The AppDroid Apocalypse

Apple TV and Google TV: Threat or Menace?

The Appdroid Apocalypse is coming, and it poses a threat to the survival of the console business as we know it. Surviving, or better still, thriving, will require understanding the coming changes and changing business models in response. It won't be easy, and for some companies it may prove impossible. For others it's a huge opportunity. Either way, the Appdroid Apocalypse is arriving soon, and we'd all better be ready.

What is the Appdroid Apocalypse? The same App Store/Android Market that's busily eating up market share from the Nintendo DS and the Sony PSP is coming to a family room near you. The Apple TV and the Google TV will eventually offer the same gaming apps that you find on iPhone/iPad/iPod Touch and Android, but they'll be played in your family room. Yeah, the same place your console is plugged in. These apps, numbering in the tens of thousands, cost an average of less than $1.50. Thousands of them are free, or free-to-play. The most expensive ones are still under $10. The Apocalypse part is where this new console business turns the existing console business into a scorched wasteland... or at least, a market where sales are declining from year to year rather than growing.

Whoa, wait a minute, you say. That's not what Apple TV does... Apple hasn't said anything about offering Apps on Apple TV. Sure, and they didn't do that for the first year of the iPhone, either. Everything is there to make it happen; the new Apple TV runs on iOS, after all. You think maybe Apple hasn't noticed they've made a billion dollars selling Apps? Or the potential of selling a few billion more in family rooms? Apple can flip a switch and turn on an App Store for Apple TV at any time. They probably just want to get everything ready for the launch, so they can hit the ground running. It could happen soon, or they could wait a year. But it's going to happen.

Google is in a similar place. They see how much action they've gotten from the Android market, and how Apple has done with the App Store. Does Google want to lose the family room to Apple? No way.

One thing Apple and Google have in common is that neither one particularly cares what happens to the traditional console business. Gee, Microsoft might lose a lot of money? A happy side effect of Apple and Google's plans.

Where's the evidence for this Apocalypse? Let's look at the numbers. Android phones are now being activated at the rate of 200,000 per day, according to Eric Schmidt. Combined, Android (8.5 million through 2009) and Apple smartphones (according to this report) will be in excess of 150 million by 2012, and with iPod Touches and iPads, along with Android tablets, it may be well over 250 million units (Gartner Group projects over 100 million tablets sold in 2012). Compare this to an installed base of 132 million DS units as of June 2010; that's likely to grow by another 15-20 million units by 2012, but that still leaves it about half the size of the iOS/Android installed base.

Nintendo's DS business is faltering; both hardware and software sales are down (43% and 23% over the last six months). The 3DS is coming next year, but it will likely be $250 to $300, and it still won't have a business model akin to Android or Apple's relatively open markets. There are over 300,000 Apps in the App Store, and the Android app market has hit 100,000. By comparison the DS has in the low thousands of titles, and many are no longer available because you just can't find a cartridge. All of the apps are always available, since there is no physical inventory.

At least 25% of those apps for iOS are games, and the average price is around $1.50. Thousands of them are free, and many are free-to-play. Apple and Google are integrating advertising into their platforms, which promises to keep game prices low as publishers can make money from ads. Freemium business models, such as used in social games like Farmville, are wildly successful (to the point where Zynga is looking at $1 billion in annual revenue by 2012); this is not a model planned for consoles. Nintendo has some 241 downloadable titles available for the DSi, but they are mostly $5 or $8 (and the DSi is a small part of the overall DS base). Nintendo is careful to preserve its retail business by keeping retail titles out of its download store. They saw what happened when Sony introduced the PSPGo, which offered no way for retailers to take a cut from software sales since it was all downloads.

The handheld videogame business is rapidly being outsold by Apple and Google, and the trend will accelerate. Sony has done pretty well with the PSP (over 50 million sold) but it has paled in comparison to the DS and the iPod; their attempt to get into the future of the business with the PSPGo (which used digital distribution) failed miserably as a high price and massive retailer pushback doomed the device. They may try again with the PSP2, but they'll have to innovate with their business model to find a way to get retailers to support digital distribution (Sony also needs to get their internal music and movie units onboard, which also promises to be a fight). Nintendo has come out squarely against the idea of digitally distributing core titles. The even more fundamental problem is that Sony and Nintendo offer devices that are only game machines, while Apple and Google offer devices with a wide range of functions. The greater efficiencies of scale mean that Apple and Google can put more and more power into their handheld devices at lower and lower cost, and they release new hardware on a yearly schedule instead of the 3 year or more schedule of Sony and Nintendo.

Now Apple and Google are poised to bring this business model innovation into the family room (here's an overview of their current offerings). You'll see an App store for the Apple TV and the Google TV, offering many different titles. Developers can easily release software without elaborate bureaucracy. There will be thousands of titles available at average prices an order of magnitude below standard console games.

These Google TV and Apple TV boxes will not be close to the power of current consoles; at least, not at first. But they'll be plenty powerful enough to run, say, Farmville. Or any of the thousands of games on iPhone or Android. Advertising will be built in, and free-to-play business models will be welcomed.

And this is how the classic console industry starts to decline. Does anyone think the last two years of declining sales have just been a fluke?

Do these things mean AAA console titles are obsolete? No, there will still be demand for them. But development costs have to be kept in check to make these titles consistently profitable. Mid-range titles are getting squeezed by lower sales and higher budgets, and there's only so many AAA titles the market can absorb.

Surviving the Appdroid Apocalypse means investing in new types of games and new business models. We're already seeing EA buying mobile and social game companies; Activision is talking about a subscription model for Call of Duty. It's a difficult task, though, to take a company mostly based around a 2-3 year development cycle for its games and completely change the way it approaches business. There will be wrenching readjustments along the way. Creating a steady flow of profits on free or 99 cent software is a huge challenge, and it will mean different development models.

