ZhugeEX Blog

Nintendo FY2016 Report

20th May, 2017 · ZhugeEX · Leave a comment

Summary

Nintendo has released its earnings report for fiscal year 2016. This is the 12-month period ending March 31st 2016.

Nintendo reported FY2016 revenue of ¥489 Billion, down 3% YoY. The decrease was primarily due to the sharp decline in Wii U hardware and software unit sales. This decline was large enough to offset the increase seen from Nintendo 3DS, the 1 month sales of Nintendo Switch and the growth of smart device games. Nintendo reported an operating profit of ¥29.3 Billion, down 10.7% YoY. Net Profit was ¥102.5 Billion, up 521% YoY. The considerable increase in Net Profit was driven by the ¥64 billion sale of the Seattle Mariners and an additional ¥20 Billion in profit from The Pokémon Company due to the success of Pokémon Go.

Nintendo Switch

Nintendo Switch is off to a strong start in 2017. Nintendo originally said they would ship 2 million Switch’s to retail for the launch period. This number always seemed low to me and it became fairly evident very soon that they had shipped more. Nintendo shipped 2.74 million units during the launch period and all retail checks indicate that the device completely sold out across global retailers. Nintendo Switch continues to see higher demand than supply through April and I expect this to continue through to the end of the year. What’s clear from the outset is that this is not a repeat of the Wii U launch. Nintendo struggled to sell through its initial launch quarter allocation for Wii U and the company was forced to slash production almost immediately. With Nintendo Switch the console has sold through its launch month allocation and Nintendo have had to increase production in order to meet demand.

Nintendo skewed shipments of Nintendo Switch hardware and software to satisfy the American market first. Nintendo shipped 1.2 million Switch’s to America whilst only 600,000 units and 940,000 units were shipped to Japan and Europe respectively. It’s good to see Nintendo prioritising the America market, where they are strongest with home consoles, but they will need to ramp up in other territories quickly to capitalise on upcoming game launches such as Mario Kart 8 Deluxe. Software shipments are a similar story. Nintendo shipped 2.86 million units of software to America (2.38 games per hardware unit) vs 0.89 million in Japan (1.48 games per hardware unit) and 1.71m in Europe (1.82 games per hardware unit).

The Legend of Zelda: Breath of the Wild had 2.76 million Packaged Shipments + Digital Sales during the month, 20,000 units higher than the number of Nintendo Switch hardware units shipped. The Legend of Zelda is a system seller for Nintendo Switch right now and with an unheard of 101% attach rate is clearly the reason why everyone has bought the console in its first month. The success of the game is great news for Nintendo who have been developing the game since before the Wii U came out, but it does show how the console launch line-up failed to attract users outside of the core Zelda / Nintendo fan base. NPD, GfK and Famitsu rankings have shown that third party software has struggled on the system with Zelda at launch.

The Nintendo Switch shows promise, it’s a powerful device that is priced well and has the advantage of transforming from a home console to portable at any time. To me it seems that Switch will convert the loyal Nintendo audience first in 2017 before expanding to a wider audience. Nintendo is trying to appeal to both the core console gamer on PS4 and casual / semi core gamer on mobile with Switch but right now the software and price is not quite right to do that. Instead, Nintendo is focused on selling in to the Wii U, 3DS and lapsed Nintendo fan base with its hybrid console this year. Nintendo has a strong first party game for nearly every month this year starting with Zelda in March, Mario Kart 8 Deluxe in April, ARMS in June, Splatoon 2 in July followed by Fire Emblem Warriors, Xenoblade 2 and Super Mario Odyssey in the fall. Each of these titles are strong system sellers that appeal to the core Nintendo crowd. Nintendo has also confirmed that they have other games that will launch this year but have not yet been showcased.

The late success of the New Nintendo 3DS due to Pokemon and the bump Wii U received from games like Splatoon and Mario Maker shows that there is still a sizeable core Nintendo base out there that is willing to purchase Nintendo hardware to play Nintendo software, provided the hardware is affordable and not called Wii U 2. The appeal of Switch as a hybrid allows Nintendo to target both the Wii U and 3DS install base and convert both with strong Nintendo IP that performed well on those systems. This may be enough for Nintendo to keep the Switch niche and profitable, due to the high attach rate the system will have from the core user base, but it won’t be enough to appeal to the wider console audience on PS4 and the casual audience on mobile to allow company to return to “Nintendo like profits”. One big issue that Nintendo faces is core third party support on the system. AAA third parties are wary of the audience mismatch on Switch and that’s why most of the games announced so far are either handheld or family games that performed well on 3DS/Wii U.

AAA service games like Destiny 2, Star Wars Battlefront II, Call of Duty 2017, Red Dead Redemption 2 and Ghost Recon are nowhere to be found on Switch. Whilst technical reasons do explain some of it, there is still plenty of reluctance and caution from third party developers when it comes to releasing these titles on Switch. There is a reason why EA is only releasing FIFA, Take Two is only releasing NBA 2K and Ubisoft is only releasing Steep. These publishers are using these titles to test the waters and see if the audience mismatch from the Wii U and 3DS era is still there on Nintendo systems. If these games underperform then AAA publishers will treat the system like the Wii U and 3DS. In other words, they’ll only bring over family games that succeeded on the Wii U and handheld franchises that succeeded on the 3DS. All the AAA service based games will remain on PS4 and XB1. This could be damaging for the wider adoption of Nintendo Switch and limit the appeal of the console to the PS4/XB1 audience in year 3 and 4.

This brings me on to my next point about the family / casual games segment. Sony and Microsoft have focused more and more on the core 24-45 year old console gamer this gen with little thought for the casual crowd. This may be because Sony and Microsoft believe that crowd is long lost to mobile, but I believe that with the right investment and products there could be room for a family/casual audience on Switch. Nintendo already has a number of titles such as Just Dance, Skylanders and Lego on Switch. However, these franchises haven’t innovated much since they came out and the audience for them has been shrinking since the Wii and DS days.

One thing that I was interested in was the Monopoly showcase during the Nintendo Direct. Not because I think Monopoly is going to do well, but because it took advantage of Switch’s USP in a great way. Nintendo and third parties need to build more games that act and play differently depending on the set up of Switch (TV, Portable, Table Top). There is a lot of untapped potential there imo. It’s an area that AAA publishers can cater to and even indie/mobile developers can take advantage of that USP and the joycons. I believe this is one way that Nintendo Switch can increase its appeal to the family / casual segment and differentiate itself from mobile gaming. But of course, the big question is whether those currently satisfied with mobile gaming are even willing to part with $$$ for a ‘better’ gaming experience when their mobile gaming experience is ‘good enough’.

EDIT: Dragonball Xenoverse 2 is an example of one of these games. More like that is what I want to see.

Nintendo is forecasting 10 million units of hardware to be shipped during FY2017/18 for a cumulative of 12.74 million units of March 31st 2018. This is an extremely achievable goal in my opinion and gels with the 10 million unit sales I forecasted for the end of calendar year 2017. I am extremely optimistic that the strong first party lineup (Including unannounced games) for year 1 will drive sales this year. The Wii U, 3DS and lapsed Nintendo fan base will migrate extremely fast to Switch in 2017 but it is unknown whether Nintendo will be able to maintain the momentum through 2018 and beyond right now.

Wii U / 3DS

Nintendo Wii U was discontinued at the end of 2016. Nintendo shipped no new stock of the console during the last quarter which means that only 760,000 units were shipped through the year. The lifetime hardware total for Wii U is 13.56 million and no further units will be sold. Wii U software sales also saw a sharp drop as new releases dried up. Wii U software sales were 14.8 million for the year, down 46% YoY. That being said, the Wii U version of Breath of the Wild did sell over 1 million units during March 2017 which is fairly impressive and just goes to show Wii U owners are extremely core Nintendo fans. Nintendo first party games on Wii U sold extremely well as many bought the system just to play these high-quality Nintendo developed games. Nintendo published software on Wii U accounted for more than 70% of all sales on the system with many games such as Mario Kart 8 having a more than 50% attach rate to the system. I believe that the early adopter crowd on Switch is extremely similar to crowd on Wii U and this will lead to high attach rates of Nintendo software on Switch during the first couple of years

The Nintendo 3DS has had an interesting story. This time last year we were all predicting that sales would be down and that FY2016 would be the final year that 3DS had any sort of major presence. That prediction was correct until Pokemon Go came out and boosted worldwide awareness of the Pokemon brand to insane levels. Pokemon Go directly led to an increase in merchandise, hardware and software sales during the year. Nintendo 3DS hardware sales increased globally, except for Japan where the device had already reached saturation, and software sales were also up due to the record breaking launch of Pokemon Sun and Moon. Nintendo shipped 7.27 million 3DS hardware units in FY2016, up 7% YoY. Software sales hit 55 million units, up 14% YoY. Pokemon Sun and Moon accounted for more than 28% of all 3DS software sold in FY2016.

The 3DS has some momentum going in to FY2017 and Nintendo are trying to capitalise on this momentum with the announcement of new games from both first party and third party developers for the 2017 calendar year. That being said, the majority of these games are quick low budget titles that are either designed for the eShop or for a small niche audience. 3DS hardware sales have done well in a smartphone dominated world but it’s clear that these games for 2017 won’t boost hardware sales like Pokemon Go did last year. Nintendo is forecasting hardware sales of 6 million units for FY2017 and I’m fairly certain that they will miss this target as momentum swings towards Switch and the list of 3DS games for 2017 fails to attract a new audience. That being said, I do expect Nintendo to achieve its target for software sales on Switch due to the high install base of the console and big titles like Dragon Quest XI coming out in Japan. The Nintendo 3DS install base will exceed 70 million by the end of this year and that is large enough to support strong software sales and help offset the decline from Wii U.

Smartphone Games

Nintendo’s smart device and royalty segment has begun to deliver results in FY2016. Nintendo is fully aware that another Wii U situation would be a disaster for the company where 90%+ of its revenue is generated from the traditional console business. Targeting smartphone gamers is an attempt to-

1. Boost Nintendo IP appeal and reach a wider audience

2. Generate a new revenue stream

3. Drive synergy with console business.

Pokemon Go was proof of concept for Nintendo with how the game blew up overnight, reached 500 million downloads and generated over $1 billion in revenue. The game was hugely successful in 2016 and Nintendo did benefit from the success of the game, even if they did not develop or publish it. Nintendo recognises profit from the game through the 32% stake it has in The Pokemon Company. Nintendo recognised ¥12 billion in profit via the equity method during the July to September quarter. ¥4.7 billion In profit during the October to December quarter and ¥3.5 billion in profit during the January to March quarter. In total Nintendo recognised profit of ¥20.2 billion / $180 million from the success of Pokemon Go in FY2016.

Please note that Nintendo do not recognise any revenue from Pokemon Go in its smart device segment. Just profit. The games that are recognised in the smart device segment are Miitomo, Super Mario Run and Fire Emblem Heroes. Miitomo didn’t do much for smart device segment revenues in FY2015. Total sales for the year were ¥5.7 billion. The release of Super Mario Run and Fire Emblem Heroes in FY2016 increased annual revenues to ¥24.2 billion. Nintendo’s strength lies in its IP and its ability to create high quality games targeted at all gamers. That being said, the company still has a lot to learn about the mobile segment and was wise to partner with DeNA to develop its mobile strategy.

Super Mario Run was a good choice for the first Nintendo published game on smartphones. The game had the full backing of Apple and the world’s most recognisable IP, that being said, Nintendo made a number of mistakes when it came to distributing the game which led to it falling short of expectations. It’s almost as If they overruled DeNA on a few key decisions and that may have cost them some dollars. The first issue was that the game cost $10 to unlock all content. This led to a number of complaints about the high cost of the game as the majority of gamers on mobile are not willing to pay $10 for a runner game that they normally can download for free. The second major issue was the on boarding process for the game. The game had multiple screens to go through and a very short amount of gameplay before introducing the $10 cost. This left a good number of gamers feeling frustrated and misled as the $10 cost was not noted before downloading the game. I’m not saying Super Mario Run had to be F2P to succeed, but a lower more transparent cost, better on boarding process and longer free gameplay session may have worked better.

Nintendo noted that it has not hit its goal of 10% conversion on Super Mario Run and I’m fairly certain they never will. That being said the game has been downloaded over 150 million times and has probably generated in the region of ¥8.5 billion ($75 million) to date. As it is a paid game its unlikely to have a long lifecycle. Nintendo also noted that today that the number of Fire Emblem downloads was 1/10th that of Super Mario Run but that revenue was much higher. This is backed up by the success of the gacha mechanic in Japan where the game performed well. Smart Device revenues in Japan were ¥11.8 billion for the year vs ¥9.3 billion in America so this does back up what I’ve noticed. Fire Emblem Heroes has much better long term potential due to its free to play nature and ongoing content updates from Nintendo.

