Game Console Ecosystems – Part 1, Strategeries

15 Mar
a mixed up Rubik's cube

Looks complex, actually pretty formulaic.

Next-generation consoles from Microsoft and Sony launched a few months ago, and initial sales figures are starting to roll in: about 6M Playstation 4’s and 4M XBox Ones sold worldwide. TechCrunch dug through monthly sales, compared them with older consoles, and said hyperbolically that The Console Market is in Crisis. Re/code more correctly interprets the raw data showing Microsoft and Sony growing a bit while Nintendo shrinks, and other reports show game revenue growing slowly. To me these and other signals unequivocally indicate a contraction is underway in TV-based gaming. Consumers are showing less interest in big-ticket devices and there are not must-have console-exclusive games. Game studios have trouble justifying the very high costs of console game development and even successful console games aren’t succeeding financially. Most independent developers avoid console development.

Ouya and other low-priced micro-consoles rumored from Google and Amazon should be more appealing to developers and consumers, but either haven’t shipped yet or aren’t yet hits. Polygon criticizes Ouya’s plan to embed their platform in other hardware and says Ouya may not be dead, but its long history of stumbles makes success unlikely, taking a particularly hard jab at their controller. I also find the controller poor, but they are doing solid developer relations and an embedded platform + store service with common content which consolidates and grows the Android-based micro-console market is the only proper start of a strategy for Ouya (the other part is a business model where developers make enough money – more on that in Part 2). The elephant in the room for micro-consoles is killer games. It’s not quantity or even quality; Ouya crossed 700 total games recently, and there are many gorgeous, fun & diverse titles available. Rather, it’s the elusive killer-app: an exclusive, unique, must-have hit game that will make new users want and buy an inexpensive micro-console just for that game. A hit game is needed to start micro-console demand snowballing with consumers, and I’m not yet convinced they yet have all the elements they need to give rise to a hit, in particular a proper revenue model.

Even if console sales are growing relative to themselves 10 years ago, their boats are not lifting with the overall rising tide of gaming and are under market pressure from several directions at once. From above, a resurgence of high-end PC/Valve gaming using cutting-edge GPUs with dramatically better performance and graphics than the newest “next-generation” consoles. These draw away hard-core gamers, the biggest spenders and influencers, and the small- and mid-sized game studios which target them. From below, the exponential growth of mobile and casual gaming, which deliver simpler, more immediate gratification for play outside the time spent near your TV, are becoming the main introduction to gaming for new players and developers, instead of PCs or consoles. From within, developers are flocking to the high-end and mobile segments of the market where they see more growth and opportunity, lower barriers to entry, lower development and distribution costs, and faster product cycles. From outside, the time and money consumers have available for gaming on consoles is being undercut by video media streaming to tablets and phones through Netflix, HBO Go, and others, and by the many TV streaming dongles and devices like Chromecast, Roku, and of course by my favorite Apple TV. The draw is also a new wave of highly-compelling and socially spread video content, and it is eating away at peoples’ limited time and attention (Ben Thompson’s The Jobs TV Does is a great overview of limited attention for escapism).

The original console business model has become strategery. Infrequently updated, big-ticket subsidized hardware; high-priced games and high-priced services; poor bundling of commodity video services as poorly integrated “apps”; limited exclusivity and tightly controlled game publishing. It hasn’t worked very well in the past 10 years to differentiate consoles or to expand the market, and it will work even less well moving forward. Creating a real console/set-top-box strategy that grows the market and profits may seem as impossible as solving a jumbled Rubik’s cube, but there are just three degrees of freedom: contentprice, and lifecycle. In Part 1 I’ll describe what each of these elements are and how they have been, are being, and likely will be used. In part 2 I’ll describe some different ways of combining them into a coherent strategy that could work for consoles and micro-consoles in coming years.

Content

These days any TV-based device needs commodity content (TV, Movies, Netflix, Hulu, some number of games) just to enter the market, but to grow it must find compellingunique and exclusive content or offer a better user experience around content (think TiVo and Netflix) or both in order to create new demand and to snowball device sales. Game content specifically requires compelling hardware and software and an ecosystem of skilled developers and companies betting on and building viable businesses around the console’s success (just like video content requires studios producing content). Making all forms of content easy to buy and consistent to access through software and within the overall business model has also become a critical user experience differentiator. When you are missing or undermining any of these traits, you are blocking the creation and sale of unique and exclusive content. You won’t grow the market or your share. You won’t attract new users. You will be vulnerable to competitors.

