Let’s talk about evolutionary consoles and why we’re starting to hear from Sony, Microsoft and even Nintendo about how the future of consoles are going to be “iterative”, “evolutionary” and even “upgradable”. Nintendo were one of the first companies to talk about this strategy publicly back in 2013 and how they wanted to create one software ecosystem that could work across multiple hardware devices, essentially meaning that software development would be made easier and everyone would be able to experience the same games no matter which Nintendo hardware they had. More recently, Microsoft started to talk about their shift to Universal Windows Applications and how this could lead to upgradable and iterative consoles. Now we have Giant Bomb, Eurogamer and Kotaku all reporting on how Sony are planning to bring out a new iterative console codenamed NEO that acts as an upgrade over PS4 in terms of specs and plays all the same games but with extra perks.
The concept of evolutionary consoles is nothing new and is indeed something that has been discussed in the past as being the future of consoles and it looks like all three platform holders are ready to embrace the idea this generation. The console market today has changed from last generation or even the generation before that. Last generation there were more than 270 million consoles sold across the big 3 platform holders and the generation before that we saw more than 200 million consoles sold. This generation we’ve seen a huge contraction in the number of console owners, publishers and games being released. The number of 8th generation consoles sold to date is lower than the number of consoles sold last generation in the same timeframe and many market research firms are pegging lifetime 8th generation console sales at around the 150 million mark, which again is lower than the last two generations.
The traditional idea that a console will launch and then remain static for a whole 5 to 6 years is starting to go away and it’s clear why. Looking back to last generation we saw the Wii break records as the fastest selling console of all time, selling through to both core and casual gamers alike. But overtime we saw casual and core gamers start to abandon the Wii in favour of other gaming devices such as the more powerful Xbox 360 and even PC and Smartphone gaming. The Xbox 360 and the PlayStation 3 were able to capture a large gaming audience thanks to a unique offering of core games that couldn’t be found anywhere else, add on peripherals like Kinect and Move as well as new and improved slim versions. But even the casual audience on these consoles started to move on, and despite record breaking sales of PS4 and Xbox One early on, the majority of these sales have been to core gamers who have gamed on consoles for years. We are yet to see a large majority of the Wii audience move over, nor have we seen the bulk of PS3 and 360 owners move over as well.
We can see that this generation is smaller than last generation and that consumers started to move away from consoles early on with the Wii and many haven’t yet upgraded from Xbox 360/PS3. The reason is because consoles remained static last generation whilst the world moved around them. The Xbox 360 may have been a top end console in 2005 when it came out but during the middle of the generation we saw the growth of smartphones thanks to Apple and Google, the renaissance in PC gaming thanks to Steam and Minecraft, as well as the launch of game models such as Games as a Service, free to play and Early Access. Consumers everywhere were being moved by the idea of ever evolving software ecosystems such as iOS and Steam whilst console gamers were still stuck on the idea of software being tied to an individual device and then that software being obsolete once a new generation came round.
The static console generation may have made sense in the 80’s, 90’s and early 2000’s but the idea of a static console generation is now outdated and frankly one that isn’t helping the currently declining console industry. Back in the day a console would consist of a unique and exotic architecture that could provide a better than arcade and PC gaming experience and could be sold at a great price. No other gaming device could come close and consumers knew that they were getting the best gaming experience for the price they were paying. When the next generation came along it provided even better experiences than arcade and PC gaming so it made sense to upgrade. After the PlayStation 2 era we started to see other devices start to catch up. PC and Mobile hardware started to evolve at break neck speeds and publishers found that many were now gaming on their smartphones, tablets and PC’s and so started to bring games and IP’s to these devices.
What this meant is that developers were now bringing games to PC that could be played on pretty much any PC, and bringing games to mobile that could be played on pretty much any mobile. But developers weren’t able to bring their PS3 or 360 games to next gen straight away as the static console cycle meant that these games no longer worked on the new consoles. It’s no wonder that both Sony and Microsoft moved to x86 architecture this gen in order to standardise development environments for Consoles, PC and Mobile and it’s also no wonder we’ve seen so many remasters. There are now no legitimate reasons for console exclusives to exist, and rightly so as PC is now a huge opportunity for console game publishers. This move to x86 was the first sign that consoles are moving to be iterative and evolutionary and it removes the distinction between games consoles and PC’s.