It's not all bad news, though. The changes favor smaller developers who can more easily adjust to a new market of smaller budgets and shorter development times. The indie developer has many more possibilities opening up than seemed possible a few years ago.

It's also true that marketing becomes a huge issue when you're trying to stand out among tens of thousands of titles all competing for attention, and that will be a big problem for smaller developers. Developers of all sizes will have to be able to make a profit on a game that may be given away. Big publishers will have many advantages going into this market due to their size, audience awareness, and the amount of dollars they can throw at things. Small developers will have more of a chance to break through into a big market than they've had before, but it won't be easy.

We're all going to have to figure out out how to first survive, and then thrive, after the Appdroid Apocalypse. Because it's coming soon to a family room near you.

Earnings Roundup For The Big Three

Sometimes it can be hard to sort out what's going on at the Big Three console manufacturers when their PR machines are churning out clouds of smoke. Fortunately, every once in a while we get financial reports that slip a few facts in there. Let's look at what's being reported. (I'm only going to cover revenue for the games divisions of Sony and Microsoft, but for both of those companies it's usually true that if the games division is doing well, the whole company is doing well.)

Microsoft, as you might have expected, had a great quarter with the release of Halo: Reach. The Xbox 360 business went up 33% over the same quarter in 2009. They sold 2.8 million Xbox 360's, about 38% higher than last year. Total revenues for the game section were $1.2 billion, with Halo: Reach accounting for over $350 million of that all by its lonesome. The division made $382 million in profit for the JAS quarter, which was a 46% increase from last year. Looks like a AAA sequel can still rake in the bucks, and doing an Xbox 360 themed around the release certainly didn't hurt. Microsoft expects to do well for Christmas, too with the Kinect poised to enter the market. They expect a 30% boost over last year's sales for the entire Entertainment and Devices division, though some of that is due to Windows Phone 7.

Looks good for Microsoft, but how's Sony doing? It's a mixed report for them. The PlayStation section had overall sales drop by almost 13% over last year, down to $2.12 billion. The PS3, though, had its number of units sold increase 9% over last year due to the PS3 Slim and the Move introduction, with total units sold hitting 3.5 million. Software sales rose from 23.9 million units to 35.3 million units. Why did sales overall drop? It's all thanks to the PSP, which saw sales drop by 50% year-over-year (I believe the technical term you see in the financial press is "plummet"). The PSP sold only 1.5 million units in the quarter, matching the 10-year-old PlayStation 2. PSP software saw a 2 million unit drop to 13 million, and PS2 software was almost halved with a drop to 5.6 million units, versus 11.4 million last year. Sony expects the PlayStation division to sell 15 million PlayStation 3s, 8 million PSPs, and 6 million PS2s for the year. Not bad, but not as good as Microsoft.

Looks like Nintendo gets to be the bearer of purely bad news. They lost almost $25 million over the last six months (compare that to the same period last year, when they had a profit of over $75 million; that's a $100 million dollar swing). Nintendo saw DS sales drop 43% over that period, down to 6.69 million units (about 1.1 million per month on the average). Wii sales dropped over 14%, down to 4.97 million units for that six-month period, with Wii software sales dropping a similar amount. DS software sales only dropped 23%, which I guess is cause for celebration compared to all the other numbers.

Some analysts think Nintendo can still pull out a good Christmas, but others (like this one) disagree, and don't see any happy surprises under the tree for Nintendo. Put me in the "Nintendo's gonna get worse before it gets better" camp. Though I'm not sure how much better they're going to get. I'm sure the 3DS will have a good launch, but that still doesn't solve the Wii problem, which probably wouldn't get new hardware until next fall at the earliest. The 3DS may have a rough time maintaining good sales with an impending PSP2 launch, and the continuing successes of the iPhone, iPod Touch, iPad, and Android devices.

It gives you some perspective when you look at the sales numbers from the Big Three and compare them to iPhone numbers (currently selling close to 5 million per month) or Android numbers (6 million per month) or even iPad numbers (currently at 1.3 million per month and rising). When iPads are outselling DS's, and the iPad is at least 5 times the price on average, you know Nintendo has a long-term problem. At least Nintendo is finally acknowledging that Apple is a threat. Of course, that's not the same as actually doing something about it, like opening up the DS to all kinds of software development with little or no bureaucracy.

We'll see where the industry sits once the glow of Kinect and Move introductions has worn off. I expect 2011 to be another lackluster year for software sales on traditional consoles.

Will the Market Kinect?

Read the whole comic at http://www.vgcats.com/comics/?strip_id=294

If you're wondering how this holiday is shaping up for Microsoft's Kinect, it's kind of a mixed bag. The product was a hit on Oprah, and Microsoft is rumored to be spending a cool $500 million dollars marketing the sucker, which both have to be seen as positives. On the down side, we still have no hard-core game titles announced for it, and the nagging rumors that the Kinect chews up so much CPU that the Xbox 360 can't run a CPU-intensive title along with Kinect (i.e., titles popular among the hardcore, like Halo) make me wonder if the device will really do all that well at $150.

One answer is that Microsoft is hoping to move the Kinect beyond gaming, according to this article in the NY Times. Microsoft sees it as a gateway into the mass market for selling media in the family room. Plus they'd like to move the technology into other devices. I'm not sure if people are ready for their computers to recognize them when they walk into a room and offer to switch on the TV for them.