Nintendo plans to release around 2 to 3 mobile games per year and the next one to launch will be Animal Crossing for Mobile. All we know is that it is a free to play game. I’ve long believed that Nintendo can create a $1 billion smart device category with a handful of successful games. There is a huge opportunity to grow Nintendo IP on smart devices, create a new profitable segment and drive synergy with consoles through online services and interoperability with console games.

Online Services and Digital Content

Nintendo has always lagged when it comes to online services and digital content. The company has seen digital download rates below the industry average and was the only company to see a decline in digital sales this year despite the industry wide trend of strong growth in digital sales. Nintendo generated ¥32.5 billion in digital download sales in FY2016, down from ¥43.9 billion in FY2015.

Nintendo has been slow to embrace online infrastructure that allows for account based systems in a similar way to PSN or XBL. The simple fact is that Nintendo is still stuck in the past when it comes to online and even third parties know that there are too many limitations on Nintendo consoles for them to successfully monetise games post launch or interact with an online community like they can on PS4 or XB1. That being said, Nintendo has taken some steps to rectify this and last year they launched a new Nintendo account system which allows gamers to have a single account which can be managed through a PC, Console or Mobile device.

Nintendo has been missing out on a huge opportunity in the digital space for a long time here and its finally time for them to jump in. We now live in a world where FIFA Ultimate Team can generate $800 million a year and where Call of Duty Black Ops III generates huge revenues from paid add ons each month. Nintendo has started to embrace this model with games like Super Smash Bros, Mario Kart 8 and Splatoon. It’s all part of Nintendo’s plan to transition their games into services similar to Grand Theft Auto V where players will buy the game, play it, and then stick around for the additional content and updates. Two of those games are launching on Switch and if Nintendo is smart they should have a live service plan in action from day 1. This can also act as a proof of concept for third parties who are waiting to see if the Nintendo crowd embraces this model.

Nintendo has also seen how successful Sony and Microsoft have been in the online space and so it’s no surprise that the company will start charging for its own online service this fall. However, Nintendo will need to offer a level of service that rivals or exceeds the one provided by its competitors and so far, Nintendo hasn’t been able to achieve that on prior consoles. The service for Switch will need to improve significantly. Nintendo are already adding value to the online service with free monthly game downloads and a dedicated smart device app that allows you to play and chat with friends, however the service will need to work seamlessly and continue adding value if users will be willing to pay for it. Sony has seen its annual PlayStation Network revenue jump from ¥35 billion in FY2009 to ¥700 billion in FY2016. Nintendo’s online revenue for FY2016 was less than Sony’s FY2009 number.

Other Growth Drivers

The Toys to Life market has struggled in 2016 with Disney leaving the sector due to growing costs, Skylanders taking a break, Lego not releasing new content for Dimensions. Even Nintendo is seeing sharp declines in the number of amiibo shipped this year. Nintendo only shipped 9.1 million amiibo figures in FY2016 vs 24.7 million in FY2015. The decline in shipments can be attributed to less amiibo figures having been released but it’s fairly clear that there is a wider trend of declining interest in the sector as everyone is feeling the burn. Toys to Life is mirroring the music / rhythm fad back when Guitar Hero was popular.

That being said, Nintendo is the strongest player in the sector due to the power of its IP. It needs to find an audience beyond collectors and give gamers a reason to purchase amiibo again. In addition to introducing new amiibo, Nintendo needs to find a way to integrate game software more with toy hardware and reduce the friction between toys and the game. Perhaps allowing toys to work in all games on console and mobile could work, or even allowing amiibo to have multiple uses outside of games. The ideas are endless, but it’ll be up to Nintendo to rejuvenate this sector. The launch of Nintendo Switch gives the company a reason to invest more in amiibo.

The NES Classic was launched at the end of 2016 and promptly discontinued at the end of the fiscal year. Nintendo intended for this to be a short term stop gap for the Christmas Holiday season as Wii U was discontinued and there was nothing new till Switch. Not so much for it to be a revenue driver, but for it to be a hot Christmas item and boost the value of the Nintendo brand in a way that Pokemon did + encourage people to look to Switch. I guess Nintendo contracted a manufacturer to make around 1.0m units based on sales of other plug and play consoles which hadn’t even sold half that. It very quickly sold out and Nintendo hasn’t really done much in terms of production since. I’m currently of the opinion that Nintendo never intended for it to become this big of a success and did not plan to scale up production. I’d say Nintendo always saw this as a stop gap product for holiday and the wild success was something they never thought would happen. I’d imagine Nintendo is trying to work out the best way to monetise VC. Whether that’s in the form of a SNES Classic or a new service on Switch / other devices remains to be seen.

Nintendo has begun licensing their IP a bit more recently but they’ve always been very cautious when entrusting their IP to others. Nintendo have started to license their IP to game developers such as Koei Tecmo, Bandai Namco and many others. So far most of the investments have been worth it and have delivered for Nintendo. Nintendo need to take this same approach outside of traditional gaming and to be fair they have shown that they are now more open to invest in other opportunities such as the partnership with universal to open theme park rides at Universal’s Parks & Resort.

There are many opportunities for licensing Nintendo IP to Film companies, TV companies, merchandise companies and more. Nintendo can do all this without damaging their IP and earn royalty fees whilst they’re at it. Nintendo have the opportunity to go transmedia with their IP and they should take that opportunity.

PlayStation VR – The Fixed Location Opportunity

10th April, 2017 · ZhugeEX · Leave a comment

A new report from the Wall Street Journal notes that Sony are looking to commercialize PlayStation VR by bringing the product to entertainment facilities. The company has set up a location based entertainment unit to do this.

https://www.wsj.com/articles/sony-goes-commercial-to-realize-the-potential-of-its-virtual-reality-headset-1491378818

PlayStation VR adoption has been strong among the core gamer crowd on PlayStation 4 with shipments exceeding 1 million units last month. This puts it ahead of the HTC Vive and Oculus Rift combined but behind Mobile VR headsets such as Gear VR and Google Cardboard. Despite the lead in the high-end space, PlayStation VR is tracking behind many popular peripherals for prior consoles such as the Xbox Kinect, PlayStation Move and Wii Balance Board. This can mainly be attributed to the high price of the unit, lack of awareness around VR, no killer app, inability to demonstrate VR easily and the current state of VR as technology. The crowd buying into PlayStation VR right now is very much early adopters who likely purchased a PlayStation 4 at launch.

VR as a technology is held back due to its lack of plurality, meaning that you need to be 100% immersed in VR at all times. There are also other reasons why it has not reached mainstream adoption just yet, some of which I mentioned in the above paragraph. VR won’t go mainstream until those issues are solved and even then it’s hard to imagine VR devices being as ubiquitous as smartphones when augmented reality or mixed reality would be better suited to be the next big advance in mainstream technology. I’ve always believed that VR is much better suited to fixed location experiences, given that you can’t exactly walk down the street in a VR headset like you can with a mobile phone or other AR device.

VR as it is right now is still at the beginning of the s curve and current sales numbers are showing that it’s nowhere near mass market adoption, especially in the high end space. Therefore, it does make sense that Sony are looking at selling PS VR in to fixed location video game arcades in addition to the PlayStation 4 user base. We’ve seen HTC demonstrate this effectively with its Viveport Arcade solution and business edition Vive headsets.

PC based VR arcades have been popping up across many places in Asia and are starting to gain popularity in the West too. The Viveport Arcade software and custom solutions available to fixed location entertainment businesses means that HTC can install its solution across many different venues from video game arcades to cinemas and even standalone pop up stations. The idea of paying a few dollars for an already configured VR experience has grown in popularity recently and is much better for most consumers who don’t want to spend thousands of dollars on high end PC rig and VR headset.

Sony has a number of advantages in selling PS VR to fixed location entertainment businesses. The first is price. Sony’s PS VR headset is still considerably cheaper than the competition in the high-end space and the PlayStation 4 itself can be found for even less. Sony’s solution is also pre-configured and suited to the traditional arcade experience. Think of how Gran Turismo VR could simply replace any arcade racing station. HTC Vive requires additional space due to its room scale technology which many venues may not be able to cater to. Sony’s PlayStation brand is also well known globally and so businesses are more likely to take on a commercial solution from a brand that is already known to gamers. Sony has promised additional entertainment apps outside of the gaming space and this could be a solution for fixed location entertainment businesses that don’t necessarily deal in gaming.

Despite the above, there are also some disadvantages to Sony’s solution too. The first disadvantage is that Sony’s high end experience isn’t as high end as what HTC or Oculus offer. I’ve personally heard from gamers who have tried VR Arcades using a mobile or non HTC/Oculus solution who have walked away with a bad experience and no desire to return. The second issue is that Sony doesn’t have an equivalent of Viveport Arcade and so will be unable to provide that tailored experience that businesses are after. The third issue is that fixed location software on PS VR is limited, both on the game and non-game side. PS VR may struggle selling in to video game arcades without a strong software showcase. A game like Resident Evil 7 VR for example requires a huge investment in time to complete a level whereas these arcades are after short 30 minute experiences. Right now Sony doesn’t have many non gaming experiences on PS VR so that’s a detractor for non gaming businesses.

Overall Sony will continue to see PS VR sell in to the PlayStation 4 install base. It’s cheap, ready to go and already has many popular PlayStation IP’s on the system. The early adopter crowd is already buying PS VR for home use and as more software comes to the system, the price is lowered and VR awareness grows we’ll see home adoption take off. The fixed location segment is another opportunity for Sony to grow VR, albeit a smaller one than the consumer segment. It’s also a segment where VR is currently seeing strong growth as evidenced by HTC and acts as a way for VR to reach millions in a way that both high end VR and mobile VR isn’t doing right now.

This is a good move from Sony in my opinion and one that will strengthen the brand outside of the home, provide a new revenue stream for Sony and encourage home adoption of PS4 and PS VR sets. It’s up to Sony to address the disadvantages above and make the system a compelling purchase for fixed location entertainment businesses.

China’s Mobile Game Regulations – Half a year on

16th March, 2017 · ZhugeEX · 1 Comment

With the GMGC Global Games Congress, a conference and platform for game developers, publishers, investors, distributors, and other companies to form lasting co-operations through access to new fervent markets, taking place in Beijing this week I thought I’d look back at what is without a doubt the biggest change to take place in China’s mobile games industry to date. On July 1^st 2016, new regulations came into effect that required all mobile games to be approved before being published in China. I’ve already published an article on what those regulations covered and I recommend reading it first if you’re unfamiliar with the changes.

It’s now been over half a year since the new regulations came into effect and as this is by far the most comprehensive set of regulations governing mobile games to date, I thought I’d take a look back and see what’s changed since then. Since the new regulations have come into effect we’ve seen the SAPPRFT ramp up the number of games it has approved for mobile devices. 110 mobile games were approved in July, 447 in August, 504 in September, 491 in October, 1,179 in November, 845 in December, 974 in January and around 650 have been approved as of February 24^th. In total that’s around 5,200 games that have been approved over the past 8 months.

SAPPRFT has promised to make the approval process easier and shorter and that’s something they need to do if we’re ever going to see the annual number of mobile games released exceed 15,000 like it did back in in 2015. Whilst we can see that SAPPRFT has ramped up approval times, most games that aren’t simple or casual games still take a good three months or more before being approved. Game companies like Tencent and NetEase have been keen to get ahead and have around half a dozen games each that have been approved but aren’t set to release until later this year.

Foreign Developers

It’s not just local publishers like Tencent and NetEase that were affected by these new regulations, all foreign developers will need to adhere to these new regulations too. Not only do foreign developers need to register copyright and the game itself, they will now need to work with a publisher in China to obtain a license number before they can bring the game to any app store. This has been the case for Android stores in the past, but on Apple’s iOS store developers used to be able to publish their game in China through iTunes connect. Foreign developers who have logged on to iTunes connect recently will no doubt have seen this message.

Foreign developers who plan to distribute their game in China will now need to work with a Chinese publisher (or set up a JV) so that they can localize the game, obtain approval for the game, market the game and operate the game in China. Other options include working with a publishing entity directly or utilizing a new service such as Unity’s publishing tool for the Xiaomi app store. The approval of the game itself, which is done through a publishing entity will always take a minimum of 90 days to complete as foreign owned games are not eligible for the fast track publishing process that SAPPRFT offers for casual games developed by a Chinese company.