The definition of evolutionary consoles is to move towards a continuous growth of community where the operating system and game library is what becomes the core definition of the console platform. Moving to x86 means that Sony and Microsoft can do just this and make their next consoles with newer and more powerful components and still retain the same operating system, online services and games library. Combine this with the ever changing landscape of the gaming world and the fast pace of smartphone and PC iteration and it’s clear to see why Sony, Microsoft and Nintendo are thinking about evolutionary consoles as the future.
GROWING INSTALL BASES
How do evolutionary consoles help the industry today? In retaining user bases of course. One of the most volatile things about the console industry today is how user bases can disappear from one platform holder to another during a generational transition. We saw it during the 5th generation when gamers moved from Nintendo and Sega to Sony, during the 7th generation when gamers moved from Sony to Microsoft and Nintendo, and during the 8th generation when gamers moved from Microsoft and Nintendo back to Sony. Whilst brand loyalty is of course huge in gaming, there is no question that it ultimately doesn’t mean much when the “winner” of each generation is different. Consumers continue to buy new hardware to use software ecosystems like iOS and Steam because as they invest more in this platform, the more assets they have attached to these platforms and the more difficult it becomes to switch platforms. With evolutionary consoles a user will transition over to a PS4.5 or Xbox 1.5 and retain all their digital service settings such as downloaded games and friends list, their physical disc games which continue to work on the new system, and their current add on peripherals such as PS VR & controllers will also work.
It’s no coincidence that Microsoft suddenly introduced Xbox 360 backwards compatibility on Xbox One in order to encourage Xbox 360 users to upgrade to the new console. It’s also not hard to believe that Microsoft will carry this functionality and Xbox One backwards compatibility onto their new iterative console. We’ve even heard Phil Spencer talk about forwards compatibility as well which could be possible thanks to UWP. It’s also no coincidence that the rumours for PS4 NEO show that all PS4 games will work on both devices with the NEO versions seeing slightly improved graphics as allowed by the improved hardware spec. Not to mention that both Sony and Microsoft now charge for their online services, tying even more people into the software ecosystem with free games each month and discounts on other digital goods.
Rather than starting the install base at zero, an evolutionary console can help grow the overall console install base which means that publishers have an even higher potential audience on consoles and other games models such as Games as a Service and Free to Play can work on console just as well as PC or Mobile. New buyers of consoles have the choice of buying a standard PS4 at a lower price whereas new buyers who are willing to pay more for a better experience can purchase a PS4 Neo. It’s similar to the PC model where users can purchase a GTX Titan at a higher price than a GTX 960 in order to see better graphics in their games. It’s also similar to the smartphone model where a game may have better graphics or features on an iPhone 6S compared to an iPhone 5 but they still run well on both.
Apple continue to sell older iPhone models and Nvidia continue to sell older graphics cards. The myth that the standard PlayStation 4 or Xbox One will become obsolete is just a myth. An evolutionary or premium model would still play the exact same games but with new possibilities. The whole point of an evolutionary console is that Sony and Microsoft are not resetting the generation but instead trying to build on the current user bases they do have to create one big community. The existing PS4 or Xbox One base are not losing out on anything or getting a lesser experience than they were before. Most customers won’t even bother thinking about the evolutionary console when there is a cheaper base console on the market and the majority upgrading to a Neo or 1.5 will be enthusiasts who want to pay more for better graphics. Something that console gamers have been asking for since November 2013.
GAMES AS A SERVICE & FREE TO PLAY
During the 7th generation the rise of smartphones and renaissance in PC gaming led to new models being introduced for games. Free to Play started to take off and Games as a Service became a popular model to follow. Publishers in the console space are also starting to embrace these models as they try to move away from relying on a hit driven model to a live and dynamic model through Games as a Service.
