more than 60% of big spending mobile gamers also play console games which shows there isn’t as big as a divide between console and mobile players, after all it’s likely that everyone reading this has played a mobile game at least once. Ultimately there is still a large core market for console gaming but the casual market is mostly on mobile with both the core and semi casual market that plays on both mobile and console. One factor I haven’t mentioned is PC gaming, I believe the rise of F2P gaming on PC through online, social and offline games will also attribute to a lack of future console sales.
The second point from above is the lack of a successful extension tool. This can mean anything from VR, to low pricing at the end of the generation, to unique software. Basically anything that leads to an extension of sales over and above the norm and right now I don’t see a case for VR to act as an extension tool. In other words I expect VR to provide a small increase in hardware sales but ultimately the majority of sales to come from those who already own a PlayStation 4 or Xbox One. I think that VR will follow the trend of 3D TV where the manufacturers will continually push it so that sales increase from day 1 but ultimately it’ll get to a point where it just isn’t worth it to invest further in VR on PlayStation 4. Note, I’m not saying this will happen to VR as a whole but just on console gaming platforms. With the Wii, Motion controls were easily demonstrable and simple and easy to use where as VR requires more demo time, precise inputs and is not easy to show off to the average user. So this is why I believe that VR will not have a big impact on software and hardware sales. If anything I expect Morpheus to sell just slightly better than the original PlayStation EyeToy camera for PS2 which wasn’t a huge success.
The third point I mentioned Is lack of software and price point. Right now the number of mainstream retail game releases is declining and we’re seeing that more and more games are failing to meet expectations. Especially smaller titles that are released at retail, Japanese developers for example are seeing low sales on PS4 and if their game doesn’t appeal to a Western audience then they will need to create a PS3 version for the Japanese audience which will sell. However the PS3 install base in Japan will not be around forever and that is why a number of Japanese developers have been or eventually will be focusing more on mobile. The same thing is happening in the USA to smaller extent where if your game doesn’t have a wide appeal then it’s not going to sell well and that’s not a good thing when development costs are consistently on the up.
It’s why we’ve seen studios close and developers focus more on multi platform solutions. Ultimately AAA developers will need to develop games using specific guidelines to ensure their games sell to wider audience and so that they can maximise the profit from those who are buying games through additional DLC and other content. I fully expect big game releases to see high sales whilst mid tier games will decline. We’ve seen a fundamental switch from AAA publishers in the past few years as they are trying to transition to games as live service. This is evidenced by the success of GTA Online and Destiny which have been able to generate recurring digital revenue for Take Two and Activision. I expect plenty of AAA publishers to follow this trend in order to offset the declines seen in the packaged games market.
I also expect to see a big digital push from smaller developers and indies. In fact we are already seeing this already with many indies choosing to publish their games as digital download only on PS4/X1. Whilst this will ensure that costs are low and easily recouped it doesn’t mean that sales will automatically be high as these are still smaller niche titles at the end of the day. Ultimately software sales will continue to decline in the overall market. In regards to price point I think that whilst prices will drop over time, there won’t be a magical price that suddenly causes sales to skyrocket. Instead I think that Sony and Microsoft will follow a similar trend like MS did with the 360 last gen, keep the price as high as possible and only drop the price when sales are really dying to revitalise them. This way they are able to maximise profit and are still going to end up selling to the same audience and same amount anyway.
In conclusion, console gaming isn’t dead. There is still a core audience out there and AAA publishers and smaller indies will still cater to that core whilst they try to increase the profit they obtain from each customer. Ultimately console hardware will be down this gen and software too, this is due to all the reasons mentioned above.