However, before a developer even gets to the stage of submitting the game for approval there is a few things they should know-

Censorship

As every game must now be approved by SAPPRFT there is an element of censorship involved at the game level. Any Chinese publisher that a foreign developer works with in China is going to ask them to make changes and this is so that SAPPRFT can approve the game straight away, rather than reject the game over and over again. It’s best to read and understand the below as these standardized rules will very quickly let foreign developers understand if their game will make it in China. Games like Grand Theft Auto for example are outright banned in China and no amount of small changes to that game will ever lead to it being approved-

All Online games must not have-

Anything that violates China’s constitution
Anything that threatens China’s national unity, sovereignty, or territorial integrity.
Anything that harms the nation’s reputation, security, or interests.
Anything that instigates racial/ethnic hatred, or harms ethnic traditions and cultures.
Anything that violates China’s policy on religion by promoting cults or superstitions.
Anything that promotes or incites obscenity, drug use or violence.
Anything that harms public ethics or China’s culture and traditions.
Anything that insults, slanders, or violates the rights of others.

No English

One of the other regulations that foreign developers need to be aware of is that there cannot be any English words or letters in the game at all. This rule also applies to any language that isn’t Simplified Chinese. This rule has actually been in place for a number of years but has only started being enforced since the new regulations started operating in July 2016. The policy is extremely strict and we’ve seen games be rejected by SAPPRFT because they used identifiers like “HP” for health points and “KO” for knock out. SAPPRFT acknowledges that only certain English words such as brand names or trademarks can be used. Identifiers such as “OL” for Online and “VR” or “HD” for Virtual Reality and High Definition are also ok. But in general, it’s best to fully translate everything in the game to Simplified Chinese. It should also be noted that all voice overs, subtitles and even the games name itself will need to be in simplified Chinese as well.

Other Best Practices

The censorship segment above contains some vague rules about what games shouldn’t have in order to be approved in China. But we’ve noticed some more specific points that foreign developers will need to adhere to in order to have their game successfully approved for sale. These points are outlined below-

All games must have a “Healthy Game Advise” warning screen in the game. Similar to those ‘take a rest every 15 minutes’ disclaimers you used to get before playing a console or PC game.
In game chat features must have filters applied to ban sensitive words. This also applies to any sort of text input such as users being able to choose a name for their character.
Game characters must not be wearing revealing clothing or see through clothing. This applies to both male and female characters and also applies to game advertising too.
The game must not include negative or derogatory words. Phrases such as “Hacked to death” probably wouldn’t pass the censor whilst “wiped out” would make more sense.
Games that depict extreme contexts, such as excessive violence or war will find that they’ll be asked to tone it down a bit. Blood is allowed in games but too much blood on the screen at one time or blood remaining on the screen for a long time would likely not make it past the censor either.
In addition to censorship, SAPPRFT won’t approve games that don’t function correctly. So do make sure that your game is tested before submitting it as they will be quick to point out if the game doesn’t work.
Games that give the users a chance gambling mechanic or “gacha” related to real money must have limits and warnings before launching the game. Developers of the game will also need to publish the drop rate of items or content that utilize a gacha mechanic.

The above isn’t a complete list, but when paired with the general guidelines in the censorship segment above it should provide a good idea to foreign developers of what they should expect before thinking about entering the market in China and submitting their games for approval.

The new regulations are daunting, but by understanding the Chinese gaming audience, the rules and the process, game developers can still release games into the market, albeit at a slower rate. Now more than ever it is crucial to study Chinese gamer behavior, build relationships with publishing partners, and invest in localization that reflects cultural understanding beyond the requirements for all games to include only Chinese text.

The new regulations are covered in more detail in our China Mobile Gaming report. Niko Partners is also working with Pillar Legal to bring a comprehensive report covering new regulations on the Chinese digital games industry, due to be published next month. Please feel free to email me for more information on this at Daniel@NikoPartners.com

What analysts think about Super Mario Run

24th December, 2016 · ZhugeEX · 2 Comments

This article will look at Nintendo’s strategy for smartphones and attempt to explain how Super Mario Run has performed in the app store.

Nintendo have three goals with their smartphone games:

1. Have more consumers experience Nintendo IP
2. Aim for Smartphone games to be profitable on their own
3. Drive synergy with traditional console business

Lets look at Pokemon Go first. The primary goal for that game was to have more consumers experience the Pokemon IP with the secondary goal for the game to be profitable and drive synergy with the traditional console business. Little did Nintendo know that the game would end up significantly succeeding in all three areas with over 600 million downloads, an annual run rate of $1 billion gross for the game and Pokemon Sun & Moon + 3DS sales breaking records over the past few months. Pokemon Go proved the power of Nintendo IP on mobile and it convinced Nintendo and the world that there is indeed a significant opportunity for Nintendo IP on mobile.

Now lets look at Super Mario Run. The game was announced as a premium paid game with a free trial, or free to start if you will. It was clear from the moment the game was announced that the primary goal of the game was to have as many people as possible experience the Mario IP, whilst the secondary goal was for the game to generate high revenues / be profitable and drive synergy with Mario in the dedicated console business, merchandise business and theme park business. The fact that Nintendo confirmed the game will not have regular/long term updates really does show that for them this game is a marketing tool for the Mario IP and other business segments and not a F2P game designed to generate long term revenue on mobile.

The majority of mobile gamers do not pay in mobile games (these guys don’t buy games and have no intention of ever buying games), even in free to play games. So it was clear from the outset that not everyone who downloaded the game would pay and that a notable number would never pay anything for the game. Those that did pay would hit a spending cap of $10, due to the one off payment, and therefore generating as high revenues as Pokemon Go was off the table from the start. Everyone knew this before the game launched. A lot of people also assumed that the free trial portion of the game and onboarding process would be good enough for people to have a good experience without needing to pay and that it would drive some people to buy the game eventually.

Has Super Mario Run hit its goal of reaching as many customers as possible? Without a doubt. The game has been downloaded over 50 million times in a week on iOS only. This is a record for the app store and Mario Run has achieved something that no other game has been able to do in one week. It just shows how big the Mario IP is and how successful Apple’s notify button + store promotions were. The goal of the game is really to have Mario played by as many people as possible, which is much more likely to happen on a smartphone install base of over 2.5 billion (Apple + Android) than on the Wii U which doesn’t even have a 15 million install base. The second goal is to have them come away with a positive experience, perhaps buy into the game or other Mario products/merchandise. The game being on smartphones also allows the game to be played by a younger audience that is being brought up on smartphones and may never have played a Mario game before / are not that familiar with the Mario IP.

So why have you read about analysts saying the games sales are disappointing despite hearing that the game has been downloaded over 50 million times in a week? There are a number of reasons which I’ll go into now.

The first reason is that the game costs $10. Mobile games in 2016 are usually free to play and those that are paid are usually very niche titles with extremely dedicated fanbases or are a ridiculously huge IP like Minecraft which has 40m paid DL. Now of course there are other successful paid games in the app store but they generate less than the top F2P titles and a large part of the mobile game first audience won’t touch them due to the price tag. Mobile is not a gaming first platform so a lot of people don’t have the intention of buying games ever on the platform. Those people are willing to download a free game to pass the time though. A number of negative reviews center around the price as the number 1 reason for their negative review. Therefore, a conclusion can be drawn that perhaps the price was too high or that Super Mario Run may have got better feedback if it was free to play to allow both high downloads and customer satisfaction. So that’s why some analysts are worried that the high price may have had a more negative impact on the wider mobile gaming audience than a positive one. One could argue that the people complaining never would have bought the game in the first place and will never buy into any Nintendo ecosystem products, but the fact that the number of negative reviews + word of mouth is this high shows it may have left have a bigger negative effect overall.
The second reason is the onboarding process for the game. The app store does not make it clear before downloading that the game has a $10 purchase in game that unlocks everything. It is in the description but no one reads the description, especially for a Mario game. Once users download the game they need to select their country (why?), create a Nintendo account which takes extra time and requires you to exit the app multiple times to complete the set up, then it requires you to accept push notifications etc… It’s a very antiqued onboarding process and one that seems like a Japanese smartphone game from 2011. Once that is all done extra data is downloaded and you play the first three levels. This can take between 5 to 10 minutes to complete and then users are hit with an unlock screen if they want to continue. The $10 unlock screen comes way too soon and doesn’t make it clear what exactly it unlocks (Are there more than 6 levels?) and also doesn’t make it clear what is already unlocked (multiple run throughs to get different colored coins + toad rally etc..) and so users being hit with this paywall early on are not understanding it and leaving negative reviews. People feel they were misled and the free portion of the game isn’t long enough or explained well enough before people are hit with that paywall which turns them off.

Those that are paying for the game right now are core Nintendo fans. Those that never pay in mobile games are being turned away by the price tag and poor onboarding process. Those that may be willing to pay are also being turned off by the high price and poor onboarding process too. It is great that Nintendo is willing to experiment with a pay to play freemium model but it does show just how difficult it is to make that model work on a platform where the majority of users just don’t pay anything. Especially given that Nintendo didn’t quite get the onboarding process right here. The reason F2P came into existence in the first place was because it meant more people could play the game and the small minority that did pay would not have a spending cap on the game. Now free to play is the standard model and the game looks like a free to play game on the app store. So of course people are going to be upset when they’re asked to pay after 5 minutes of gameplay.

Overall, the above has led to more negative reviews and less than positive word of mouth than it has positive reviews. Even some tv shows (Seth Meyers) have made fun of it for charging $10 after three levels. The onboarding process has left a sour taste in peoples mouths. This is a worry given that new/lapsed Nintendo gamers aren’t experiencing the full game and are turning away with a negative experience. This could affect Nintendo’s second and third overall goal of profitability + synergy with consoles + could even affect DL next month or when the Android version comes out. Not to say that Nintendo should have made this free to play, but they seem to have missed a trick by not getting the onboarding process right and perhaps by charging too much.

So, yes the game has been downloaded 50 million times. But if the majority of those are not having a great experience then that is something worth considering when measuring the success of the game. We’re already seeing the game slip out of the top grossing charts despite the number of downloads still remaining high which isn’t a good sign. Then again, that’s 50 million + people still talking about the game so that could also be seen as a good thing in one way. Of course, Nintendo has set the price at $10 to mitigate some of the risk and so that Mario does not become devalued on mobile + make it easier to upsell to console/other licensed products. But it looks like the onboarding process is what didn’t work well for them. Perhaps if the game was labeled more clearly on the app store it would have set expectations better and not had the negative backlash.

Nintendo’s goal in the future, as confirmed by Kimishima, is that Nintendo want to create a successful and profitable mobile games segment alongside their console segment. So we will see different models such as free to play and games that aim to generate higher revenues. If Nintendo get it right we could see them with a billion dollar mobile games segment in a couple of years time which would offset the loss of their dedicated handheld game revenues when Switch comes out and 3DS is discontinued.

So what happens now? Well, everyone will be looking to see how the game performs in Week 2 and beyond. Will the game continue to achieve high downloads in week 2? Initial reports suggest people are still downloading it and it’s still featured on the app store. Will the game convert as well in week 2 as it did in week 1? Initial reports suggest no. That could be an effect of the negative feedback the game has received. Will the game push people towards Nintendo consoles + merchandise? This remains to be seen. It’ll be very interesting to watch.

Anyway, that’s just my take on the above. Please feel free to leave your thoughts below.

*Speculation* With Super Mario Run it was clear that Nintendo wanted to treat this as a marketing tool first to get the Mario IP back into the mainstream. There is no issue with having a few games like that where revenue is not the primary goal, but it does seem like Nintendo overruled DeNA on this game earlier on. It seems to me the game was originally going to be F2P, which is clear from the Toad Rally mode tickets + kingdom builder + limits to how much you can have etc… but Nintendo pulled the plug. Which makes sense given they didn’t want to devalue the IP, but then the two point above have led to negative reviews when it may not have had that much negative feedback had they got those two points right or made the game F2P. Just speculation on my end here. *Speculation*

My thoughts on PlayStation VR sales

5th October, 2016 · ZhugeEX · Leave a comment

Note. The estimates quoted in the article below are based on a personal forecast and are not related to any estimates from my employer (Niko partners).

PlayStation VR will launch next week, marking the first time that Virtual Reality hardware and software will be available on a dedicated home console (If you ignore Nintendo’s attempt two decades ago). Sony has made it clear that they want to bring Virtual Reality into the mainstream through lower price and a more comfortable and controlled experience. The below is some of my general thoughts on why PlayStation VR will do well, but also why it won’t be as big as some are predicting. Note that these are just my personal estimates and I could very easily be wrong.