The AAA market today is not as sustainable as it once was as production costs have ballooned over the years with the average selling price of a retail console game sticking at around the $60 mark. This in turn led to a number of mid sized publishers closing down at the end of last gen and many big AAA publishers halving the number of games they put out each year. Ubisoft for example have gone from more than 50 games per year during the peak of last generation to confirming that they’ll only release a total of 12 games this year. So not only are there less retail games being released this gen at higher costs, they’re also taking more time to develop. Gamers are also demanding for games to improve in terms of graphics and gameplay which only adds to the cost and when it comes to console games the core are only buying certain genres which limits the number of possibilities for AAA.
The solution for these AAA publishers is to adopt the Games as a Service model and we’ve seen big publishers like Activision, Take Two and Ubisoft become very successful with this. Using games like Grand Theft Auto V as an example, not only are gamers buying games in huge numbers at retail, they’re also spending on the game after release through paid DLC, micro transactions and subscriptions. Activision have done the same with Destiny and Ubisoft have seen success with The Division. Games on console are now making more than ever before and users are spending more per game, but with less games in development this also brings significant risk. For one it means that each game has to succeed. In the past a game could fail but it wouldn’t mean much as there would be another 30 or so successful games. But now with less than 10 games out in a year it means that if 1 or 2 fail then it could pose a significant issue for the company.
Lets say a more powerful PlayStation 5 comes out instead of an evolutionary console, it means that gamers are going to expect another ramp up in production costs to take advantage of the new hardware features, publishers will need to wait for the install base to grow on PS5 and also risk everything on next generation development. In turn it means that publishers will be forced to reduce the number of games they’re putting out each year as they can’t afford the manpower to create multiple games at this high level. Now if 1 or 2 games out of 5 fail then that could spell the end of the publisher and the mainstream industry on consoles. Publishers simply can’t afford another steep ramp up in costs and so an evolutionary console is one way of getting around this.
The PlayStation 4 Neo builds on the install base of the PlayStation 4 and developers are already familiar with the system and know that they will be creating a version of the game that has a potential audience of 40 million already and an even bigger audience when you factor in buyers of the Neo. More than 70% of PlayStation 4 games are also on PC which means that these developers are already used to scaling their games to work with more powerful specs and can adapt the game to perform better on PS4 Neo. Ultimately it avoids the ramp up in costs that a typical new generation would pose and means that publishers don’t need to wait for the install base to grow. Not to mention that technology upgrades are slowing down and it’s going to take longer for us to see a jump from PS2 to PS3 level this gen.
This also helps games like Destiny grow. Destiny is an IP that is planned to have at least one mainline game or expansion released every year and an evolutionary console is suited to supporting a game like this. For one it means that everyone with an original Destiny game disc can continue playing the game on PS4 Neo without Activision needing to redo the game and as all the online services are the same it means that the same install base can continue purchasing all the add ons and expansions no matter which system or game disc they have. There is also no risk for Activision in releasing a new disc version as that too will work on both the standard and evolutionary console. It’s similar to how Clash Royale works on every smartphone or how Counter Strike works on every PC. Whereas on console a PS4 game wouldn’t work with a PS3 console.
Free to Play games are starting to gain traction on consoles but ultimately they’re still a very small slice of the pie. Most free to play games are on Mobile and PC and many publishers don’t see the point in releasing a free to play game on console. Especially as free to play games that are on console do exceptionally better on Mobile or PC. Free to Play games require large communities to be successful and Mobile is able to provide a more than 2.5 billion install base whilst PC’s are able to provide a 1.5 billion install base. This means that there is much more potential of finding success on these devices than on a console install base of 150 million or so. Although I should note that console gamers are indeed more dedicated than Mobile gamers and therefore could spend more per user.