Some people think the Kinect will be the next Wii, but I'm rather skeptical. Since, you know, people already have a Wii... and you can get a complete Wii for not much more than a Kinect by itself. Market research company Ipsos says Kinect will be the big winner this holiday season, and they offer some surveys they've done as evidence. Consumers rate Kinect highly on believability and uniqueness compared to the Sony Move (note to Bill Robinson: Does that mean the Kinect is uniquer than the Move?), so Ipsos thinks the Kinect will be the winner this holiday season.

Early reports say Sony has, well, moved over 1 million Moves so far, which they say is good but some analysts feel is rather disappointing. The Move is actually better technically than the Kinect as far as hard-core games go, since it doesn't affect the CPU much at all. The Kinect is a much more marketing-friendly device: "Look, ma, no hands!" It's an easier sell when you say no controllers needed, and it uses voice commands, it recognizes you... it sounds very futuristic.

All that's enough to get some consumers to open their wallets, but when the shiny newness wears off is there enough functionality to keep selling that bad boy? I think Microsoft will have to keep releasing nifty new applications (not just games) if they want to avoid a loss of Kinectic energy.

PSP2 Rumor Roundup & Analysis

One possible PSP2 configuration

The rumor mill has been grinding out factoids like crazy lately about the PSP2, so I thought I'd round up all the rumors and season it with some analysis and some inductive reasoning.

This article is a an interesting roundup of one analyst's thinking. He makes a lot of good points about the PSP's history, though he fails to mention they have sold over 55 million units. Not bad at all, just not anywhere near the DS line's 125 million units. The PSP has also been plagued with piracy, which has kept developers away, and the launch of the PSPGo didn't help matters either. (Retailers hated it because they couldn't sell software for it.)

Based on various reports (here, here, and here) we are likely to see the PSP2 shipping next fall. The usual pattern is to show the machine publicly at E3, where you announce the ship date and the price. If you're aggressive about the release, you start showing the machine even earlier, like at the Game Developer's Conference (though you probably hold off mentioning exact specs or pricing). If you want to hit the ground running, you've been seeding key developers with advance hardware units and early dev kits for at least a year ahead of time. Which is just what the rumor mill has been saying; developers have had it in their hot little hands for months.

What also seems to be clear is that the hardware design isn't yet locked down. There are still battery and heat issues to take care of, so the final spec is not yet complete. Here's what seems to be pretty sure, though:

• Higher resolution screen (at least 1" bigger also), so that they can say HD (which leaves them some wiggle room, as there are several resolutions that qualify for that title)
• Dual analog controls
• Physical media (yes, it won't be download-only)
• Backside touch controls
• More powerful graphics/CPU than a 3DS or even an iPhone 4

 It would be a big break with the past if Sony decided to court small developers and independent developers, but given how the iOS market has progressed it would certainly be a smart move on Sony's part. Sony would be really smart if they opened the device up to other applications besides games, and made it a music player and video player, with a slick online store that sold all sorts of media. Don't hold your breath, though.

Price? I'd guess somewhere between $249 and $349 depending on many factors, such as the 3DS price and how it's selling, and exactly what hardware is in the PSP2 and how much Sony wants to profit on the hardware.

I think that Sony has a good shot at a reasonable chunk of market share, IF they really push the downloadable content angle and create something that resembles the iTunes store in its ease of use and breadth of content. Both Sony and Nintendo have to realize the reason Apple is grabbing their market share is not the hardware, it's the business model. I fear neither Sony nor Nintendo will be able to deal with the forces that prevent them from adopting the Apple model, even in part. I hope that they will be able to.

Pandora: The Other Handheld

Here's another contender in the handheld gaming device market... only it's not really trying. Still, it's got some impressive hardware. It's an interesting testament to crowdsourcing: They managed to put together a fully realized handheld gaming device at a reasonable price of $349, which is pretty impressive considering the minuscule production runs (800 so far).

It's a cross between a gaming handheld and a PC, with an 800 x 480 touchscreen and enough horsepower to run various gaming emulators. You can surf the web, play videos, and use the built-in gaming controls to play a wide range of games. You've got WiFi, Bluetooth, dual SD card slots... the specs are really quite impressive. And it's only slightly bigger than a DS. You'll also have noticed the full QWERTY keyboard on it, which will make your Quake games easier (yes, you can play Quake with it).

What's the catch? It's a Linux box, which means you need to be comfortable with installing software and tinkering with the system. Not to mention hunting down software. This device does not have a mass-market veneer on it; it's a raw hacker's delight.

It took their team a couple of years to pull it together, which is not bad considering it was a hobby project. Heck, hasn't Sony been working that long on the PSP2? Which, by the way, continues to heat up the rumor mills. More people are saying it will ship sometime in 2011. Some people are looking at Sony job postings and wondering if their open reqs for Android programmers has anything to do with the PSP2. Others are looking at patent applications and talking about a backside touch-sensitive control scheme (while you're holding the PSP2, your fingers could be controlling it by touching the back of the device). Apparently there may still be battery and heat issues to overcome, though, as Sony stuffs plenty of power into a small package along with a drop-dead gorgeous screen.

Well, Sony should take their time and get it right; the competition is fierce, with the 3DS poised to hit in March, and the iPhone 4 already rocking an amazing screen and some serious horsepower (plus an array of sensors that makes for some interesting game design possibilities).

Still, the Pandora and the PSP2 and the 3DS are lacking a key competitive advantage the iPhone possesses: the iTunes store. Not just because it has a huge array of music and video to choose from, but because it makes buying games and media products dead simple. Yes, it can be hard to find the right choose among a zillion games, but compare that to the DSiWare store... it is to laugh.

I only hope Sony is putting some energy into an online store experience. Or hoping to tap into the Android Market. Nintendo... I'd love to be shocked and see them come up with a real online store for a wide range of products.

The Pandora? It's a niche machine, to be sure, but it sure looks like a fun one. A hat tip to Randy Reiss who told me about it. Randy, I hope you have fun with your Pandora!

