Win, Place or Show: Does it Really Matter?
September 28, 2006
Fall is finally here and most of the news is out about what we can expect from the video game systems. The launch of new consoles always generates a great deal of excitement and buzz for the industry. Unfortunately this is often followed by a sense of disappointment with the realization that the world has not suddenly been turned on its axis. The console hardware battle is a marathon, not a sprint, and will be played out over the next three years. It is unlikely that this holiday season will reveal any major surprises that would cause us to make a major market reassessment.
Of course, DFC Intelligence makes market forecasts and predictions. However, we also like to stress not putting too much emphasis on raw numbers. There is always an urge to declare winners and losers, first place and second place, often without having a clear idea of what those terms mean. We feel is more important to analyze 1) the reasoning behind forecasts; 2) what it would mean if a given forecast proves accurate and 3) understand what will happen if the market does not evolve as expected. As analysts we do not make the rules or play the game, that is done by manufacturers and consumers. Furthermore, it is a constantly evolving game and the rules are always changing. It is kind of like the NFL, where if the offenses are not scoring enough points the league can tighten up restrictions on defense.
In our forecasts we have done multiple scenarios for each major platform. Prior to 2006 we argued that Sony’s market dominance was so strong that, without a clear distinguishing factor, the best Microsoft or Nintendo could hope for with their platforms was a close second place. In 2006, we have that clear distinguishing factor: price. T he Xbox 360 and Nintendo Wii now have a clear opportunity to challenge the PlayStation 3. Whether they take advantage of this opportunity will depend on not only their execution going forward, but how Sony reacts to any potential challenges to its market leading position.
However, consumers will not make their decision overnight. This is a battle that will play out over the next few years. We have stated that two key goals for Sony are keeping the PlayStation 2 market active, thus slowing the upgrade cycle, and becoming more price aggressive by late 2007. At the 2006 Tokyo Game Show Sony took some of the steps that we feel are necessary to make their best case scenario happen.
The most important step Sony took was adding HDMI output to the lower priced PlayStation 3 SKU. Without HDMI, the basic PS3 system was essentially a crippled unit. Of course, consumers are very confused about terms like HDMI and 1080p, and even sophisticated consumers may not understand their importance. Imagine a sales clerk trying to explain the absence of HDMI on the lower end SKU: “you can get the cheaper PS3 if you don’t want to do high-def TV.” Obviously such a statement is not necessarily accurate but who wants to take the chance. By adding HDMI consumers can feel free to purchase the cheaper PS3 system and not worry that they are locked out if they ever want to upgrade. That makes the PS3 effectively $100 closer in price to the competition. If Sony can continue with aggressive moves like that the PlayStation 3 could have a bright future.
DFC Intelligence forecasts the worldwide video game and interactive entertainment market to grow from about $29 billion in 2005 to around $42 to $44 billion by 2011. This growth is likely to occur regardless of which platform is the most successful. However, it is crucial to understand who will benefit from this growth. In a little over four months from launch to the end of its fiscal year, Sony expects to ship 6 million PS3 units. Those systems represent over $3 billion in potential consumer spending. However, that is spending on hardware and it means $3 billion consumers do not have to spend on content. In other words, there is not necessarily a straight line correlation between revenue growth and profit opportunities.
Some important points to note about the interactive entertainment market going forward:
1) Higher prices mean a possible slower upgrade path. The PlayStation 2 base could remain very active for several years. Indeed keeping the base active is likely to be a key component for Sony’s success. The problem is an active PS2 base will likely be buying existing inventory, greatest hits and used titles, as opposed to new titles.
As the chart below shows, with our Sony best case scenario the installed base of new systems in 2011 is below that for the existing 128-bit systems. For other scenarios, the PS2 does not do as well, but the installed base of new systems is still very similar to the installed base for 128-bit systems. In other words, growth in this upcoming generation is not likely to substantially exceed growth in the previous generation.
2) Another key point is that under all scenarios the new game systems from Sony, Microsoft and Nintendo are all viable platforms. In the past generation there was one platform, the PS2, that far outclassed the field. Going forward we do not see a scenario where any platform has that kind of dominance over the next five years. Even under the worst case scenario, Microsoft and Nintendo do better with the Xbox 360 and the Wii than they did with the Xbox and GameCube. In the past content creators could focus on the PS2 as a primary platform and from there look to other platforms for ancillary revenue. In the future, properly leveraging multiple platforms will be crucial to success.
3) Not only do we expect a more even distribution in the installed base of console systems, but we also forecast console software as an overall percentage of the interactive entertainment to decline. As the charts below shows, console software, as a percentage of overall revenue, is expected to decline from 47% in 2004 to only 34% in 2011. With the growth of online games, mobile games and PC games the market becomes about much more than just the leading console system.
4) The key to future success is likely to be platform diversity. The challenge will be that it is becoming increasingly difficult to port among platforms. Developing for online PC, portable and console systems has always been very different. However, now there is the added twist of some major differences between the console systems. The PS3 is noted for having all kinds of potential power. However, that power comes from the Cell processor and its eight SPE co-processors. To take full advantage of this power a team may need to be dedicated to properly distributing code among the different processors. To get SKUs for other platforms out on time it is likely to require separate teams working independently. Meanwhile there are issues like custom control features for a Wii version and of course mobile and online features require a very different design paradigm. How development talent is spread among multiple platforms could become the key issue for software publishers going forward.
There are clearly some very important issues for the video game industry that need to be resolved going forward. It is not so much about system X selling 100,000 units more than system Y last month. Increasingly consumers own multiple platforms on which they play games. There are many opportunities to reach a growing consumer base. Unfortunately the market is also getting substantially more competitive and the pitfalls are growing just as fast. Even the largest companies risk becoming overextended as they try to be all things, to all people, in all places.
DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry.
A sample of reports on the video game and PC game market include:
The Online Game Market This 800 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles.
Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Complete five-year forecasts for all individual console and portable game platforms by region (Asia, Europe, North America, rest of world)) through 2011. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as portable game systems.
The Business of Computer and Video Games This report includes an historical analysis, overview of individual hardware system, top-selling games, game genres, consumer demographics, business models, retailer profiles, marketing elements and case studies, industry trends.
Market Leaders in the Video Game and Interactive Entertainment Industry This 750+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 25-50 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company.
Overview of the Video Game and Interactive Entertainment Industry This report is designed to provide an overview of some of the key trends in the video game and interactive entertainment. The focus is on highlights from the forecasts and analysis of trends, game genres and business issues found in DFC reports.
The Game Market in China This 350 page report contains a complete look at the rapidly growing Chinese game market, including forecasts to 2010, government regulations, market entry strategies, business models, distribution options, game genres and numerous company profiles and case studies.