WarGaming recently spoke at GDC about their experience in bringing World of Tanks to Xbox 360 and Xbox One and how it took them a long time to get everything right as the Xbox 360 was not built to take advantage of the free to play model. It meant that WarGaming had to build the systems themselves, hire more staff to manage the console versions and adhere to strict policies that Microsoft had put in place. Ultimately if their game flopped then it would not have been worth the time, money and effort they had put in. Thankfully their game did well but the same can’t be said for other free to play games on console that were limited by the consoles inability to evolve at a fast pace to support new games models.
The main reason free to play doesn’t work on console is because the low install base of consoles holds it back. Using an example with a 40 million install base, a premium game that targets males over 25 could have 2 million buyers on console and generate $80 million in gross revenue at $40 a pop. If you have the same 2 million active users on a free to play game with a 25% conversion rate then that means you only have 500,000 paying users. Assuming that the ARPPU is around $30 in the first month for the game it means that the game only generates $15 million during that launch month. If you were to lose 60% of players each month then that means for the first 6 months you’d only just generate $25 million in revenue. Therefore you either need to get console gamers to spend more than they ever will, or rely on an evolutionary console to grow the install base so the potential number of downloads and paying users is much higher.
RETAIL MARKET & COMPETITION
Evolutionary consoles are also the new Slim models for Sony and Microsoft. Slim consoles have been a tradition for Sony since the original PlayStation and Microsoft since the Xbox 360. These slim models came in multiple configurations with at least one having a larger hard drive at a $50 or $100 premium over the cheapest model. This allowed the companies to continue to sell hardware at a cheaper price but also offer better experiences at a higher price for those who were willing to pay. This actually worked for Microsoft with the Xbox 360 Slim with the average selling price of the console increasing in 2011 over 2010. The upgrades this time are not the hard drive but to the CPU and GPU, everything else remains the same from the games library to the online services.
In previous generations the hardware was always sold at a loss, offset by high profit margins on software. The PlayStation 2 for example was priced at $299 and within a couple of years was already at $199. The original Xbox sought to compete on price and so took a $130 hit on each console sold just to be able to match the PS2 price whilst hoping that software sales would make up the difference. This generation has been slightly different with Sony and Microsoft opting to sell their consoles at a per unit profit. However competition with Sony has led to Microsoft selling their console under $300 this quarter whilst Sony have even dropped the price of their console by $50 in order to attract a new audience. Both companies will be looking to introduce evolutionary consoles to boost profit margins on hardware and encourage users to spend more on hardware.
Sony and Microsoft are also trying to emulate the Apple upgrade cycle where a new iPhone is released every year. Sony and Microsoft don’t need to release consoles every year but they do need to iterate on consoles more quickly in order to boost sales and increase profit margins in their gaming divisions. Console gamers spend more per person than any other group of gamers and so an evolutionary console isn’t going to be too hard of a sell to consumers who are used to spending hundreds of dollars per year on their hobby.
As mentioned before, consoles stood still last generation as Mobile and PC grew around them and in 2016 we’re now seeing Mobile really start to take off with many companies like ARM predicting that Mobile GPU’s will be as powerful as the base PS4 by 2018 and PC companies like Nvidia already advertising the fact that a $200 graphics card in 2016 will play games at a base 2013 PS4 like level. Both PC and Mobile gaming are growing fast and with many already owning a smartphone or PC, the evolutionary consoles from Sony and Microsoft are somewhat necessary to stay relevant in the gaming space. Mobile devices have already cannibalised the dedicated handheld market and if mobile devices or other such devices like smart TV’s or streaming boxes are able to provide console quality games on TV then it may mean publishers and consumers move to those boxes whilst the base PS4 stands still again.
At the end of the day this is all about each of the three platform holders trying to maximise revenue on hardware, retaining their customers in a software ecosystem and growing the overall install base, as well as making sure that publishers are able to succeed on console.
Nintendo have hinted at taking the evolutionary console approach many times. Back in 2013 during an investor briefing it was the late Iwata who said that they wanted to make software development easier for their handheld and home console devices by using the same software ecosystem and architecture for both. Nintendo blamed their software shortages and network issues on both devices having different architectures and focuses during development. It meant the 3DS couldn’t interact with Wii U and vice versa and game development on both was completely different. Nintendo stated that they wanted home and handheld to no longer be different and to become a family of systems that run the same software, have the same connected services and use the same architecture.