Android Sales Rising, Android App Revenue Lagging

Google's Android continues its growth, as Google announced as part of their 3rd quarter earnings roundup (which was terrific, of course). The Android Market is now over 100,000 apps (about 30,000 of them are games), and apparently activations continue at about 200,000 every day, which pencils out to around 6 million new units a month. Whoosh. Google's mobile search and services drags in about $1 billion a year for the company, which will no doubt continue to grow.

We'll see the introduction of Android 3.0 this year, and probably more new versions next year. I'd bet on a tablet version next year some time, too. Google plans to a launch a streaming music service with Android 3.0 this year, according to reports. That should give it a boost, though rumors say Apple will be doing something similar at some point (they did acquire a streaming music company earlier this year).

The Android operating system overtook iOS in the second quarter in terms of global market share, 17.2% to Apple's 14.2%. Of course, they were both beaten by Blackberry and Nokia took first place for smartphones. But that was before Apple's iPhone 4 hit, and that has been a smash hit that bids to rewrite those percentages for the next report.

With all this, are developers making a lot of money off of Android apps? Well... not so much. This New York Times article lays out some of the problems. Sales are anemic compared to iOS app sales, in part because it's a lot easier to buy an iOS app; one click in the iTunes store and you're done. Google doesn't want to use anything but Google Checkout, and so most people have to enter in a credit card number and it is no longer simple. Also, there's no in-app purchase mechanism (which has been a huge boon for iOS developers), though Google has said they plan to implement that at some point.  Finally, many Android developers just depend on ad revenue, figuring that Google tends to attract people who don't plan to pay for things (since Google offers so many free applications and services).

Another big issue is the fragmentation among Android devices. There's a huge variance in the hardware and in the versions of Android, so developers have to spend a lot more time, effort and money testing their app on different devices. Yes, you have to check out your app on an iPod Touch, various flavors of iPhone and iOS, and iPad, but that's still far less of an issue than all the different versions of Android and the hardware it runs on. It almost reminds you of the bad old days of trying to create games for phones, with hundreds of handsets to consider. (At least, you don't have to worry about the telco getting in the way, or any problem putting your app on sale.)

I think we'll see more Android apps, especially from iPhone app developers looking to extend their success. Porting an app is going to be easier than starting from scratch, and many of your marketing efforts will help sales on both platforms. But it's a different market, and it still lacks some of the refinements of the iOS market. Those little touches can make a big difference in sales, and therefore a big difference to developers (especially small ones).

Marketers need to understand the differences between the two markets, and study them, before launching marketing efforts. Or even before finalizing app design; your revenue plans may need to force differences in the design. I wish it was all simple, but of course it's not.

Will Tablets Be Bigger Than Consoles?

If you believe the Gartner Group's analysts, the overall tablet market is going to grow at an amazing rate -- and it will become bigger than any game console by 2012. Yes, the prices for games are less... but note that iPad games tend to have a higher price than iPhone games (all of $4 or $5 instead of $2 or $3). Still, when you're looking at a total market of 175 million or so by the end of 2012, it should be enough to convince you to enter that market.

The chart from Forester Research, above, shows tablets gaining a quarter of the US market in a few years for all computing devices... that's out of 500 million or so sold. Makes you wonder why other companies are taking so long to challenge the iPad.... but it may be tougher than it looks. Android is not yet tablet-ready, according to Google. And Apple has a number of custom chips, and patents, that may be hard to work around. Still, the lure of the market size will get competitors to figure out ways around these barriers.

Here's what Gartner predicts for tablet sales (iPad and Android and whatever else, though iPad will probably get the biggest share):

	2010 Sales	2011 Sales	2012 Sales	2013 Sales
Media Tablets	19,490	54,781	103,425	154,150

(numbers are in thousands)

Add those up and you can see that by 2012 tablets will be a larger market than any console; the iPad by itself will probably be among the biggest consoles ever. (Expect Apple to sell about 24 million next year, on top of the 16 million or so this year... it'll be comparable to the Xbox 360 base, bigger than the PS3. Note that the iPad is only one of the iOS devices... which currently total about 125 million worldwide installed base.)

"The all-in-one nature of media tablets will result in the cannibalization of other consumer electronics devices such as e-readers, gaming devices, and media players," said Carolina Milanesi, research vice president at Gartner.

Yes, they're talking about tablets demolishing the netbook category (strangled in its crib, essentially), and taking a chunk out of notebooks and accelerating the move away from desktop computers. Manufacturers are already seeing this in their sales numbers.

Some perspective is provided by looking at total worldwide console sales:

Console	(Millions)
Playstation	103
PS2	145
PS3	38
NES	62
SNES	49
N64	33
Gamecube	22
Wii	71
Xbox	24
Xbox 360	42
Game Boy	119
GBA	82
DS	125
PSP	53

So the biggest installed base, worldwide, is the PS2 at 145 million. Not bad, but nothing today is selling in numbers to come close to the PS2. Game consoles are lucky to crack 500,000 sales in a month, and usually it's lower (the Wii is hitting 250,000 per month now). The iPad is looking at getting to 2 million a month by the end of 2011 (it's already over 1.3 million per month), and to keep climbing. Note also that with the new Apple TV you'll be able to wirelessly stream any game you're playing on your iPad right to your TV... or iPhone game, or iPod Touch game. Soon you'll be seeing Apple TV with its own App Store and its own games. Oh, console makers have a lot to worry about.

Still, there are some interesting flaws in the picture. One is that a recent survey showed one third of all iPad owners so far have never downloaded an app; not a single one. Seems odd to me, but that will probably continue to some extent. The iPad is getting some very casual users who aren't computer savvy and may just be content to browse the web, or play their media library. But with a little advertising I bet that percentage will shrink.