Through a combination of studio consolidation among game publishers and a smaller appetite for spending to secure exclusives, XBox and Playstation evolved from their earlier generation to have weak content differentiation. Today most of the exact same blockbuster games — Call of Duty, Assassin’s Creed, Need For Speed, Battlefield, etc — were available on both XBox One and Playstation 4 at or near launch. For years many “exclusive” titles have simply become first-party non-unique variants of a genre like “first person shooter involving war/zombies/science-fiction” which sell well enough but are not killer hits broadening the customer base and moving more consoles. Other platform exclusives are killer in terms of sales and their attach rate, but are indistinguishable to non-experts (e.g. Forza on XBox vs Gran Turismo on Playstation). These grow the market, but equally, and so don’t differentiate consoles from one another.

Blocking, back-stabbing, or limiting novice, first-time, or independent development through onerous distribution contracts, high-cost development systems or difficult toolchains frustrates developers and limits the overall amount of innovation in an ecosystem. Small, independent developers and young people who want to learn to program and build their own games are a tremendous source of innovation and energy – reducing all barriers to their participation in an ecosystem is critically important. Microsoft and Sony have flip-flopped madly on development systems, development tools, and supporting independent developers and independent game distribution over the last 10 years. At this point it’s still not clear whether they will deliver on all the changes to support frictionless independent development that they’ve promised, but it is clear that Sony has promised and delivered more for Playstation 4 recently. Microsoft is behind this curve.

The launch this month of Titanfall exclusively for XBox One and inFAMOUS Second Son exclusively for Playstation 4, though, are a solid test of how quality exclusive content drives sales. Microsoft is inexplicably weakening its wager by allowing Titanfall on the older XBox 360 and PC in coming months and has few other exclusives up its sleeve – it seems to have much of its marketing budget and all its PR eggs in this basket, betting it will recreate the HALO phenomenon from the original XBox (which was a recreation of the Zelda+GoldenEye phenomenon from the Nintendo 64). Sony, on the other hand, is spending much less on marketing and has several very interesting exclusives pending. They had already been investing more heavily in exclusives like The Last Of Us for the Playstation 3 – again, I’d posit that Microsoft is behind this curve.

It’s difficult for me to write even a brief summary of how flawed user experiences are on XBox and Playstation around game and video content, subscriptions/login, or navigating to and within streaming apps like Netflix, Hulu, or HBO Go within the XBox dashboard and XBox Live or within the Sony dashboard and Playstation network. Suffice to say that neither console has taken better and consistent user experience around content to heart, though at least Playstation doesn’t double-charge for access to streaming services (you must be an XBox Live subscriber for $5-10/mo before you can use your $7.99/mo Netflix account – pure insanity). At every level of account setup, login, password recovery, network configuration, troubleshooting, game-saving, subscription- and single-purchase management, billing, channel and content navigation, launch and navigation delays, update management — you name it — Sony and Microsoft user experiences are complex and difficult for novice users to access. Both are very vulnerable to products with better or even limited and simplified user experience, and both face tremendous technical challenges in simplifying their designs due to their underlying architectures, teams, and processes.

These are all grave content execution mistakes: Too much effort on the quantity and comparability of titles (they’ve got a racing game, I’ve got a racing game). The short-term tactic of matching your competitor (they’ve got 15 launch titles, I need 15 launch titles). Not enough effort betting on and paying big for exclusive content which grows your installed base. Not enough effort to create a “minor league system” of strong and resilient independent developers and new/young developers. Making digital and video content difficult to find and purchase, or making setup and content navigation inconsistent and frustrating.

Price + Lifecycle

While many other prices for entertainment have gone down – prices for large flat-screen TV’s, prices for movie entertainment including DVD/Blu-Ray players and discs,  prices for casual web- and mobile-apps and their in-app purchases, prices for streaming service subscriptions for Netflix, Spotify, and others — the prices for consoles, console games, game subscriptions and downloadable game content (DLC) has stayed mostly steady over the last 10 years and has now risen for the latest console generation.

High software and DLC prices, high hardware prices and the multi-year lifecycle of console hardware were originally tied to the only business model that could deliver graphics for compelling games: high-priced custom hardware and a controlled publishing model moving high-priced software through a price-regulated distribution channel. Only this combination of price, channel, business model, and lifespan could return a large enough software attach rate and the corresponding lifetime average revenue per user (ARPU) to make consoles + first-party game publishing an overall high-margin business.