Sony have ticked the box on price, with the headset available in two SKU’s, one costing $399 with the PS VR headset and the other costing $499 which comes with the headset, camera, two move controllers and a copy of VR Worlds. This is considerably cheaper than its competitors in the PC space which come in at $599 (Oculus Rift) and $799 (HTC Vive) respectively. The cost of the Oculus is also somewhat inflated by the yet to be released touch controllers which are rumoured to come in at over $150, effectively making the device as expensive as the Vive.

The entry price for the PS4 console itself is now $299 which means that a consumer can be VR ready with PlayStation at the same price as it would cost them to buy the HTC Vive alone. This is a huge advantage to Sony and that advantage gets even bigger when you realise that they already have an install base of over 45 million PlayStation 4 customers that are VR ready. This is a very large number compared to the 20 million or so PC’s that are compatible with the HTC Vive’s and Oculus Rift’s high required specs. These PC’s also cost hundreds, if not over $1000 dollars to build, making the entry price for PC based VR considerably higher than for console based VR.

Sony also has a huge advantage in creating a closed and controlled system with PS4 and PS VR. It allows them to create a controlled environment that provides a more polished and consistent experience to gamers. PC VR will always provide a higher quality experience in terms of visuals and processing power, but it is currently on a fragmented platform. PlayStation can certainly use this advantage to drive adoption of their more polished and standardised experience through positive word of mouth and marketing.

The company has done well to tailor the experience to gamers in the living room by allowing games to be played seated or standing with minimal need to move around the room. Space is a key issue and the HTC Vive requires a lot of it for games, PS VR does not. PlayStation VR also makes Virtual Reality more social by introducing the second screen concept. It allows them to market their games as experiences for the entire family or a group of friends. This increases the appeal of the product significantly over competitor devices.

In addition, more than 230 developers are working on creating games and applications for PlayStation VR with 50 due to launch before the end of the year and a further 110+ announced titles in development for 2017. Sony will also ship a demo disc with the PlayStation VR allowing gamers to try out 18 different titles, a great way to encourage spend on premium priced software. The software development landscape certainly looks good on PlayStation VR and whilst a lot of the early titles are tech demos or full console games with VR added on, I expect we will see more immersive VR experiences in 2017 and 2018 as the industry grows.

Sony is well positioned to take the lead in the high end VR space due to all the reasons listed above. The Oculus Rift and HTC Vive have fallen short of expectations this year and it all comes down to the high price of entry, lack of innovative and new software, a fragmented experience on PC and the inability for consumers to experience/understand VR. John Riccitello’s gap of disappointment is very much real and I wouldn’t expect adoption in the PC space to grow until all four issues are addressed.

Whilst I expect Sony to be the leader in the space, this doesn’t mean that they don’t have issues that need to be addressed too. The biggest issue right now is that Virtual Reality is a very new medium in the eyes of the world. It is not based off an established technology and it is not something that everyone can experience or relate to through a traditional video demonstration or billboard ad. This has led to Sony rolling out demo stations across GameStop to engage consumers and allow them to experience the sense of presence that VR brings. It has also led to them marketing VR in creative ways by introducing the second screen concept and by creating a transparent headset in adverts to allow viewers to see the expression of joy on peoples faces that would otherwise be hidden by the HMD.

The second issue is cost. Whilst the headset is considerably cheaper than its competitors, it is still a minimum of $399. This is $100 more expensive than the actual console itself and so it makes sense why Sony are trying to position PlayStation VR as its own platform, rather than a simple add on. Whist the addressable market is huge, the number of people willing to spend $400+ isn’t according to various surveys and this is one of the reasons why Mobile VR is set to be adopted much faster than console and pc based VR.

The PlayStation VR headset itself is also one factor holding back the adoption of console based VR. Whilst the design is very consumer friendly, it is still slightly bulky, awkward to wear and requires a number of cables and connections to work. The Move controllers were not designed from the ground up for VR and so some have noted that they can be uncomfortable during gameplay and not feel natural.In addition, the hardware specs are not at a level that allows for the same level of graphics that a HD Console game would have. That being said, the headset is providing a ‘good enough’ experience for early adopters to VR.

The final point holding back PlayStation VR is software. Right now the software titles being released are a cross of tech demos and add on VR content to a full HD console game. It allows big franchises to cross over to the VR world, but right now they’re not offering a more compelling experience than what can be found on the console itself. PlayStation VR needs a continuous stream of both big franchises and unique VR only software in order to push hardware sales. Sony also need to enhance their non game offerings in order to increase mass market appeal. We’ve already seen Anywhere VR and a few other non game apps which are a start. We should expect to see more non game apps for PlayStation VR beginning in 2017.

It’s clear to me that PlayStation VR is best positioned to take the high end space easily and even take market share away from Oculus and HTC. However, we are still very early in the VR lifecycle and with the factors listed above, high end VR will struggle to meet mainstream status for a while. Initial demand for PlayStation VR from the early adopter crowd has been there like it was with Oculus and HTC, but we saw that sales started to drop off once the supply issues were sorted . PlayStation VR could see a similar drop off, but I am actually slightly more bullish and expect the support from Sony and third party to be a huge driver of sales for PlayStation VR in 2017 and beyond as the PS4 becomes more attractive at a mass market price with big franchises appearing on both PS4 and PS VR exclusively. Not to mention that Sony are selling PS VR at a profit from day 1 which gives them additional flexibility when it comes to price drops to encourage adoption.

Console VR will also receive a boost from Project Scorpio at the end of 2017, which is due to support VR. It’s not 100% clear if Microsoft will release their own headset or partner with Oculus, but it means that more software will come to console VR and boost the space even further. Oculus Rift and HTC Vive are expected to ship under 1 million (significantly under 1m) units combined in 2016 and the reason for this low number is primarily due to all the factors listed above. I believe that it will take a hardware refresh in the high end PC VR space for adoption to grow.

Sony has noted numerous times that they are being cautious with PlayStation VR and have used a pre order system to see what sort of demand there is for the headset. A good chunk of early adopters, mainly those who purchased the PS4 day 1, have registered interest in the system and it looks like PS VR will easily outsell both Oculus Rift and HTC Vive on an individual level, if not combined, in 2016. That being said, a number of PS4 early adopters are also interested in the PS4 Pro which limits the appeal of PS VR this year due to the high price of both.

Overall, I expect Sony to use this year as way to test the waters for demand of VR hardware and software in comparison to their other more established products. Sony has hinted that supply may be constrained through the end of the fiscal year and we could see a product that has more demand than supply because of this. That being said, the demand right now is from early adopters who are aware of the 50 titles at launch and the capabilities of the system. Sony will no doubt increase supply in line with demand as new software is released, positive word of mouth begins to spread and more are able to experience VR in store through 2017.

Having looked into all the available data and reading some of the feedback today, I expect Sony to ship 300,000 units of PlayStation VR hardware to stores during the launch period with an additional 300,000 units shipped during the holiday selling season for a cumulative total of 600,000 units sold by the end of 2016. EDIT FOR NOVEMBER: After a statement from Sony saying that they will increase production to meet demand I now expect a further 200,000 or so units to be shipped before the end of this year for a cumulative total of 800,000.

I am also expecting 2017 and 2018 to be the peak years for the product, assuming Sony are able to deliver on the three points noted in the last paragraph. A total of 3 to 4 million units could be sold during 2017 and 2018. The numbers may seem low but I would say that the appeal for high end VR will remain limited overall with Mobile VR taking the biggest share of the pie first and a second gen PC/Console VR generation succeeding that.

Overall, I expect PlayStation VR to be treated by consumers as an add on to the PlayStation 4, similar to that of PS Eye on PS2, even if Sony are trying to position it as its own platform. We may have to wait for a second revision of PS VR for console VR to really take off and conquer the mass market. I would be surprised if this gen 1 headset achieved a signifcantly higher than 5% attach rate with PlayStation 4 and I estimate that the headset will not top the 10 million sales milestone in this generation.

Tencent & Supercell – What does it mean?

22nd June, 2016 · ZhugeEX · Leave a comment

Chinese Internet company Tencent confirmed yesterday that it has agreed to buy SuperCell in a deal that values the Finnish games company at around $10.2 billion. Tencent will acquire an 84.3% stake in the company at a value of $8.6 billion. Supercell employees will continue to own the rest of the company. SoftBank will be selling its 72.2% stake in Supercell and will own no shares after the deal closes in the third quarter.

In addition to selling its stake in the company, SoftBank will also receive a dividend of $0.4 billion from Supercell before the transaction closes. SoftBank say that they have earned a total return of $8.4 billion on their investment in Supercell which is around 2.9 times the original capital invested. SoftBank will receive 48% of the payment from Supercell in August, 50% in November and 2% in August 2019. This isn’t the only big move that SoftBank have made, recently they chose to sell $7.9 billion worth of its shares in Alibaba and around $685 million of its shares in Gungho Online Entertainment. SoftBank say that this is part of their ongoing strategy to cut debt in order to improve their financial standing after a somewhat disastrous Sprint acquisition which has led to an overall debt of $107 billion. SoftBank have shown that they continue to stand by Sprint, by increasing ownership in the company, and therefore are divesting some of their other assets in order to improve on their current situation.

Supercell

Supercell is a mobile game developer founded in 2010 and based in Finland with 5 offices around the world and 4 hit game titles – Clash of Clans, Clash Royale, Hay Day & Boom Beach which have a combined 100 million+ active users. After switching to a “Mobile First” strategy in 2011, Supercell have been hugely successful with their mainstay title “Clash of Clans”, which has consistently been in the worldwide top 10 grossing iPhone & Android list since launch. Revenues for the company have grown from $101 million in 2012 to over $2.3 billion in 2015. SuperCell also generated a profit of $964 million before tax during 2015 which shows how efficient the company is. What’s even more impressive is that the company achieved those revenues in 2015 with just 3 active games and 180 employees. Whilst Clash of Clans is by far the biggest revenue generator, the average revenue being generated per game in 2015 was around $760 million which is more than most games earn in their lifetime. The revenue per employee metric also shows just how successful the company is with each employee accounting for nearly $13 million in revenue.

As you can see from the chart above, Supercell are generating huge profits that are similar to that of Activision Blizzard & EA and more than that of Sony’s Game division & Nintendo. They were one of the top 10 biggest companies by game revenue in 2015 and one of the most, if not the most, valuable mobile game developers today. The company operates a small number of hit games around a live service model which keeps players engaged and spending over a long period of time. The strategy has worked well for Supercell with all of their games ranking within the top 20 grossing games in the U.S. on a regular basis. Supercell are also not afraid to kill games that they believe have no potential to succeed and quickly move on to another project. Under SoftBank, Supercell have retained their independence which has allowed them to develop the games they want with no restrictions.

Tencent

Tencent is the largest gaming company in the world, and that’s even before you figure in Supercell’s revenues. Unknown by many in the West, Tencent are a huge Internet company in China who are known for their services such as WeChat and their huge gaming presence on PC & Mobile. Tencent’s strategy for gaming has 3 points. The first point is their investment in internal IP’s aimed at the Chinese market on PC & Mobile. Tencent have developed many hit games in house with the biggest being League of Legends (Riot Games actually developed this but since Tencent own Riot I thought I’d include this as it’s probably the only one you’ve heard of) and other hit titles such as Moonlight Blade, WeMOBA & Honor of Kings. The second point is that Tencent work with external developers to bring their games to China successfully. Many of Tencents biggest games like Crossfire, Dungeon Fighter Online, Blade & Soul and many others are created by overseas developers and then successfully promoted & sold in China. The third point is that Tencent continue to invest in game related companies, Supercell being the most recent example, but before that they purchased Riot Games (League of Legends) and own stakes in Epic Games, Activision Blizzard, Glu Mobile and many others. This allows them to have a huge global presence which often goes unnoticed.

Tencent’s gaming revenues continue to grow at a record pace as they continually release more and more hit games in the PC & Mobile space in China. Online Gaming continues to account for more than 55% of Tencent’s overall revenues and in 2015 the company generated more than $8.7 billion from games software, of which $3.2 billion was from Mobile games. Tencent have also grown their games division by leveraging their Internet services such as WeChat, which has nearly 800 million monthly active users. Tencent also plan to organically grow their games division this year through the release of more hit titles and plan to expand their IP’s into fully fledged entertainment properties through other forms of entertainment.

