Guest post written by Kevin Chou
In Austin next week video game developers will gather at a conference called GDC Online, where the console makers host lavish parties and preside over warehouse-sized booths with giant screens showing games of glory and gore with noise reverberating from stadium-sized speakers. What everyone should be watching instead is the quiet but massive migration of core gamers online.
It’s like hosting a royal coronation on the eve of the decline of the British Empire.
What travel agents learned from Expedia, Borders learned from Amazon, Tower Records learned from Apple iTunes and Blockbuster learned from Netflix, the traditional game makers are about to learn from free-to-play online video game companies: their business is about to fall off a cliff.
The eighth generation of game consoles is coming and I predict sales will be 32 percent lower than the prior generation. Of the three console makers (Microsoft, Nintendo and Sony), only two will survive this console generation and still they will be forced to make a strategic shift away from gaming to become an entertainment hub in the home.
Since the seventh generation console launch in 2005-06, Microsoft’s Xbox 360, Nintendo’s Wii and Sony’s PlayStation3 have sold more than 225 million units worldwide. The total gaming market is up to $70 billion this year from $65 billion in 2011. That’s good news if you look only through that lens. Put on another pair of glasses though and the outlook is daunting for the console makers and packaged games companies. Retail software revenue is down to $28 billion this year from $29.5 billion in 2011. More importantly, online revenue, including digital delivery of video games, is up to $24 billion in 2012 from $18 billion last year.
And the biggest growth segment? Mobile games.
New video game consoles sell once every six to eight years. Meanwhile, better tablets and phones come out every year. I’m already on my third smartphone and second iPad in two years. These mobile devices come with ever-increasing computing power, functionality and fidelity, and this wave of devices is one of the forces that’s upending the reign of game consoles.
Even if the eighth generation of consoles offers more functionality to consumers than current versions, the real issue is, who wants to spend several hundred dollars for a stationary device when you can carry as much game-playing enjoyment in your pocket or bag? Spending hundreds of dollars for the next generation console just doesn’t have the appeal it once did.
Substitute products from smaller, more agile companies have a history of upending the established players. This has been well-proven; see Clayton Christensen's book The Innovator’s Dilemma. We’re now at that inflection point in the video game industry. The explosion of mobile and tablet computing and the growth of “free-to-play” game companies offer consumers a more compelling, less costly and more flexible game-playing experience than playing on a console.
The whole video game business model has changed, brought to you by the egalitarian Internet. Consumers who have been conditioned for three decades to spend hundreds of dollars before they begin playing now start playing for free, whenever they want, wherever they want. This pro-consumer concept puts the console companies on a slippery slope toward doom. Proof points: PlayStation’s Vita sold 50% less than its predecessor and the poor Nintendo 3DS launch spurred the company make drastic price cuts. Meanwhile, Kabam’s 2011 gross revenue of more than $100 million will grow by more than 50 percent this year.
Consumer product lifecycles last between 20 and 30 years until the next generation takes over, and the trend has only accelerated in recent times. For music, vinyl records spun exclusively from the 40’s until cassette (and eight track!) tapes inserted themselves in the 70’s. CDs arrived twenty years later and are still in trays today, although in smaller numbers. Movies were first published on VHS tapes in the late 1970s and that format ran exclusively until DVDs showed up 20 years later. Consumers still use DVDs today, but in fewer and fewer homes because streaming by Amazon, Comcast, Hulu and Netflix is faster, cheaper and more convenient than going out to buy or rent a disc.
In this same vein, video game consoles, which started their reign in the 1970’s, are beginning their decline. The upcoming eighth generation will be the last. When their expected revenue dips to about 70 percent of current revenue, packaged game developers will find it impossible to run their businesses sustainably, and the decline of their business will accelerate. The fixed costs of AAA game production will be too great to support the diminished market. In the meantime, innovative companies will be making controllers that work with your tablet or smartphone, and Apple or Google or some new start-up will make the video of these devices show up on your TV. Consumers will reap all the benefits of playing video games without any of the cost or limitations of consoles. Consoles will be on peoples’ TV stands for another decade at least - you can still find a VCR in one of your neighbors’ homes – but consoles’ days as the Gotta-Have consumer device are behind us.
In short, the world has moved online. Travel agencies, booksellers, music shops and video stores have all bowed to the greater consumer benefit of speed, flexibility, low cost and deep personalization provided by the Internet. Video game console makers and AAA game developers are not immune.
Core gamers, welcome to the Web.