Update: Seems like Nielsen was wrong about that statistic; only 9% of iPad owners haven't downloaded an app. They recanted here; no explanation, no apology. Makes you kind of suspect their other numbers...

GameStop's Game

So the news comes out in a press release that GameStop has put an iPhone game of their very own in the App Store, Buck and the Coin of Destiny, for 99 cents.

Many thoughts come to mind, but my comment on IndustryGamers was this:

"I don't know, 99 cents seems like a lot... maybe I'll get a used copy."

The E-magazine Problem

The future of magazines?

While e-books are a growing market, the e-magazine is not so lucky. The problem has been the business model; books depended solely on their sale for revenue, while magazines have depended mostly on advertising and only somewhat on their sale price for revenue. (The mix varies; some magazines have very high sub costs and issue prices and not a lot of advertising, while others discount the subscription price heavily in order to woo more advertisers.) So e-books have found it easier to generate revenue; all they have to do is get a sale, and there are now a number of places to sell e-books online.

Magazines have a different set of challenges. Usually they aren't written by one person, so immediately you have to deal with a number of authors, editors, and layout people (sometimes the roles are combined, of course). Most of f the time those people would expect to be paid up front, or on publication, or a regular salary. If you're depending on sale revenue that means a lot of risk up front, until you have an established brand and know pretty well how much you'll make every month from sales. Which all means you'd have to have a fair amount of capital to get started (unlike the current e-book market).

The biggest problem  for online magazines is the lack of ad revenue, or a standard market for display ads like you'd see in a magazine. AdWords is a very minor revenue stream, and banner ads barely more. There really isn't a good model equivalent to full page ads in magazines, though many experiments are being tried.

This blog post from IO9 has some ideas on how to fix it, suggesting e-mags try some ideas from gaming, such as additional features you get with payments (a variant of free-to-play) or actually making the magazine point-driven, so you get points for participating and can buy more points, while points are used to gain access to some features or special benefits.

It's an interesting read, and perhaps someone will try these ideas out. Once again, though, it will have to start with some well-capitalized experimenter. Perhaps a cooperative of book authors might be able to make it work, contributing short stories and sharing the revenue from the sale... but it could get awfully complex to do the accounting unless it was the same group of authors every time.

Of course, the big thing magazines are pinning their hope on is the iPad and other tablets. At least that way they can create a magazine that looks reasonably familiar to them, and hope to sell advertisers display ads the same way they do now. It remains to be seen if that model will work, though. There are some very nice magazines on the iPad (like Popular Science), but I don't think any of them are making money on their iPad versions yet.

Innovators, the market is appearing... can someone seize it?

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Nintendo In Crisis

The DS as a shopping tool? I don't buy it.

Nintendo is in an interesting position these days... as in the old Chinese curse, "may you live in interesting times." Their flagship product, the Wii, was declared the early winner of the latest console generation as it handily outsold the XBox 360 and the PS3. Publishers were scrambling to shift development dollars away from PS3 and XBox 360 titles to the Wii. That was then... and now, Wii sales have fallen 45% from last year and is being beaten handily by XBox 360 and PS3, thanks to their new low prices. Worse, publishers found that the attach rate (the rate at which console owners bought software) was far lower for the Wii than for the other platforms. Sure, Nintendo could sell a new Zelda or Mario title for the Wii, but sales of anything else were disappointing despite the large installed base of Wii. The installed base doesn't help publishers if they don't buy software.

Well, that's OK, because Nintendo still has the best-selling DS line. Well, it was best-selling... this year sales are down 25%, with both hardware and software taking a hit. The introduction of the DSi XL was undercut by Nintendo's announcement of the 3DS. An amazing blunder, or perhaps it was just that Nintendo realized a larger DS was not going to solve the sales problem, they needed some new technology. So they stepped on the product they had just announced.

Now we're looking at a very bleak holiday season for Nintendo. No new Wii on the horizon; no price cuts; no killer software for Christmas. The DS line has slowed to a crawl as the 3DS is announced for March. What's the big N going to do?

There is an interesting twist; a patent application they have in the works that details how you could use the DS as a shopping tool, assuming the store had information on products stored in a wireless network in the right format. On the positive side, it shows Nintendo is thinking about the DS as more than just a game-playing device. On the negative side... it's pretty lame compared to what you can already do with a smartphone by reading UPCs and comparing prices to other vendors.

Nintendo is hoping the 3DS sells big; they are so confident they are charging a premium price (and possibly raising software prices as well). Even assuming they are right, though, this does not help the Wii. The answer to that one is really pretty simple: Drop the price to $99. And do it before Christmas. Meanwhile, crank up the engineering on a new console, whatever you decide to call it. More horsepower would be nice (and relatively inexpensive), but it really needs some new gimmick. Sony and Microsoft have now copied the Wii's gestural interface, and improved on it considerably (in two different ways). Can Nintendo think of something new?

Really, though, the answer doesn't require hardware innovation; they need business model innovation. Look at what's driving the success of iOS and Android; it's their huge market of Apps, with an amazing variety of uses at low prices. Nintendo could create such a market, and even integrate it between the DS and the family room console, giving you an additional reason to use the handheld device as an optional controller for the family room console. All it requires is that Nintendo completely upend the way they do business now and reinvent their approach to online connectivity, throw open the doors to developers and make the tools easy and inexpensive, and make the approval process transparent and so swift it only takes a day or two.

You may doubt that Nintendo can reinvent themselves so completely. Well, they were once a company that produced playing cards... there's been a few changes since then. It's possible, especially if their sales don't recover as much as they hope.