What this means is that consumers would have an improved experience when it came to software and online services on all devices and Nintendo would also be able to save on costs and effort by developing games that would work on both systems. In fact Iwata himself likened this idea to iOS and Android and said that Apple is able to release multiple iPhone models because there is one standardised way of creating apps for all devices. It’s the reason that Android doesn’t have software shortages but why the Wii U and 3DS did. Ultimately what Iwata was trying to say is that he wanted to create an evolutionary platform for all of Nintendo’s future devices, whether it just be 1 home console or 5 different types of form factors.
In the end this seems to be the direction that Nintendo is taking and there is no doubt that their next console, the NX, will adopt this philosophy so that Nintendo can create games for all their devices easily.
The first thing Microsoft did to signify that they were looking at evolutionary consoles was to choose x86 as the architecture for Xbox One. Phil Spencer has openly talked about iterative consoles and it seems that Microsoft are keen for the Xbox division to become one portal for Xbox Console Games and Windows 10 Games & software. Ultimately the idea that Xbox is a static console has been dismissed in recent years as Microsoft have focused on providing their games and services across all Windows devices.
Ultimately this is a huge shift in strategy for Xbox and could signify the end of the traditional console cycle. Phil Spencer was keen to talk about things like backwards compatibility and forwards compatibility and this is certainly something we’d expect to see from a company that is interested in an evolutionary console. Whilst many see this as a fundamental shift away from the traditional console model, it’s not too different at all. First of all, Spencer dismissed the idea that we’d see upgradable parts or add ons to the Xbox but that instead we’d get a brand new iterations that evolve the Xbox One. You won’t need to upgrade parts but instead you’d just be able to buy a new Xbox and immediately be able to play all Xbox One games on there, the added advantage being that Microsoft have worked hard to bring 360 backwards compatibility to Xbox One.
Microsoft are giving choice to consumers by bringing games to both Xbox One and PC. Not every gamer wants to play games on PC and not every gamer wants to play games on console but the crossover between the two means that Microsoft is able to capture a large gaming audience. Console exclusives don’t play a huge role in selling consoles these days and the majority of the top selling games are third party titles that appear on both console and PC. Microsoft are trying to create a strategy that allows them to be leaders on both PC and Console but face tough competition from Steam on PC and Sony on console. Releasing a new Xbox One model with additional features could put Microsoft back on equal footing with Sony if they are able to play their cards right and Microsoft are in a prime position for evolutionary consoles to work thanks to UWP.
Ultimately there are two ways this can play out. Microsoft could find that they’re unable to compete with Steam and the Windows Store is unable to gain any traction at all among gamers. In turn this means that many PC gamers will stick with buying their games through Steam and also not bother with the Xbox One Console. Whilst an iterative console does put Microsoft on equal footing with Sony, the PlayStation 4 install base currently stands at 40 million and so many gamers with consoles today would be more enticed by an evolved PlayStation 4 which is rumoured to be in development.
Alternatively, Microsoft could bridge the Console and PC gaming divide if UWP and Windows store is able to take off and they could use their advantage of Windows OS installed base to their advantage over Sony. Microsoft could turn the Xbox One into something of a Steam box where all Windows UWP games are able to run on Xbox One and vice versa. An evolved Xbox One could also provide additional features that could put them on par with Sony such as VR support with third party headsets or even compatibility with Hololens further down the line.
Ultimately it’s all up in the air for Microsoft right now but it is clear that evolutionary consoles is the next step for them. As they are behind in the gaming market right now they may choose to be a bit more aggressive and feature rich with their evolved console.
Many major news outlets have been reporting on the fact that a PlayStation 4 Neo is real and is coming soon. The console is the very definition of an evolutionary console and marks Sony’s attempt to solidify themselves in the console market as well as grow the overall install base of PlayStation 4’s. The first thing to note, according to leaked documents, is that Sony are very much about not splitting the user base when it comes to Neo. The documents stipulate that games are to run exactly the same on both devices with the Neo having access to an upgraded mode that can make the game take advantage of the boost in hardware specs to make the game run and look better.