Benefits for Supercell

There are plenty of benefits for Supercell in this deal, the first being that Tencent are taking a hands off approach and allowing the company to remain independent. In other words there are no changes being made to Supercell’s location, employees, games or creative process etc. and that is a very good thing. It means that Supercell can get on with their winning formula without any issues and can do what they do best. Tencent did the same with Riot Games who have grown League of Legends into the biggest PC game worldwide. Where Tencent can benefit Supercell (& Riot) is with the support and resources to localise their games in Asia and have them promoted in the right way. Tencent can easily provide additional resources to Supercell at any time and assist them in making their games even more popular in China than they are today by leveraging their Android gaming platform which is currently used by more than 300 million unique gamers. Supercell games now have the opportunity to reach more gamers and to enhance their games for social play on Tencent’s gaming platforms. With Tencent publishing the game, rather than Kunlun, it means that the company will see all the revenue that it generates from games sales in China, rather than a small percentage like before.

Another benefit, and one that Ilkka Paananen talked about is being able to work with other Tencent owned companies like riot games to learn from them. Riot games have been hugely successful with e-Sports and Supercell are only just starting to explore the world of e-sports with Clash of Clans. Supercell could potentially work with, or learn from Riot Games in order to enhance the success of e-sports in their titles as an example. Overall, Supercell are in a much better position now than they were with SoftBank. SoftBank were hands off as well but they were too hands off in a way that meant that Supercell couldn’t rely on them for help. With Tencent, Supercell can gain a lot more due to Tencent’s experience in the Games industry. Supercell employees will also benefit from this through a share incentive. Employees will now be able to sell shares from vested options to Tencent on an annual basis which should help employees stay financially motivated. Most importantly of all, Supercell stay private and there are no changes to the magic formula.

Benefits for Tencent

The deal also benefits Tencent in a number of ways as well. The most obvious benefit being that it instantly adds another $2 billion plus in revenues to their online gaming segment. Even if revenue from Tencent games remains flat this year, the boost from Supercell would allow for revenues to increase at a faster rate from 2015 to 2016 than they did from 2014 to 2015. As noted in the slide below, total combined revenues for Supercell and Tencent would’ve equaled $11.1 billion in 2015 and could exceed $13 billion this year giving them a 13% share of all worldwide game software related revenues. The deal will also allow Tencent’s mobile gaming revenues to grow faster than expected and account for around 50% of their total game related revenues. Tencent would now not only be the largest PC game publisher (League of Legends) but also be the number 1 mobile publisher worldwide with Clash of Clans, their internal IP and other partner IP.

Tencent generated around $1.3 billion in revenue during 2015 from outside China. This deal is a way for Tencent to indirectly expand their presence in the West where they’ve traditionally struggled with their own internal IP. With Riot Games and Supercell, Tencent now own one of the biggest PC gaming companies in the West and one of the biggest Mobile gaming companies in the West. Revenues generated in the West could triple as soon as this year for Tencent. The company now has a serious presence and revenue stream outside of China. But this isn’t just about the West. Tencent have done an excellent job at making League of Legends, which was somewhat popular in China, into the most popular game in China. It’s an example of Tencent doing what they do best with their partners. Now with Supercell, Tencent have the opportunity again to “do what they do best” and make Clash of Clans, a somewhat successful game in China, into the most successful game in China. Tencent also have the opportunity to learn from Supercell as well, no doubt about that. What Supercell have done in the last few years is extremely impressive and many would jump at the chance to be able to learn from them.

Tencent are also making a smart move by increasing their mobile game portfolio. Mobile gaming is still set to grow and Supercell are on track to see revenues grow this year. On the flip side, the number of PC gamers in China has stopped growing and revenues for PC gaming have remained somewhat stagnant in recent years. With this move, Tencent are pushing Mobile gaming revenues higher than PC gaming revenues (In the company) and setting up a future where Mobile games is the biggest and fastest growing segment for the entire company.

Overall it’s another great investment for Tencent in the gaming sector, not only are they acquiring the Supercell IP, employees and know how, but they’re also acquiring the over 100 million people who play Supercell games every day. That makes these IP very valuable and there is definite room for expansion of these IP into other Entertainment areas, whether it be e-sports, movies, comics, merchandise etc….

Risks

However, as positive as this article has been, there are some concerns with this deal and just how big of a return it will generate for Tencent. Tencent didn’t really over pay for Supercell at all, instead some will say that the price Tencent paid is quite reasonable. However there is an over reliance on a small number of hit titles from Supercell to generate high profits. Should just 1 of the games start to lose users at a rapid pace, Supercell could start to see revenue and profit decline sharply, especially if they have no new hit title to replace the old one. Also the cost of developing new games, maintaining current games and user acquisition costs continue to increase. This means that Supercell could see the same revenue in 2016 that they generated in 2015 but the costs could be much higher leading to a lower operating Income. Ultimately there are many scenarios in that Supercell could go from a huge revenues to low revenues in a short amount of time.

So far the company has another hit on its hands with Clash Royale and other games are performing fine so it seems that the company will continue to grow this year. How long they can continue growing for is another question in itself though. So far, Supercell have been able to prove that hit mobile games can continue to engage users for a very long time, three years in the case of Clash of Clans. They are also looking into new ways to increase user engagement and spend, through e-sports for example. If Supercell can continue to overcome consumer fatigue and introduce new ways to keep users engaged, then the deal will have been a huge success for Tencent. If not then it may look like Tencent have just spent $8.6 billion on a company that were at their peak last year.

Another risk that hasn’t been talked about as much is the risk that the talented staff at Supercell may decide that now is a good time to leave the company, perhaps to create their own start up. Tencent say they want to continue to encourage strong employee evolvement through share incentives where employees will be able to sell shares to Tencent at their current value. A few may decide to take the money and leave, especially if they feel the whole Tencent thing isn’t working out. The biggest issue here is that Supercell could lose some key team members and be unable to replace them. It’ll be interesting to watch this.

Summary

With this deal closing in August, Tencent are now huge. In fact they’re bigger than huge, their game software revenues will be higher than Activision Blizzard and Electronic Arts combined. Speaking of Activision, the King deal was more about Activision buying themselves into Mobile. With this deal, Tencent are not buying themselves into mobile as they already do well with mobile. What this deal is doing is solidifying their position in Mobile, making them the number 1 mobile game publisher, and allowing them to achieve a direct presence in the West in Mobile gaming.

Tencent now dominate the entire gaming market and it’s not just because of the Supercell acquisition. It’s much more than that. First of all, Tencent’s mobile presence is already huge as I mentioned earlier. Tencent are already the number 1 mobile publisher in China and 10 of the top 30 mobile games in China are published by them. With Supercell they also have a huge presence in the West and become one of the top publishers there. In PC Gaming they have a huge number of Internal IP’s and Partner IP’s like League of Legends, Crossfire and Dungeon Fighter Online that do well in China making them the number 1 PC publisher there. The success of League of Legends in the West also means that Tencent are one of the biggest PC game publishers in the West too.

But it doesn’t end there. Tencent hold stakes in mobile companies like Glu Mobile, Miniclip, CJ Games and many others that have seen good levels of success. They outright own Riot Games in the PC games sector and hold a nearly 25% stake in Activision Blizzard and a 40% stake in Epic Games. In short, not only do Tencent have their hugely successful internal games in China, they now own the number 1 PC game company (Riot Games) and number 1 mobile game company (Supercell), they also publish some of the most popular games in China which have been developed by partners, and finally, they hold a stake in pretty much every gaming company you can think of.

Who will Tencent buy next?

The future of Games Consoles is evolutionary!

25th April, 2016 · ZhugeEX · 3 Comments

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

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.

MICROSOFT

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.

SONY

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.

SUMMARY

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.

Sony celebrates one year of PlayStation in China – REPORT

14th April, 2016 · ZhugeEX · 2 Comments

5,500 word report on the Chinese console market
Sony has a successful first year but faces many challenges
Console market still very niche, potential to grow is there

It’s been just over a year since the PlayStation 4 and PlayStation Vita officially launched in China. Sony held their own anniversary event to celebrate the occasion and so I’d like to go back over what has happened during year 1 for PlayStation and consoles in China so that people who do not know much about the situation there will be understand the various success, challenges and mistakes that Sony have had over the past year.

First, we need to understand the Chinese market as it is today. In 2015, China has a population of nearly 1.4 billion and in 2015 was crowned the largest games market in the world thanks to games software and services revenue of $21.7 billion. There are now more than 130 million PC gamers in China and a whopping 400 million mobile gamers in China. In fact the total number of mobile gamers in China is more than the population of the US.

Mobile gaming has become hugely popular in China thanks to the increase in affordable smartphones and continued investment in software and services from Chinese tech companies. Mobile has acted as a leapfrog technology for China as users in China are now Mobile first and use their mobile devices for pretty much everything where as most in the West may still use a PC for some things. Social networks like WeChat on Mobile allow users to buy goods, transfer money, pay utility bills and order taxi’s etc…, all within 1 application. It’s only now that companies in the West like Facebook are starting to do this.

With everyone in China using Mobile for everything, it makes total sense that most would also play games on their smartphones in China. Companies like Tencent and Netease have created new IP’s on mobile as well as bought over very popular PC games to mobile and provided a full game experience on smartphones. By taking advantage of popular game genres and themes as well as integrating full social experiences, companies like Tencent have been able to dominate the Mobile games market in China and in total the Chinese Mobile games market generated over $7.9 billion in 2015 (Including advertising).

Before Mobile it was PC that was the leader in China. In fact PC still is the leader when you look at revenue rather than number of gamers. Despite a lower amount of players, PC gamers in China play longer, spend more and are more committed to gaming. However the number of Mobile gamers continues to grow in China and they are becoming more core so it won’t be long till Mobile generates higher revenues. A number of years ago the Chinese gamer would have to visit an Internet Cafe in order to play online PC gamer as it would be likely that they would not have an Internet connected PC at home. There are still more than 100,000 Internet Cafes across China today and anyone can go and log on to a popular online game such as League of Legends, Dungeon Fighter Online or Cross Fire and play for as long as they want for just a small amount of money.

Online games have been hugely popular in China’s PC market, this mainly as Chinese gamers prefer social experiences but also because you couldn’t really save a single player game on an Internet Cafe PC without hard drives filling up very quickly. These days the Internet cafe market is dying a very very slow death with many Chinese now buying their own PC’s (Steam is gaining traction in China) or moving over to mobile as their primary gaming device as it becomes more convenient. Chinese PC games revenues in 2015 grew to around $12.8 billion with $9.5 billion coming from online client games and the rest coming from social/web games.

Mobile and PC are the two biggest gaming categories in China whilst console gaming accounts for less than 1% of all games revenue generated in the country during 2015. Only $21.6 million was generated by console software sales in 2015 (Yes, that does say million, not billion) which is laughably low when you think about it. It’s the complete opposite of countries like the US where Console game sales account for more than 1/3rd of all games software revenue. The reason for this huge leaning towards Mobile and PC vs Console in China is very simple. Consoles have been banned in China since 2000.

It was back in 2000 that the Chinese Government saw fit to ban consoles in China. The official reason given at the time was that Video Games had a negative effect on the Chinese population and could affect the mental and physical development of young children. Its odd then that Mobile Gaming or PC Gaming was never banned, but that’s China for you. It was only in 2014 that China looked into this console ban and agreed to a trial period where foreign consoles could be produced in the Shanghai Free Trade Zone and then distributed across China, subject to standard local inspections on multimedia goods. Microsoft was the first to announce that they would be launching a console in China (Xbox One) and Sony followed soon after with the PlayStation 4.

Basically this trial was an experiment to see how it would work with games consoles being sold in China and to see what regulations would need to be changed. An official statement at the time said that this was part of China’s exploration of “reform and opening”. There had been a number of other economic reforms taking place at the time and this was one of them. In July 2015, a few months after the PS4 launch, the government issued a statement saying the trial was a success and that it was now over and it is officially ok for console makers to manufacturer and sell their goods anywhere in China. However, the regulations aren’t as simple as they are in the US for example. The Chinese government is still very strict about what Sony can and can’t do in China and so there are still a lot of restrictions and challenges that Sony face in the country.

Sony officially announced that PlayStation would be coming to China at the Sony Expo on October 24th 2014. It was Andrew House who took to the stage and confirmed that China, along with the US and Japan was now part of the three biggest markets for Sony Group and that they were now preparing to bring both the PlayStation 4 and PlayStation Vita to China in 2015. A further press conference on December 11th 2014 confirmed that the PlayStation 4 would launch in China for 2,899 RMB ($450) and the PlayStation Vita would be available at 1,299 RMB ($200). Sony said they would launch the systems in partnership with Shanghai Oriental Pearl (Distributor in China) and that they had over 70 third party developers willing to bring games and services to PlayStation in China.