Still, my guess is that Nintendo will not do anything so dramatic. They tend to be conservative. Perhaps the Wii may see a price drop next year, but probably only to $149. They will hope the 3DS reignites the DS line; the real effects won't be known until some months after the introduction, when sales settle into a predictable level. (Though, thanks to NPD hiding the numbers, we may not really know whether that's happening or not.)

Marketers need to predict where the market is going in order to guide their planning. It looks to me like the momentum is heading away from Nintendo.

E-Book Marketing Success Story

Yesterday the new e-book Draculas was released on Amazon, and the results of the marketing campaign they conducted are in. I interviewed one of the four authors in this post about their marketing efforts, and now we can see the results after one day. It's a smash hit, reaching #76 on the Paid Kindle bestseller list in one day, with over 120 reviews already posted. They've already sold over 800 copies at $2.99, which puts them in the black given their $1300 upfront costs (which includes formatting, cover art, interior art, the website, and some ads on Kindleboards and Kindle Nation). Everything from now on is gravy... and since they never have to worry about printing, the book will stay in print and keep generating revenue.

One of the authors, J.A. Konrath, details the marketing campaign they conducted in this post on his blog. I'd like to add some of my own comments about their marketing efforts.

First off, the level of success they've had does depend to some extent on their previous success as novelists. They have a fan base, or rather four fan bases. By collaborating on this book and on its marketing, they've successfully cross-marketed to all four fan bases, which not only helps the sales of this book but should have a nice boost to each author's e-book sales going forward. Point: Look to ways to expand whatever your current market is by tapping into another existing customer base.

Second Point: They mustered the power of bloggers among their fan base by getting them to post reviews. All they had to pay was a free copy of the e-book; they gave away 260 copies. Now, with a traditional book you'd have the expense of printing those copies and mailing them, and the time delay... with an e-book, costs were next to nothing. Did they lose 260 sales? Perhaps... and they've certainly gained far more than that in the added publicity and exposure for the novel.

Third Point: They didn't add in a cost for their time to do all of this marketing. I think they'd say it really didn't take that much time for them, but let's say it was some opportunity cost (meaning they could have been writing other novels) to them; perhaps as much as $10,000. Still, that should be made up in a few months of sales... and this should keep selling month after month, and the authors expect at least 1,000 units per month. Granted, Amazon takes 30% off the top. But you add together enough of those little revenue streams and you have a pretty nice living.

Fourth Point: The price is $2.99, which is far lower than traditional publishers charge... but it makes it an impulse buy for readers, and since you have no physical costs to cover, you still have a great margin. I think most e-books (particularly fiction) are overpriced; they could generate more revenue by pricing them lower. But there's no way to know for sure unless you try, and most publishers are afraid to try lest they damage sales of the physical books. If you're not a publisher of physical books, why not give it a go? You can always raise the price back up if it doesn't boost sales enough. Finding the sweet spot on digital pricing means finding the pricing that maximizes your profits, whether that's $100 or $1. What should matter is the size of the check you put into the bank, not the price on the product.

All without having to go through a New York publisher.

Ladies and gentlemen, the e-book era has officially arrived. You can make good money off of e-books without ever having to deal with the old infrastructure. I put the first e-book into a retail store, in Acrobat Reader 1.0 format, on a floppy disk about 15 years ago. It's taken a lot longer than I expected, but it's finally arrived as a viable format.

Now I have to get busy and write some books...

Could This Stop GameStop?

What publishers would like you to think.

A recent 9th Circuit Court of Appeals ruling could derail the used game business. The court has ruled, in the case of Vernor v. Autodesk, that software publishers have the authority to prevent the resale of their software to another user. The ruling directly contradicts previous court rulings that software could be resold under the "first sale" doctrine. (The "first sale" doctrine states that companies only have the right to dictate the terms of the first sale; once someone has bought the product it can be resold without constraint. This is what allows used bookstores to sell books, for instance.)

On its face, this could stop everyone from eBay to GameStop to you from selling a piece of software you bought from someone else. Of course, publishers hate the idea of used software, so they think this is a great idea. They've been trying to eliminate used game sales for years. You know those "license agreements" included with software you buy, that no one in the known universe has ever read? Those basically say you didn't just buy the software you just bought; instead you just have a limited right to use it for a while, and you certainly can't sell or transfer that right to anyone else, no way.

You can bet this ruling is likely to be appealed, so this may end up in front of the Supreme Court... if they choose to hear it. If not, or if the appeal is denied, then we may well see some publishers taking on GameStop and telling them to stop selling used games. Or, in other words, saying "you can't make a profit any more", which is they way GameStop will look at it. Ouch.

Of course, as packaged retail software becomes more of an endangered species, publishers will be moving to subscription revenue and non-transferable online usage rights (see EA's Sports Pass, where they charge you $10 to be able to play online... doesn't matter if you bought the game new or used). So the whole issue will be moot in a few years. Which is why GameStop had better accelerate their search for other revenue sources, and try harder to move online. And also why publishers had better move faster getting into digital distribution, or risk getting left behind in sales and revenue.

Of course, there's a simpler solution: Charge less for new games. If you were paying $20 for a new game instead of $60, you'd be a lot less inclined to look for a used game. Which is where the whole Classic game category came from; after a publisher feels it has exhausted the market for a game at $60, it drops the price to $20. Maybe they could sell even more if the price was lower to start... especially if it's a digital product without any hard costs to recover. Maybe Sony, instead of spending 5 years and close to $100 million to create 1000 cars and over 70 tracks for Gran Turismo 5 before releasing sometime in the hazy future, could just make, oh, 100 cars and 20 tracks and charge $40 for it, and release it in 2 years while spending only $40 million. Then sell other cars and tracks as they are completed, as digital downloads. Nah, what a dumb idea, trying to release a game quickly and minimize risk and capital outlay.

