ReadWriteWeb DeathWatch: Video Game Consoles

Modern game consoles are much more powerful than yesterday’s Pong-pads, but their setup and business model remain virtually identical to the Ataris and Colecovisions of yore. But all of that’s about to change - this coming generation of game consoles will be the last to resemble anything you remember.

The Basics

In 1972, television maker Magnavox introduced the Odyssey gaming system for just under $100. It lacked sound and color, and relied on primitive plastic screen overlays to display backgrounds, but it ushered in a Golden Age. Five years later, Atari released the 2600, which IGN called “”the console that our entire industry is built upon.“” The Atari 2600 popularized game consoles, making the home gaming industry a multibillion dollar industry almost overnight. By 1982, the Atari 2600 was generating $2 billion in yearly revenue, with the competing with Colecovision and Intellivision systems also performing well.

Perhaps inevitably, the boom made publishers sloppy, and game quality started to slip. Lousy games, overproduction, a tight economy and heavy competition from PC gamess combined to derail the console industry in the infamous Video Game Crash of 1983. Two years later, Japan revitalized the industry with the release of the Nintendo Entertainment System (NES). The NES (IGN’s #1 console of all time) offered more polished graphics and sound, more versatile controllers and much more quality control than previous systems. The public ate it up, and the gaming industry has bought tens of millions of consoles and hundreds of millions of games ever since.

The console business model hasn’t changed since. Every 5-7 years, hardware vendors release new, dramatically more powerful dedicated gaming systems. The vendors subsidize these consoles, breaking even or losing money on each sale, in order to gain wider distribution than competitors. Over time, they turn a profit through a handful of “must-have” in-house titles and licensing fees from third-party publishers. The market supports two-to-three major players at any one time, and Sony, Microsoft and Nintendo have ruled the roost since 2001.

The Problem

Nobody’s really happy with the current console scene. Consumers worry about backwards compatibility and format wars, so sometimes wait for years to buy new systems. Microsoft and Sony worry about selling enough titles to justify their hardware costs. Publishers spend way too much money for the tools and rights to produce games for multiple platforms. Samsung and Apple want in on the action. Something has to change.

There are plenty of industry experts who feel the console era is over, but most of them attribute that to one particular threat or another. To Cevat Yerli, CEO of Crytek, that threat is the trend toward casual gaming. To Sony/GaiKai’s David Perry, it’s cloud-based games replacing consoles. The truth is a bit of everything.

Let’s start with Yerli’s point about casual gaming. A 2011 ESA study revealed some interesting statistics:

  • 55% of gamers play games on their phones or handheld devices
  • Puzzle, board games, game shows, trivia and card games represent 47% of the total market, while action, sports, strategy, and role-playing games (the bread-and-butter of console gaming) account for only 21%
  • Non-traditional formats (downloadable games, digital add-ons, in-game purchases, mobile games, etc.) accounted for $5.4 billion in 2009 and $5.8 billion in 2010

But let’s not get ahead of ourselves. Console hit Call of Duty still generated several times the revenue of Angry Birds in 2011. But Angry Birds cost much less to make and distribute. That’s one reason game publishers aim to widen their scope beyond hardcore gamers.

Cloud gaming, meanwhile, is already a big enough threat to convince Sony to buy in for $380 million. Latency on all but the fastest connections makes cloud gaming a non-starter for hardcore games right now, but by the time we’re ready for a Playstation 5 in 2020, that barrier will likely be history.

The Prognosis

By the time the XBox 720 and its ilk have worn out their welcome, we’ll have seen a complete shift in the way we buy our games, and how we think about the hardware that plays them.

1. Death Of The Discs The company that invented the Blu-Ray considered dumping it from the Playstation 4. That’s a pretty good sign that version 5 won’t have an optical drive. Physical media will go away, for good reasons. Discs are easy to lose, difficult for publishers to regulate, and – most important – easy to resell. Resold software generates nothing for publishers that would like nothing better than to make every player a customer.

2. Free-to-Play Goes Hardcore If discless consoles shut out rentals and resales, something needs to fill the void for the try-before-you-buy crowd. Enter Free-to-Play (F2P), the payment model that already dominates social gaming and Massive Multiplayer Online games (MMOs). A model that provides a baseline tier of free services (or in Ouya’s case, a set of several free levels) could expose new games to millions of new customers and dramatically reduce buyer’s remorse. We’re already seeing in-game purchases generate serious money in hardcore games, and that trend will only grow.

But Free-to-Play has a major downside. It destroys the current model of hardware subsidies paid back by large, up-front game costs. Without a guaranteed subsidy, every system sold will have to pay for itself. That means either dramatically higher up-front costs or dramatically less complex hardware.

Raising prices too high would lock out families and teens, and invite competition with more versatile and upgradable PCs. Dumbing down the box would work fine for cloud gaming, but high-end local processing would suffer. Expect to see a fragmentation in hardware offerings to meet these needs, and don’t expect the Big Three to keep making all the hardware themselves.

3. “Playstation” Becomes A Spec. Sony, Nintendo and Microsoft will continue to cut deals with cable companies, set-top-box providers (including Apple), and television manufacturers to embed special gaming processors in their devices. We might even see hardware tiers. For example, an Apple TV might be “Wii Streaming Certified,” but the latest Nintendo fighting game might require a compliant PC, or a box with more oomph. This would leave plenty of room for everyone in the ecosystem to sell different combinations of hardware and bandwidth, and where there’s potential profit, there’s industry excitement.

Look for Sony to try to beef up its TVs with exclusive Playstation content, while Microsoft inks deals with everyone else. In the words of Twisted Metal creator David Jaffe, the Big Three become “more like movie studios for video games.”

4. Tablets Are The New Consoles If you’re going to build a seamless, cross-platform entertainment system, you might as well go all the way. Android will be a major gaming platform, with or without the Big Three, even if Ouya fails. Microsoft’s SmartGlass is already hinting at where this trend is going. By 2020 it wouldn’t be surprising if the remaining video game titans all had proprietary virtual machines running on Android that would stream each company’s cloud gaming service and allow at least some level of local execution for downloadable games.

Can This Technology Be Saved?

The Crash of 1983 wiped console companies off the map, but that was an extinction event. This is an evolution, and all the players see it coming (Microsoft more than the others). Today’s gaming giants are resilient, and they’ll adapt. It may be possible that the Big Three or their minions will continue to offer a higher-cost hardware bundle - much like Microsoft plans to sell the Surface as a flagship product -but given the economic direction of the industry, innovation is more likely to manifest in a novel controller or a software layer that could be used by multiple hardware and OS configurations. In 2020, your TV may very well be your console.

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