Sony also announced that they had partnered with Snail Digital to bring ‘King of Wushu’ (F2P MOBA) exclusively to PlayStation 4 and they also announced that Final Fantasy X HD was in development by Square Enix for PlayStation 4 and would also come to China. These announcements proved that Sony were 100% serious about cracking China and not just launching the console with no support. Sony launched the PlayStation 4 and PlayStation Vita on the 20th of March 2015. A good number of people queued up at the Sony store in downtown Shanghai to purchase the consoles and games.

What challenges did Sony face?

Costs- The PlayStation 4 launched in China at $450 which was more expensive than the Western launch of $399. Microsoft launched their Xbox One even higher at $570 with the Kinect bundled in. The average Chinese gamer does not have $450 to drop on a gaming machine, in fact the average monthly wage in China currently stands at $750 a month which shows that the PlayStation 4 isn’t exactly something that everyone can afford in China. However there is still a large number of people in China with disposable income.

The chart above outlines how this works. It also shows that there is a fairly large audience that actually could be able to afford a PS4 but that relies on this audience being interested in games. Gamers in China these days aren’t used to paying upfront for hardware, or even software. Mobile phones come on contract and mobile games are free to play, PC games are also free to play and can be played at an Internet cafe. The PlayStation 4 goes entirely against what Chinese gamers are used to and requires you to pay upfront for both the hardware and software, it’s not exactly cheap either at $450 for the console and $40 each for a complete game. In some cases it can even be cheaper to build a gaming PC at home in China with most PC games F2P or very cheap on Steam. There are now nearly 10 million gamers using Steam in China.

Another issues that comes under cost is that most core console gamers in China may have already chosen to import a console or will choose to import a console as it is cheaper than the official Chinese version. During the console ban there was a small number of gamers that imported around 2 million consoles per year (at peak) and as the PlayStation 4 came out a year and half after the Western launch then it only makes sense that some may have already imported. This means that those that were willing to pay for a console in China already have one and so Sony needs to sell in to a new gaming audience in China for the launch to have been worth it.

Censorship- The Chinese Government still upholds traditional censorship laws and apply this to console sales in the country as well, what this means is that the government has to approve everything Sony and Microsoft do before they are allowed to do it. In this case it means that all game releases have to go through the Government first, if the game is too violent, has adult content or goes against Chinese cultural values then it will not be allowed to go on sale. Games like GTA 5 are outright banned whilst other games like Halo MCC have had to censor parts of the game or remove blood splatter just to get the game to pass the censor. All games content needs to be submitted to the culture department for approval and whilst the official procedure is supposed to take 20 days, it can take much longer in some cases. Here is content that is not allowed to be sold in China-

Gambling-related content or game features
Anything that violates China’s constitution
Anything that threatens China’s national unity, sovereignty, or territorial integrity.
Anything that harms the nation’s reputation, security, or interests.
Anything that instigates racial/ethnic hatred, or harms ethnic traditions and cultures.
Anything that violates China’s policy on religion by promoting cults or superstitions.
Anything that promotes or incites obscenity, drug use, violence, or gambling.
Anything that harms public ethics or China’s culture and traditions.
Anything that insults, slanders, or violates the rights of others.
Other content that violates the law

It’s an exhaustive list and one that is very much open to interpretation. Ubisoft were all ready to launch Assassin’s Creed Chronicles: China in the country and even started promoting the game, however the culture department came back to them at the last minute and banned the game from being sold. This censorship policy affects Sony a lot as it means that games like God of War 3 Remastered and Bloodborne will be unable to go on sale in China at all. Even Microsoft have suffered with none of their big 2015 exclusives having launched officially in the country. In total only around 50 games have officially launched on both PlayStation 4 and PlayStation Vita which is a far cry from the more than 1,000 games that have launched on these systems worldwide.

Games- Another issue Sony face is that games content can be hard to bring to China. There is almost a Chicken and Egg problem when it comes to console games. Publishers want to see evidence that their games will sell well in China before they part with the cash for a high quality localisation, but at the same time if there are fewer titles localised at the moment then it means that there is a lower supply of games to entice gamers to buy a PlayStation 4. It’s not cheap to bring over games to the Chinese Mainland as it requires the game to be fully localised into Simplified Chinese. This is different to Traditional Chinese which is used in localisations for Asia so more resources need to be used in order for a company to launch their game in China.

Games also have the issue of censorship as well. A localisation could be fully complete but if it’s not approved by the Government then it could mean that the publisher will either need to abandon their plans to launch in China or change the game in such a way that it now complies with the law. It’s also hard to know if these games will appeal to a Chinese audience. Console games are usually available on PC and those that are not are usually quite unknown to the Chinese market. A game like Little Big Planet 3 is huge in the West but in China the game is relatively unknown. It means that a lot of console publishers have to be smart about the games they bring over. They need to appeal to Chinese gamers or have some sort of hook that gamers will be drawn to. It’s the reason why games like Dynasty Warriors & Transformers have performed so well on PS4 in China. The Three Kingdoms period is hugely popular in China and Transformers was recently one of the top grossing movies in the country.

In total, only 6 games were available for the PlayStation 4 at launch and only a few new games launched each month. This was primarily because it was foreign publishers bringing games into China so it required localisation and approval first. This brings me on to my next point.

Chinese Games- Most console games are unknown to Chinese gamers, they prefer to play F2P games such as Fantasy Westward Journey or League of Legends which are only available on either Mobile or PC. The most popular Chinese games are nowhere to be seen on Console and so many gamers will not be interested or drawn to the PlayStation 4 without any sort of familiarity. In fact we’re starting to see a new trend emerge where Chinese tech companies are starting to enter the TV games market in China in an attempt to take over the living room.

Companies like Huawei, Tencent and others are releasing their own Android mini consoles onto the market that you can hook up to your TV to watch TV shows, Movies and play games. It’s basically an Apple TV or Fire TV for those in the West but there is a bigger emphasis on the gaming features with Tencent’s MiniStation console allowing you to control the games with your smartphone as well as promising PC and Mobile games playable on your TV with exclusive content. Tencent even plan for their future MiniStation variants to support VR. Ultimately this is a way to bring your Mobile into the Living room and play Mobile and PC games from your favourite publishers on the big screen. It doesn’t help that these Android consoles are targeted at families and come in considerably cheaper than what a PS4 or XB1 costs with some as low as $50. A number of big Mobile companies continue to invest in the ‘TV Gaming’ market and whilst it is technically bigger than the console market in China it hasn’t exactly taken off just yet or generated a huge return.

It is clear that Sony has competition from Chinese games companies, not only on Mobile and PC, but also in the living room as well. Sony need to appeal to Chinese gamers and bring more games to PlayStation 4 that are both free to play and also promote Chinese cultural values.

Family- Another challenge that Sony face in China is that gaming is that living room gaming is not accepted by most traditional families. It’s one of the reasons that consoles were banned in the first place. There are still a lot of negative stigmas around gaming, especially in the older population and so many parents are unwilling to buy dedicated gaming consoles for their Children. Chinese kids used to have to convince their parents to buy them a PC under the pretence of using it for studying but there is no such excuse for a dedicated video games console.

Of course a lot of this negative stigma has dissipated in the last few years as mobile gaming has taken off and many are now more open to the idea of gaming. There are always plenty of negative stories about gamers in the Chinese media, such as those addicted to gaming or committing crime because of gaming, but these stories have died down and ultimately there are more people today who are accepting of gaming than there were 10 years ago but it still remains something in the culture there and it’s not going to fully go away for another few years.

What did Sony do right?

Region Unlock- Sony hit a home run with the launch of PlayStation 4 in China. Console gamers in China had eagerly awaited news of the console launch but were gradually losing confidence after they saw what had happened with Xbox One. The Xbox One launched at a high price, was region locked and had a drought of no games for around 5 months after launch. Sony did the exact opposite and launched at a much lower price than Microsoft (Despite Sony being more expensive in the West) and also made sure that the console was region unlocked, this means that gamers could insert any disc into their console and it would work. They also released a steady stream of games each month. The region unlock was the biggest feature as it meant that gamers could play any PlayStation 4 game on their console. Xbox One gamers who purchased the official Chinese version were stuck with the 10 launch games and could not play anything else.

Sony also made sure to appeal to Chinese gamers through hardware bundles. To date there have been more than 10 custom hardware bundles or limited editions that have launched in China and have been tailored to appeal to Chinese gamers. Sony also helped lessen the upfront cost of PlayStation 4 by packing in 4 free games with the console which meant that gamers did not have to spend anything upfront in order to start playing games. Games were also considerably cheaper in China than the West with most AAA titles retailing for just $40 compared to the $60 they usually retail for. Sony also dropped the price of the PlayStation 4 last year to make the console even more affordable to gamers in China. Shanghai Oriental Pearl, the distributor, say they have sold more than 500,000 PlayStation 4’s and Xbox One’s to date. While there is no official split, some retailers are saying that PlayStation 4 sales overtook the Xbox One sales only a month after launch.

Monthly updates- Sony have been able to maintain a steady release schedule in China thanks to their first party teams, support from third party and also Indie devs. They have of course faced issues but their communication with gamers has been top notch. The marketing manager for China, Takehito Soeda, has done an excellent job at getting people excited about the console space in China. He is very similar to the current image Phil Spencer holds in the West where he listens to gamers and acts on his words. It’s a very different approach from the social media team at Xbox China who have, I’m sorry to say, hired a suit to provide PR statements of no value. Sony have been able to gain trust in China by continually supporting the gamer there.

Sony have even gone as far as to try and solve some of the issues with China’s console market. They were the first ones to bring a region unlocked console to China, they were also the first ones to bring simultaneous launches to China and they also are trying to work with the Government to bring in an independent body to approve video games (similar to ESRB). There is no age rating system in China and Sony are pushing hard for one to be introduced in order for game approval times to be sped up. For now the majority of games that have launched in China are kids games that don’t need to be censored such as ‘Minecraft’ for the Xbox One and ‘Little Big Planet 3’ for the PlayStation 4. Sony believe that by introducing a rating system it means more games can launch in China, that may have been outright banned before, and that it can speed up approval times to allow for more games to launch in China and the West at the same time.

Localisation: Sony have been very quick to try to appeal to Chinese gamers. Sony partnered with Snail Digital to bring ‘King of Wushu’ to PlayStation 4 from day 1 as an exclusive game. The popularity of both Chinese games and Free to Play can not overstated in China so this was a genius move to bring a Chinese game to PlayStation 4 first. It meant that gamers would require a PlayStation 4 to play the game and the game was completely free. Sony have continued to embrace this model on PlayStation 4 and have bought other free to play games such as Warfare to the console as well. As well as this, Sony have worked hard on localisation with many third parties to bring games to both Asia and China. PlayStation 4 is now the best selling console in Asia and this has a knock on effect in China as it means more games are now being bought over to Asia and localised in Traditional Chinese. What this means is that gamers in China do not need to wait for the game to be localised in China, instead they can just import the Asian version of the game and play and understand the game just fine.

Sony helped bring Metal Gear Solid 5 to Asia and other foreign publishers are seeing the advantage of bringing their games to Asia as well. SEGA very recently bought over Yakuza Kiwami to Asia and found that the game sold just as well in Asia as the game did in Japan. Before the PS4 launch, Asian gamers would either have to wait for a localisation or import the English or Japanese version. With the Asian versions now supporting Chinese, it means that sales have increased by a huge amount. It also means that games that are censored in China can easily be imported, Grand Theft Auto 5 for example is a huge hit in China and despite officially being banned is often the number 1 game being streamed on websites. Sony have started to expand their localisation team and have the aim of bringing even more games to China in the future. There are many overseas games now coming to China and many are seeing success there.

Local Support- When Sony first launched in China they set a goal to provide multiple programmes to local developers including technical support and financial incentives, with the aim for these developers to create console game products on PlayStation 4 that feature both Chinese cultural characteristics and local ways of game play, all aimed at meeting Chinese consumption habits. Sony have been working very closely with a number of big publishers and Independent developers in China to bring their games and new ideas to PlayStation 4. Sony have realised that whilst they will have the advantage in overseas software it is going to be local Chinese developers that can help grow the PS4 user base in China and even overseas through free or low cost digital download titles. Some of these games have already launched, such as ‘Mr Pumpkin’s Adventure’ where as some like ‘Chinese Paladin 6’ are still in development.