Yet another reason why software executives are having an uncomfortable time...

New Apple Numbers Smashing Records

Apple has announced its numbers for the quarter ending September, and they are eyepopping. They hit a record $20 billion in revenue, with a profit of $4.3 billion. They sold 14.1 million iPhones... and they could have sold more, only they couldn't build them fast enough. Meanwhile, they also sold 9 million iPods and 4.2 million iPads (oh, yes, and Mac sales hit 3.9 million, a 27% increase).

Some very interesting information came along with this. First, the App Store has hit 300,000 Apps (for comparison purposes, the Android Market is over 90,000 Apps). Second, the number of iOS devices out there has hit 125 million, which is getting pretty darn close to the number of Nintendo DS units out there (132 million as of June). Clearly, given the respective sales rates, Apple will easily pass Nintendo's installed base this next quarter, and never look back no matter how well the 3DS does. Third, the iPad has become one of the fastest-selling gadgets ever, if not the fastest. Some analysts were disappointed Apple didn't sell 5 million, but there were supply constraints.

Oh, and Apple managed to sell over 9 million iPods, too, though that number was down 11% over last year. Probably had to do with the transition to the new iPod based on the iPhone 4. The new Apple TV sold 250,000 units, though of course it didn;t have very much of that quarter to work with. Still, it managed to match the Wii in sales for that month. (Wait until Apple puts the App Store on the Apple TV, then the floodgates will open.) Plus, Apple said they had hit a peak of 300,000 iOS product activations per day, handily beating Google's 200,000 per day. Apple also casually mentioned that Blackberry sold 12.1 million units in that period... the iPhone has now blown past the business leader. The iPad is making strong inroads into the business market, which is surprising to some people. Netbooks, notebooks, and consoles are all beginning to feel the impact of the tablet revolution, which is only just beginning. Note that the iPad-specific apps number over 35,000 and climbing.

What can we expect in the next year? Their numbers will only look better. Assuming Apple can get over their supply problems, they should be able to maintain their iPhone sales at least at that level. The long-rumored Verizon iPhone may actually appear next year, and if it does those numbers will climb higher. We should be seeing at least 5 million iPhones every month, maybe more. The iPad will probably hit close to 2 million per month. The iPod Touch will probably be 2 million per month. The Apple TV may even hit 1 million per month once it gets an App Store.

Consider, this, too: Apple is now the second largest company in the world by market capitalization. Their sales make them bigger than Microsoft, and in the upcoming quarter they'll beat Google and Microsoft, too. Cash in the bank is close to $50 billion... which means they can acquire whatever they feel they need to in order to increase their business. If they want to spend a bit more on marketing in any category, they can overwhelm any competitor.

Those numbers put the entire console business in the dust. No wonder sales are down. Will console makers figure out that their business model needs to change? Will Microsoft somehow get it together with Windows Phone 7 and the Xbox 360 and the Kinect to make a solid family room competitor? Can Sony put together a PSP2 and an online media store connected to the PS3 that will offer a compelling alternative? Will Nintendo finally create a successor to the Wii and reinvent their WiiWare and DSIWare stores? Or is Google the only effective competitor left?

September Sales Sucked

Digital game sales (left) take on physical game sales.

NPD may have tried to obscure the faces of the guilty, but the sales figures for September still showed evidence that publishers were getting killed. (Michael Pachter let loose some specific numbers, even though NPD didn't.) Sales were down once again for the most part, with a few bright spots. Overall, home console unit sales were down 20 percent over last year. Granted, last year September had the PS3 price drop boosting sales tremendously, but this year the PS3 had the Move introduction which was supposed to boost things. Still, Sony's PS3 sales were down 37 percent from last year's September, with 312,000 units sold.

The Wii suffered even more badly, with sales dropping 45% year-over-year down to 254,000 units. No wonder Nintendo is pushing for the 3DS to succeed, and and at higher prices for the software. They badly need something to replace the aging Wii's sales, and the DS line is sagging almost as much. So far we've seen nothing from Nintendo about what they might do to boost sales of the Wii this Christmas. The DS line is going to be hard to pump up, too, given that most fans are looking forward to the 3DS introduction.

Meanwhile, non-physical game sales were booming. NPD's first quarterly report on the subject estimated revenue from sources including used games, game rentals, game subscriptions, digital full game downloads, social network games, downloadable content, and mobile game apps combined to be at $2.6 to $2.9 billion, or roughly 70 to 80 percent of the $3.7 billion spent on new retail sales of hardware, software and accessories in the first six months of the year. Given the relative growth rates of the two areas, I'd expect to see the revenue cross over sometime in the next year or two.

Which leads to why NPD would make these changes (referred to in this post) to scrub away specifics, and to add reporting on other game revenues. I believe NPD was under pressure from publishers to "do something" about the constant stream of bad sales numbers. A bad sales month here and there can be explained away; two years in a row of down sales can't be explained so easily. The monthly news release from NPD saying "sales continue to suck" leads to self-fulfilling prophecy, as publishers cut back on spending, consumers get wind of things not going so well, projects get trimmed or slowed, and sales continue to slow. It's a vicious cycle.

One solution, if the news is bad, is to stop spreading the news. (Easier than fixing systemic problems or changing your business model, certainly.) So I suspect there was pressure from many sources for NPD to stop saying such nasty things... or at least, stop making it so specific by naming titles and publishers and specific hardware device sales. That way, even though the numbers still say "sales sucked last month" an individual publisher can say "Sure, maybe other publishers had a problem, but our title Call of Sequel of Honor II sold really well!"