So far the reactions have been mixed but it seems a number of gamers are not understanding what Sony are actually doing here. It’s a fairly simple explanation, ultimately Sony are selling two PS4’s that have access to the same games, the same online services and the same operating system. One is cheap where as one is more expensive and provides some perks such as being able to run games better. Sony are no doubt introducing this console to introduce perks such as native 4K, UHD blu-ray and better VR support into the more expensive version so that gamers have the choice of paying more for more. This evolution of the PS4 is what we should expect to see in another 3 years as well. It’ll be a life cycle that never ends and is constantly updated with all games working on all versions.
Technological improvements are slowing down these days and the PS4 Neo is an evolution that benefits publishers by keeping game development costs low, gamers by allowing users to have the same or better experience on new hardware and the industry as a whole by keeping consoles relevant in a market where many thought they’d fail by now.
This really is about consoles staying ahead of the game. This new evolutionary model is mimicking the successful model of smartphone iterations but with a long enough gap between each iteration.
This reminds me of how the DSi was successful in boosting DS sales for Nintendo and how the 360 Slim and Kinect provided a huge boost to the Xbox 360. This is slightly different though as rather than a PS5 in 3 years from now we may just see another evolved console. We’re moving away from the traditional console cycle and the PS4 may never really be discontinued by Sony, instead we may just see the base revision be discontinued by Sony whilst the more powerful versions live on under the same naming scheme. We are getting to a point where the Operating System and Gaming library define a console and where there are no more traditional generations where the install base starts from zero.
Consumers will adopt this model, and if they don’t then the only other option they have is PC gaming which can end up even more costly with upgrades needed each year in order to experience each game at a high level. For most it’ll make sense to stick with console and most will upgrade within the same platform holder in my opinion. This is a great way for Sony to solidify their lead.
To sum up, this move is all about ending traditional console cycles and moving to evolutionary ones where each new system plays the same games, runs the same OS and carries over your digital services. Evolutionary consoles allow the install base to continually grow so that consoles never start over again and instead every console owner is equal and can play the same games. It benefits game developers who cannot afford a ramp up in costs and allows them to bring more games to console and develop games with new monetisation models. On top of this the move marks the platform holders attempts to stay relevant in today’s fast moving market and stop gamers migrating to PC or Mobile. It also allows platform holders to generate more revenue from hardware sales.
The final point, which I’ve mentioned numerous times, is that this doesn’t make the base hardware obsolete. Instead it grows on that install base. The PS4 Neo and Xbox 1.5 aren’t products that replace anything, they’re just premium versions of a product. There is a reason why many games through this year are still releasing on PS3 and 360, publishers don’t want to miss out on that massive install base still on last gen, the difference here being that PS4 and PS4 Neo are the same console gen and there are already 40 million base PS4 users. Sony would be crazy to create exclusive PS4 Neo games and the leaked documents show that they are being very strict on ensuring that all games work on both consoles and the base experience is good. This really is just another DSi or an Xbox One Elite controller. You can also compare this to phones or computers, an iPhone 6s may have more features than an iPhone 5 but that doesn’t mean I’m being forced to upgrade from my iPhone 5. I certainly can if I want but it isn’t a forced upgrade and I’m not missing out on any apps because of it. Same with PC gaming, sure some people have a Titan in their rig and can play games at ultra settings whilst my PC is on medium. But at the end of the day I’m still playing the same game and it works the same way. The mass market understands these differences and knows if they want to spend more on a premium product or on a base product. At the end of the day plenty of people are still going to be buying base PS4’s because it’s the cheaper option and they know they can still play the same games. Developers can certainly optimise for both as they do on PC and Mobile, after all you don’t need a Titan to run a game, the game just runs better on a Titan. Ultimately consoles moving to this evolutionary cycle will allow console gaming to evolve faster than ever along with the rest of the gaming world.