Sony have opened up a couple of competitions to support Independent developers through crowdfunding. The Indie game competitions are open to any indie developer in China who wants to develop their game for the PlayStation 4. The second competition, which ended in January, was arranged by Sony Computer Entertainment (Shanghai) in association with Oasis Games. Oasis Games are a publisher based out of Hong Kong who help support Chinese developers by bringing their games to market in China and overseas. The competition is run in a way very similar to Kickstarter, in fact the competition is run on ‘Modian’ which is the Chinese copy of Kickstarter. A total of 32 indie developers signed up to enter the competition. How it works is that gamers will watch videos and read descriptions of the games to see which ones they like best and then will help fund that game with their own money. The competition lasts for two months and the top 3 games that received the most funding from users would win and enter into a contract with Sony to receive more funding to release their game on PS4.

During the two months a total of 6,500 gamers funded more than $33,000 across all the games. Similar to kickstarter the funders do not go away empty handed, as Sony was the sponsor all the prizes were pretty much Sony merchandise. Funders actually got a generous return as whatever they funded was paid back to them in the form of a product that cost the same amount at retail. For example if a gamer funded $60 or more they were given a Dualshock 4 and their name would be credited in the game, as well as this they would be entered into a sweepstake to win a PS4. Or, they could actually fund the retail cost of a PS4 in China ($370) and get the PS4 as the reward for funding that much. So no matter how much you pledged, you were always rewarded with a PlayStation product of the same value.

One of the games to win the first completion was ‘Koi’. They raised more than $1,500 and as the winner of the competition they also received additional funding of $7,500, a PlayStation development machine and outside support from PlayStation’s Japan Studio on their game. They also entered into a contract with Sony to release the game on PlayStation 4 first with an exclusivity period of 1 year (excluding PC and Mobile). During this exclusivity period the game will also get full marketing support both in China and also overseas. The game launched in China on March 29th and will be coming to North America later this month. Sony plan to continue supporting Independent developers in China and bringing more locally developed Chinese games overseas.

Simultaneous launch- Sony have been working hard to bring games to China and one thing they’ve worked on is simultaneously launching games in China at the same time as the West. Sony saw an opportunity to make Gravity Rush a hit in China and so launched the game in the country at the same time as Japan and with an exclusive limited edition bundle. Sony also launched Ratchet and Clank in China this week, the same time as the West. Another game launching in the future is Final Fantasy XV, the series is hugely popular in China and so Sony are hoping that this simultaneous launch will mean that the series grows the popularity of PlayStation in China.

Sony have realised that software is key to attracting a large install base for PlayStation 4 and so are continually bringing over AAA overseas titles, Independent Chinese titles and other experiences as quickly as they can. This is one thing that has put Sony above their competition in China and has allowed them to have a successful year so far.

What went wrong?

Sony’s first year has been good for them when it comes to building a relationship with their user base, but they haven’t had the best of times when it comes to growing the console market in China. They generated a loss during their first quarter in China, which is to be expected, but also shows that it may take some time before Sony recoup the costs from launching in China. It’s also become clear that localising games for the China market is still something that publishers are not 100% confident with. Only a small number of games are submitted for approval each month and I’d honestly be surprised if there were more than 100 games on PlayStation 4 in China by the end of the year. Most publishers are instead just opting to release an Asian version of their game and hope that the Chinese install base are willing to import, most are but there are of course some lost sales in that.

The biggest issue still plaguing Sony is censorship in China and this means that they haven’t been able to bring over many games themselves. Their top line of exclusive titles are nowhere to be seen and even Uncharted 4 is still in the queue to be approved in China with no approval date in sight. Games are supposed to take 20 days to be approved and despite appealing for an improved rating system there has been no word on if the Government will be acting on Sony’s suggestion for an Independent body to rate Video Games.

Sony have been criticised in China for their PlayStation Plus service. They charge around $30 a year for online multiplayer but the service at launch was very bare bones. There were no free games, no online services, and even the share button didn’t allow streaming of games to any site. Sony have indeed added in free games now but it took them a very long time and they still haven’t solved the issue of online services that provide local content. A lot of people are unhappy with the state of PS plus in China but Sony are looking to improve this in time. It’s just that it’s already taken a very long time already.

Sony continues to face many challenges in China, PlayStation marketing manager Takehito Soeda said at the PS4 launch “A lot rides on how rich of a software portfolio you can offer to users, so we intend to find the right blend of overseas titles and games developed in China. We are creating a console market from scratch here.”. Soeda is spot on here, the PlayStation has launched in a market where Mobile and PC is king, where the government censors cause popular overseas games to be banned and where Mobile companies are launching rival products with games that appeal to Chinese gamers tastes. Sony can’t do anything about the upfront cost of a PlayStation 4, outside of sell the console for a loss, and so they need to get their software portfolio right in order to attract gamers, this is how PC gaming became so successful.

The analogy that many, including Sony, use at the moment is that the console industry is very much like the Chinese box office market 10 years ago. Back then it was plagued by piracy and entry barriers – now the China film market is rapidly becoming a close rival to the US film market, and Hollywood has found many ways to achieve success in China. Many believe that Sony can find success in the console market in China and help grow it to be a huge gaming force in the living room like it is in the West. The console market has remained untapped in China for a very long time but it’s ultimately going to be Chinese gamers that decide if they’re willing to change their gaming habits from playing on Mobile & PC to buying new games hardware and software to play at home. Personally I remain cautious about the future of consoles in China and believe that it can be a successful niche but console gaming can never be much more than that.

The winning combination is to continue lowering the cost to entry, publishing AAA games from Western/Japanese publishers in China, Introducing locally developed Chinese games that are free to play or low cost and finally to continue innovating in the digital space with a meaningful PS Plus subscription that offers you similar functionality to that of Android ‘TV Gaming’ devices.

March 2016 NPD Forecast: A billion dollar month

12th April, 2016 · ZhugeEX · Leave a comment

We are two days away from when The NPD Group will be releasing their U.S. Games Industry Sales Report for March 2016. This report covers unit sell through and dollar spend in the Console Video Games Hardware, Software & Accessories market across retailers in the US. The NPD Group directly tracks around 95% of the retail Video Game Market in the USA through a point of sale tracking system. Participating retailers in the USA include Walmart, who account for nearly 50% market share, Amazon, Target, Best Buy and over 900 others. For the remaining 5% of the market, The NPD Group use sophisticated proprietary algorithms based on proven research and decades of experience in order to account for that small part of the market that they do not directly track. The monthly reports help provide an overview of the Video Games Market in the US each month and help show how publishers and platform holders are performing. More than 70% of total spend on new games is via retail and so the NPD Physical games report remains a very useful report that shows how healthy the Video Games market is for console games at retail.

As part of a new Monthly post I will be attempting to accurately forecast and predict each months results. The below is an attempt to accurately forecast the results for March 2016 as well as show readers what they should be expecting.

Please note that the March 2016 NPD report counts sales from February 28th 2016 through to April 2nd 2016. I will be writing about what we can expect to see in regards to Hardware and Software sales. Please note that the below is only for the U.S. retail market and does not include digital sales.

Predict the U.S. Retail Video Games market to exceed $1b in March 2016 compared to sales of $964m last year.
Predict HW sales to be down 12% YoY to $275m. Decline in 7th gen & Portable spend. Lower ASP on 8th gen HW.
Estimate SW sales to be up 18% YoY to $465m thanks to successful launch of ‘The Division’.
8th gen home console sales on track to reach Install base of over 40 million units by end of 2016.
Hardware dollar spend on track to be down YOY in 2016, Software dollar spend expected to be flat to slightly up in 2016 vs 2015

HARDWARE

The console hardware market generated a total of $311.1m during March 2015 according to The NPD Group. Over 650,000 8th gen home consoles (PS4/XB1/NWU) were sold through to end users during March 2015 with the PlayStation 4 selling the most out of these three. I expect total spend on console hardware sales to decline 11.6% YoY during March 2016, down to $275m. This will be due to higher sales of 8th gen home console hardware being offset by lower ASP’s as well as a sharp decline in both portable and 7th gen hardware sales.

PlayStation 4:

The PlayStation 4 has had a record year so far with total hardware sales up 20% over last year as of the end of February. I predict this trend to continue through March 2016 as more consumers purchase a PlayStation 4 to experience new 8th gen software titles, such as ‘The Division, that release this month. The current $349 bundle is at a very attractive price and comes with a copy of Call of Duty: Black Ops III, the best selling and most popular 8th gen console game so far. This bundle has worked in Sony’s favour over the last three months and I expect that the $60 pack in game will continue to drive hardware sales among mainstream consumers looking to purchase a gaming system. I’m predicting that the PlayStation 4 will see a slight 16% YoY increase in hardware sales to 395K.

The RRP of the PlayStation 4 has dropped from $399 during March 2015 to $349 in March 2016. Whilst unit sales will be up year over year it is clear that the average selling price of the console will have decreased by $50 or more. This means that whilst unit sales will be up, it does not necessarily mean that spend on PlayStation 4 hardware will increase as well. In fact I expect that total spend on PS4 hardware will remain flat YoY and the lower ASP will be one the reasons for the decline in total hardware spend this March.

Xbox One:

The Xbox One has seen sales slide during the first two months of 2016 with sales currently down more than 10% YoY. The console, whilst selling well in its own right, does not have the pull and appeal that the PlayStation 4 currently has. Microsoft have been quick to react this month and put a temporary price cut into effect on March 21st which took the total cost of the system down to $299 on all base bundles. Microsoft also partnered with Ubisoft and Take Two this month to bring two bundles to market. One such bundle included a copy of ‘The Division’ and will have helped increase hardware sales among core gamers looking to take advantage of March’s biggest game. The other bundle came with a copy of ‘Grand Theft Auto 5’ and will have driven sales among a more casual audience. Microsoft also introduced a “Name Your Game Bundle” which allowed gamers to purchase an Xbox One at $299 with their choice of 1 Xbox exclusive title.

I expect that the deals above will have helped increase Xbox One sales by 15% YoY to reach a total of 270k. This is still considerably less than the PlayStation 4 despite a price and bundle advantage, however if the prediction above comes true then it means that the sales gap between XB1 & PS4 will be smaller this month compared to last month when the PS4 outsold the XB1 by more than 150k.

Estimates by ZhugeEX.com

Other:

The Wii U from Nintendo has two big games launching for the console this month, ‘The Legend of Zedla: Twilight Princess HD’ and ‘Pokken Tournament’ are expected to sell in good numbers but these two games will not help grow the overall install base of the Wii U. The Wii U install base has already peaked and these two games will primarily be selling in to the current install base. Therefore I would expect Wii U sales to decline by 29% YoY in March 2016. This is similar to what the Wii U sells on a normal month.

The New Nintendo 3DS launched during February last year and sold in big numbers during February and March 2015. The same has not been repeated this year and February 2016 saw 3DS sales fall significantly YOY. The 3DS has no big game launching this month and therefore I expect the 3DS to fall nearly 60% YoY in March 2016. It is becoming increasingly clear that the portable handheld market is on its last legs in the US and it’s unlikely that a new entrant into this market will succeed.

7th Gen console hardware sales are on their last legs as well. The PlayStation 3, Xbox 360 and Wii hardly sell in any significant number these days. It’s clear that 7th gen hardware is now very much dead. This decline will also contribute slightly to the lower spend on Hardware sales.

SOFTWARE

The Division is the highlight of March 2016. The game is expected to be the best selling title to launch during a March since ‘Super Smash Bro’s Brawl’ for Wii in March of 2008. The huge launch for ‘The Division’ will help increase dollar spend on software at retail by a predicted 18% YoY for March 2016.

The Division had a huge launch from day 1 and Ubisoft revealed that the title had grossed more than $330 million worldwide in its first five days on sale. This made it the biggest New IP launch since ‘Destiny’ back in September 2014 which grossed $325 million worldwide in its first 5 days. Ubisoft also revealed that the game saw over 1.2 million peak concurrent users over the games first weekend and that together players spent more than 100 million hours playing online in the game’s week after release. Destiny debuted with more than 2.5 million unit sales across console at retail during September 2014. It is important to remember that ‘The Division’ had a PC release as well and therefore I predict it unlikely to have sold more than Destiny did at retail in its first month due to the simple reason that The NPD Group do not track digital PC sales in their retail sales report. The game looks like it is on track to sell over 2.1 million units at retail on PS4 & XB1 during March 2016 and generate more than $130m in revenue at retail for Ubisoft in the US.