In the period around 1999-2000 the confluence of commodity GPU advances (which due to Moore’s law and exponential advancement very suddenly matched or beat custom designed hardware from Sony and Nintendo) and the robust ecosystem of DOS and Windows game developers, tools, and APIs, was the unique crossover point we used at Microsoft to enter the console business with xBox. At that point, the commodity PC CPU and GPU were less expensive in terms of up-front design & manufacturing time & expense (Intel/AMD and NVidia were already making those investments and paying them down across millions of units in the desktop and laptop categories), but were still fairly expensive on a per-unit basis. We could use the difference in lower up-front investment to differentiate the XBox with faster time-to-market, local storage, high-speed networking and on-line services, but still needed the longer lifecycle business model to recapture the overall investment and high cost of the hardware itself. The original XBox vision (as I pitched it) was to reduce the lifecycle length while maintaining forward game compatibility and ride commodity PC component prices down on volume, a strategy which would greatly disadvantage other console players dependent on custom hardware development. It would also potentially advantage Microsoft by influencing operating system, tool, and API priorities internally with the concrete pressures from devices and games needing fast-boot, stability, simplified install/uninstall and overall simpler user interaction for consumers. For reasons that still don’t make sense to me, the subsequent XBox 360 generation diverged from the Intel/PC architecture, making a deep investment in custom PowerPC hardware which bifurcated toolchains and along with nonexistent (at worst) and dysfunctional (at best) small/independent developer support, alienated developers, sending many back to the PC and eventually towards the Valve/Steam ecosystem. Several terrific exclusive XBox 360 games, a thriving on-line service, a surge caused by Kinect, and the fact that the Playstation 3 made an even deeper and more tragic hardware investment in the impossible-to-program Cell processor allowed the 7th console generation to stumble along from 2005 through 2013 with XBox slightly in the lead. It is telling that the 7th generation was exceptionally long and that both 8th generation devices have now returned to a commodity PC architecture. XBox One and Playstation 4 are using virtually identical 3-year-old Intel-compatible CPU+GPU SoC components, much to the relief of (and probably due in great part to lobbying by) the largest game studios.

But both new-generation consoles are expensive items – their base prices will likely land at $300-$400 for the 2014 holiday season with game, storage, extra-controller and service bundles creating average retail revenue of $450-$600 per unit. At this price they will not out-perform similarly priced PC rigs or Steam machines which will get almost all the same content since they are tepid on paying for exclusives and studios are reluctant to bet heavily on either leader. The 8th-generation consoles have once again been designed for a multi-year lifecycle – these are not easy-to-justify prices for consumers, these are not purchases that can be made yearly or even biennially.

Microconsoles like Ouya’s, the Apple TV with a game controller which I expect shortly, and the rumored Google and Amazon set-top-box/consoles based on commodity phone/tablet mobile SoC’s running Android or iOS are at another unique crossover point for competitors to enter and disrupt the console and set-top-box market. Just like Microsoft’s entry at a crossover point in hardware costs with the original XBox which disrupted the custom hardware and software development phase of existing consoles, new, cheaper devices will disrupt both the long-lifecycle and the subsidized hardware characteristics of the traditional console business model, and they will enter with an even larger and stronger developer ecosystem than the big consoles as they draw on experienced mobile developers. Some, like Apple TV and Ouya, will be able to sell hardware which improves graphics performance radically every year at a low (in the case of Ouya and its licensees) to high (in the case of Apple) profit margin due to their much higher volumes in phones and tablets and basic economies of scale. The prices of their core ARM-based CPU and GPU alone will be 1/4 to 1/5 the price of the PC-architecture-based chips, while exponentially gaining on their PC counterparts in performance, matching them within 4-5 years. In particular, Apple holds a strong advantage having disintermediated chip suppliers – they can fine-tune custom chips for gaming at the lowest possible price.  Others, like Google and Amazon, may sell similarly fast-improving hardware yearly at cost or at a small loss, subsidizing it with their overall software and service ecosystem. Apple and Amazon are I think also likely to offer dramatically better user interface for purchasing content and watching video from multiple sources, which will be further disruption to the inconsistent ways that cable/television, Netflix, and other streaming providers are paid for and integrated on the latest consoles, to say nothing of inconsistencies in setup, login, saving, and other common user experiences. In all cases, after the new entrants use this crossover point it will not be possible for long-lifecycle products to survive without making the same transition to more open development, and a shorter 1-2 year, backward-compatible lifecycle.

Interestingly, if either of Microsoft or Sony do adopt a shorter hardware cycle and more open development, notice how closely they start to mirror Valve’s simple Steam/Steam-Machine strategy: higher-priced hardware updating on a yearly basis surrounded by a strong, well-established developer community who already understands forwards- and backwards-compatibility; simple, open and totally free toolchains; digital distribution; a consistent architecture with enough variations to allow hardware competition and multiple price-points, but enough similarity to prevent developers from having to test too many diverse configurations. My only question is honestly which of these two gets the courage to partner with or buy out Valve first.

Tune in next week for Part 2 where I’ll suggest some non-strategery strategies for micro-consoles to compete and for traditional consoles to shift gears to save themselves from extinction.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: