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Is the Game Console Market Shrinking?

Zacks Equity Research

A new report from market research firm NPD shows that only 29% of “core gamers” will purchase the next generation of gaming consoles right after they are released. The report, named “Core Gaming 2013,” defines “core gamers” as those who spend more than five hours a week playing games and who play most genres of games.

The report follows data from NPD which showed that 2012 was the end of the sole dominance of the physical video game. Stock keeping units (SKUs) had begun to give way to digital transfers and download. But what was more disturbing was that video games sales had declined by 9% from the previous year. And of the $14.8 billion worth of sales, excluding hardware, $5.92 billion came from digitally distributed content.

The alarming detail about the second figure is that even though it represents a 16% increase over digital sales in 2011, growth was at 14% in 2011. This implies that though growth is happening, it’s sluggish in nature and may not be enough to compensate overall decline.

These numbers clearly show a developing trend which is bringing about sweeping changes in the gaming business. The next generation of gaming platforms has to change the game radically in favor of the industry. These sentiments were echoed by Andrew House who heads Sony Computer Entertainment’s (:SCEA) PlayStation Division recently.

At an event held to introduce the new PlayStation 4 console from Sony Corporation (SNE), House admitted that the company was betting big on the product. The stakes are probably equally high for Microsoft Corporation (MSFT) and Nintendo Co. Ltd. (NTDOY) as the next generation of gaming consoles is launched. Both the PS4 and the successor to the Xbox 360 are now expected to launch towards the end of the year and to be priced between $350 and $400.

In fact, price and underlying costs have become a key factor behind the success of gaming consoles going forward. And this is closely linked to the price and availability of gaming titles.

Publishers have disagreed over the development costs of the next generation PS4 and Xbox games, leading to concerns that the cost of these titles will rise. An analyst from Wedbush Securities Research has predicted that these games will cost around $70.  SCEA CEO Jack Tretton says PS4 titles will not cost more than $60. But that has done little to allay these concerns.

This may directly affect sales of the new consoles because many of the new titles can be played on both current as well as next generation consoles. This means that only staunch loyalists will buy these consoles when they are first introduced. Instead, they are likely to wait for prices to drop. This is far from good news for console makers.

Console-makers have already made key decisions to drive down costs. Unlike, the past where consoles ran on custom made chips, both Sony and Microsoft will use off-the-shelf chips produced by chip maker Advanced Micro Devices, Inc. (AMD). AMD’s chips are able to deliver the required visual horsepower using accelerated processing units or APUs. The risk here is that the success of these platforms is now closely tied to the fortunes of AMD.

This negates the need to set up dedicated chip manufacturing facilities or ordering custom made chips as was done in the past from the likes of IBM (IBM). Besides, focus has shifted from raw processing power to the versatility of these chips. Consoles are increasingly being used to play audio and video content as well, morphing into a central entertainment hub for the home.

This fits into the trend where tablets and smartphones are changing the face of gaming, at least of mobile gaming at any rate. They are also being viewed as versatile entertainment devices. They have also popularized casual gaming which is growing as a category, giving traditional console makers much food for thought.

Of course, the serious gamer will stick to the gaming console. But the future success and growth of console gaming will closely depend on whether the industry can successfully match up to these emerging trends.

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