Another big launch this month is “EA Sports UFC 2” which is the sequel to the 2014 title. The game has been praised by critics and in many regions such as the UK has performed better than the first title did. I expect the sequel to also perform better in the US and sell more than the 278,000 units that EA Sports UFC sold through during June 2014. The game received an early price cut that may mean that sales were lower than expected but I still forecast the game to do well and the lower price as well as the demand for a new UFC title (Due to growing popularity of the sport) will help the game achieve somewhere close to 400,000 unit sales, albeit at a slightly lower ASP, meaning it may only generate $20 million at retail in the US. Mortal Kombat XL also launched this month as a complete version of Mortal Kombat X. Despite the high $60 price tag It is expected to sell very well among fighting fans and therefore I’m projecting that it will sell over 200,000 units in the US during March. The original game sold more than 1.25 million units during its first month in the US.

Sony exclusive title MLB The Show 2016 launches on PS4 and PS3 during March and should sell in similar numbers to the 2015 title. I would expect the game to do somewhere around 250,000 units and generate around $18m in revenue. Nintendo’s exclusive titles this month are Twilight Princess HD and Pokken Tournament. Both games will sell in good numbers however will be limited by the small install base of the Wii U. There is certainly demand for Twilight Princess HD and It could double the unit sales of Wind Waker HD during its first month should the Wii U install base respond favourably to the title. Pokken Tournament is a new fighting game IP for Nintendo but based on a popular franchise, therefore the game will perform in line with, if not better, than Street Fighter V did on PS4.

Estimates by ZhugeEX.com

SUMMARY

Overall the software market will be up this month thanks to The Division. 8th gen console software will continue to dominate the charts whilst sell through of portable and 7th gen software will continue to decline at sharp rates. We are now getting to the point where no major releases are launching on 7th gen consoles and therefore it won’t be long before 7th gen console sales no longer matter in NPD reports.

March will be a healthy month for the industry and could potentially generate over $1b in dollar spend. The boost will primarily come from the launch of The Division on PlayStation 4 and Xbox One. Should the $1b prediction come true then the total retail Video Games Industry in the US will have generated $2.45b for the first 3 months of 2016, this is slightly lower than the $2.55b generated during the first 3 months of 2015 and further reflects the decline that retail is seeing. Hardware sales are forecasted to be down this year despite an increase in 8th gen home console unit sales. The increase here will be offset by declining ASP’s as well as sharp declines in portable and 7th gen hardware sales.

The number of 8th gen home consoles titles being published this year is expected to grow and in turn will generate higher revenues. However the number of titles being published on portable consoles and 7th gen are set to decline sharply in 2016 which will offset the increases seen on 8th gen. In turn this means that software spend at retail is likely to remain flat in 2016. Digital is also expected to grow in 2016 for both full game downloads and add on content. The accessory market is expected to grow slightly this year as the toys to life and collectables segment matures.

Previous Months forecast (Februrary 2016):

Click to see original forecast.

Disclaimer: Please note that the numbers and estimates provided above are based on data from The NPD Group as well as projections and forecasts made by ZhugeEX.com. While every effort has been made to ensure the accuracy of the data presented, we cannot guarantee that all the numbers above are correct and accept no liability for financial decisions made based on the information contained in this article. Readers should be advised that the article does not represent a recommendation to buy or sell securities of any kind regarding any publishers, platform holders or other companies mentioned above.

Final Fantasy XV on track to gross $600m, will reverse series decline

6th April, 2016 · ZhugeEX · 2 Comments

After 10 years of waiting, Square Enix have finally announced that Final Fantasy XV will be launching on PlayStation 4 and Xbox One on September 30th 2016. The game was originally announced as Final Fantasy Versus XIII for the PlayStation 3 back at E3 2006 but the game quickly ran into development issues and so the name, platform, director and game engine were changed a few years back. Final Fantasy XV is set to be the ultimate Final Fantasy experience and we believe that this new title will help reverse the decline that the series has seen in recent years.

Hajime Tabata, the director for Final Fantasy XV, noted at a press conference last week that he would like to see the game sell 10 million copies worldwide to be considered successful. A Square Enix representative did clarify that the 10 million comment is not meant to be referred to as a minimum to recoup the investment made on the game, but instead as a sales goal that the development team set themselves. It is worth noting that 10 million is more than every other Final Fantasy game has sold (When excluding re-releases and remakes). Final Fantasy VII has sold over 11 million units worldwide but this only came after the game was re-released many years later on multiple platforms. The game originally sold less than 10 million units when counting the original PS1 release back in 1997.

Final Fantasy is the flagship franchise for Square Enix with more than 110 million copies sold worldwide across 45 unique titles. During the peak years we saw games like Final Fantasy VII, VIII & X sell in more than 8 million units each on their original release platforms and even the recent Final Fantasy XIII has sold in more than 7.5 million units on PlayStation 3, Xbox 360 & PC making it somewhat successful. The JRPG series clearly has worldwide appeal but the games have been on a decline recently with the XIII saga. Whilst the first game in the series sold in over 7.5 million, the second game titled Final Fantasy XIII-2 has failed to exceed more than 4 million unit sales and Lightning Returns: Final Fantasy XIII has sold in even less despite the expanding console install base. Many fans of the series were left disappointed after the release of XIII and criticised the game due to its linear design and the sequels did not do much to bring fans back to the Final Fantasy universe.

We have seen a huge effort from Square Enix to make Final Fantasy relevant again and everything they have been doing up until this point has been very positive for the series. For one, Square Enix have learnt a lot from the development of Final Fantasy XIII and have now started adopting agile development processes. Square Enix are working with external studios to help with Final Fantasy XV to shorten the development cycle and enhance overall quality. Not only this but Square Enix have made a concerted effort to bring prior Final Fantasy games to old and new fans through ports on STEAM as well as through HD re-releases of Final Fantasy X/X-2 and Type-0 HD. Square Enix have also kept core fans up to date on the development of Final Fantasy XV through regular Active Time Reports and recently the company announced that they are developing a Remake of Final Fantasy 7 which has had a hugely positive response from fans and has even has non fans excited.

Final Fantasy XV has been geared to appeal towards the Western audience, from design choices to announcements, all of Square Enix’s promotion around the game has been aimed at those in the West as the company knows that the majority of their sales will now come from outside Japan. Games such as Final Fantasy VII and VIII were able to sell nearly 4 million units each on the original PlayStation in Japan thanks to the large install base and popularity of the series at the time, even Final Fantasy X sold 3 million units on the PS2 in Japan. In recent years the home console market has declined sharply in Japan and it is now expected that the PlayStation 4 will have an install base of around 3 million units by the time Final Fantasy XV launches. This is compared to the more than 6 million unit install base of the PlayStation 2 around the time of Final Fantasy X’s launch.

Final Fantasy XIII had a very front loaded launch with more than 1.5 million units sold on PlayStation 3 in Japan during the games first week but sales dropped off very quickly with only around 2 million being sold in total. The sequel, Final Fantasy XIII-2 saw lifetime sales of just under 1 million units in Japan and Lightning Returns sold even less with just under 500,000 units sold in. As Final Fantasy XV is a long awaited title, the game has the opportunity to sell in big numbers to fans who have been waiting for the release but sales will ultimately be hindered by the install base of the PlayStation 4 in Japan. It is likely that the game will be the first million selling title for PlayStation 4 but we would not expect it to reach the heights that Final Fantasy XIII did, instead tailing off just south of 1.5 million units sales.

Final Fantasy XV is the first title in the series to see a simultaneous launch worldwide. Square Enix announced that the game would be localised into Latin American Spanish and Brazilian Portuguese text. German and French versions were also announced to have their respective voice overs, players able to switch between German/French, English and Japanese audio. A Chinese version was also announced to launch on the same date worldwide with an exclusive partnership to bring the game and related media to the mainland. Final Fantasy has had a large fan base in South America & Asia and the simultaneous launch will help drive sales in these regions and help offset the decline in sales that is expected in Japan.

The game also has a huge fan base in North America, with most mainline games exceeding 1 million unit sales during the first few months. Final Fantasy XIII opened with unit sales of over 1.3 million units in the US during its first month on sale and just like most other mainline games, went on to easily exceed over 2 million unit sales. Square Enix have been heavily promoting the game in the USA and I would expect that the game has the potential to once again sell more than 2 million units and could even reach 3 million or more should the game review well and receive positive word of mouth.

The game will also act as a major test for Square Enix as it is the first major mainline JRPG game that is launching on 8th gen home consoles in the West. Nintendo have shown that big JRPG’s can still sell well in the West if positioned right, as with Fire Emblem Fates on 3DS. We’ve seen that Western RPG’s such as The Witcher 3 are succeeding in the West with nearly 10 million unit sales on PlayStation 4, Xbox One & PC to date. The Witcher 3 is a much more Western friendly game, however it is clear that Square Enix have tried to make Final Fantasy XV appeal to the west through design choices and marketing. The game is also open world, similar to the Witcher 3, which is a popular trend among many games today. If the game does sell well in the West then XV will have the advantage of receiving a sales boost from Japan (where The Witcher 3 did not sell well) but it is important to remember that Final Fantasy XV does not have a PC port just yet (Whereas the Witcher 3 saw a lot of sales thanks to the PC version). Other Japanese games aimed at Western audiences, like Metal Gear Solid V, have also seen success with more than 6 million unit sales worldwide. This is already equal to what Metal Gear Solid 4 sold during its lifetime and more than any other prior mainline game in the series.

The worldwide install base of PlayStation 4 and Xbox One,at the time of Final Fantasy XV’s release is set to be higher than the install base of PlayStation 3 and Xbox 360 at the time of Final Fantasy XIII’s release with most gamers today spending more on Video games than they did previously. Final Fantasy XIII was able to ship 5.5 million units worldwide during its first month on sale (March 2010) and I expect that Final Fantasy XV could be on track to match or even beat that opening due to the simultaneous worldwide launch. Square Enix are also heavily marketing the Final Fantasy XV brand right now with a brand new movie (Kingsglaive: Final Fantasy XV), anime (Brotherhood: Final Fantasy XV), multiple demos and a mobile game due to release this year. Square Enix have also been promoting the Final Fantasy brand through the continued Final Fantasy PC ports (Prior titles) and the remake of Final Fantasy VII that has got old and new fans of the series excited.

These various promotions, along with the simultaneous launch, will help the game achieve a high sell in number during the first month. In regards to lifetime sales, the game has the potential to sell in around 1 to 1.5 million units in Japan, over 3 million units in North America and a further 3 million+ units in Europe and Asia. A total of 8 million could be sold in the first 12 months across PlayStation 4 and Xbox One according to our forecasted ‘Realistic’ scenario. The pessimistic scenario is that the game should at least ship 6 million whilst the optimistic scenario would see the game selling in over 10 million. The game certainly needs to do better than the pessimistic scenario in order to see a return on investment.

Whilst promotions for the game will help sales, there are a number of other factors that need to be considered, the first being review scores. The ‘realistic’ sales figures quoted below are only possible if Final Fantasy XV receives an above average score on Metacritic (Over 75) and if the game has good technical performance at launch. Positive review scores, along with promotions and marketing from Square Enix, will help spread positive word of mouth and have a positive impact on lifetime sales of the game. The final factor to consider is a late PC port. A PC port is rumoured to come out after the PlayStation 4 and Xbox One release date and should this happen before the end of the 12 month period then it would be extremely likely that the game would benefit from a further 1 million unit sales and could potentially exceed our realistic expectations and even reach the 10 million unit goal set by Square Enix.

A PC Port will serve the game well as it will not be a huge cost for Square Enix and the port will sell to the audience who are currently purchasing the prior Final Fantasy games being brought to PC. The PC version will also encourage a certain number of gamers to double dip, despite already owning the game on PS4 & XB1. The PC versions of Final Fantasy games do not traditionally sell very well with Final Fantasy XIII having only sold just 600,000 units according to SteamSpy. However, Final Fantasy XV could benefit from a late port on PC due to the reasons above and could provide a boost of 1 million or more unit sales.

Because Final Fantasy is a well known franchise, the game stands to do well due to the brand name alone and pre orders for the game are already looking positive with all 30,000 limited editions having been sold out in a matter of days. Square Enix are currently looking in to releasing more units due to popular demand. The September release is just before the Christmas rush and so the release date falls into a fairly light window with not much big competition to go up against. The various promotional activities from Square Enix such as the movie and anime will allow the game to reach maximum exposure during launch and could potentially allow the game to have the biggest launch the series has ever seen.

We are fairly optimistic that Square Enix can see a turnaround with Final Fantasy XV, but to what extent remains to be seen.

Disclaimer: Please note that the numbers and estimates provided above are based on Square Enix company data and forecasts made by ZhugeEX.com. While every effort has been made to ensure the accuracy of the data presented, we cannot guarantee that all the numbers above are correct and accept no liability for financial decisions made based on the information contained in this article. Readers should be advised that the article does not represent a recommendation to buy or sell securities of any kind regarding the company involved.