NPD is obviously aware that game revenue from outside traditional channels is booming, so they want to cover it... but in such a way as to not embarrass those publishers who aren't moving into those areas. So the monthly pig gets a nice glossy lipstick and some eye makeup. Meanwhile, mobile, social, and free-to-play games are bringing home the bacon.

E-book sales up 193% This Year... So Far

Print book sales are down, but e-book sales are up 193% this year... and the year's not over. Those are the numbers from 14 publishers, and don't count the explosion of e-books from authors who have figured out that they don't need publishers much any more.

If you want the full picture, the press release is here; it's filled with interesting numbers. Such as that e-books make up 9% of trade sales for these publishers... doesn't sound like much until you realize it was 3% last year. As tablets and e-readers continue to sell in big numbers (54 million tablets are forecast for 2011, not even counting e-readers), that growth rate should continue.

The interesting question is whether the dedicated e-book reader can survive; some don't think so. I think the tablets will crush them in a few years, the way smartphones crushed PDAs. As the price of tablets drops, there's less room for the dedicated e-reader to survive. Once you have a tablet, the e-reader is an extra device. I expect tablets to drop into the $300 range by the end of 2011 as fierce competition rages. But it really doesn't matter to the publishing industry which device wins.

A little simple math based on the sales numbers above will show you that in a few years the publishing industry will be transformed... book stores, distributors, publishers, and authors too. One thing you can be sure of: Business as usual will not be the order of the day.

Game Budgets To Rise Even More?

Here's an example of doubling down: The lead producer at Guerrilla, developers of Killzone, feels that game budgets need to increase. It's not enough that publishers are having trouble making money, sales continue to decline for traditional videogames, and other types of games are booming with shorter development cycles and lower price points. You think it should be even harder to make money?

OK, there's still room for AAA titles, but the risk is getting greater. Maybe not for a developer that has an iron-clad contract, but at least for the publisher. And even developers can't really depend on those contracts; just ask the (former) head guys at Infinity Ward. I don't think making life more difficult for publishers is really the answer. Not in a market where Sony just announced that Gran Turismo 5 will be delayed once again; that project must be closing in on $100 million in development, and no revenue to show for it yet. The rumor mill is buzzing about this blog post, wherein the anonymous author claims Bioware's MMORPG Star Wars: The Old Republic is already north of $300 million in development costs, and it is not a good game (amid other rants about Mythic and EA).

Here's a list compiled in February of the highest game budgets (estimated) at that time... and it's already outdated.

1. Grand Theft Auto IV - $100 million
2. Gran Turismo 5 - $80 million
3. Shenmue - $70 million
4. Too Human - $60+ million
5. Metal Gear Solid 4 - $60 million
6. Halo 3 - $55 million
7. APB - $50 million
8. L.A. Noire - $50 million
9. Final Fantasy XII - $48 million
10. Killzone 2 - $45 million

Grand Theft Auto IV

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• Cheats and Walkthroughs

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Grand Theft Auto IV

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Grand Theft Auto IV

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Gran Turismo 5

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Too Human

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Metal Gear Solid 4: Guns of the Patriots

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Halo 3

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L.A. Noire

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L.A. Noire

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Killzone 2

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Interesting to note that the producer of one of the titles on that list is arguing for bigger budgets, isn't it?

Yeah, there will be big budget titles, but they'd damn well better be hits, and there will be fewer of them. Meanwhile, the industry has to figure out a way to make hits without spending like Jim Cameron on a new film. More like Zynga's scheme, where you spend a few months in development and reap years of amazing profits. Or something like this, where Lord of the Rings Online has doubled its revenue since moving from a subscription model to free-to-play. And paid subscriptions are up, too.

The game industry's key business models are changing rapidly. The days of endless growth in videogame retail sales ended two years ago, and we are unlikely to go back. This era represents the greatest change in the game industry since the NES revitalized the console market in the 1980's. Smart marketers and developers have already realized this and are planning changes in the way they do business. The others are asking for more money.

Steam May Offer Trade-Ins; Publishers Likely To Be Steamed

This one's hot off the intertubes... seems that Michael Pachter, noted industry analyst, is on the record as saying Steam will soon allow gamers to trade in their Steam purchases for other purchases, levying a fee on the transaction of course. Basically, pulling a GameStop with your Steam games. You're tired of it? Trade it in for a new one.

I expect publishers would be more than a little annoyed at this, unless Steam cuts them in for a piece of the action. Which they'd better consider, or else publishers will be loading up their BFGs and looking to put Gabe Newell's head on their wall.

This would, I think, accelerate the move to digital downloads for many people, and give Steam a leg up on other digital distributors (until they duplicate it). GameStop has to be watching this one closely. The interesting, unstated part, is exactly who gets to keep how much of that extra money that Steam will be making from a game... or who gets dinged. If I pay $40 for a Steam game, then a couple of months later I trade it back to get (I'm making this amount up because there's no data yet) $25 in Steam credit... what happens to the money that was paid to the publisher of that game? If I then buy a new game from another publisher with that credit, does that publisher get less cash than they normally would from a Steam purchase?

I can envision different answers to these questions, and some of them would not make publishers happy. Unhappy publishers might stop allowing their games on Steam... so it will be interesting to watch how this unfolds. Stay tuned.

NPD, Data Provider, Announces Data Concealment

Here's some disappointing news: NPD, for many years a major source of numbers about retail sales, has announced that they will no longer provide numbers for the amount of hardware or software sold each month. At least, not unless you're a paying customer.  So it's going to be much harder for those of us unwilling to pay thousands of dollars for this information. Which, generally, means smaller developers, where much of the industry opportunity and growth lies.

I suppose it makes sense for NPD to try and enhance a revenue stream. It is interesting to note that NPD will begin footnoting their information to make it clear that their numbers don't include such things as digital distribution, subscriptions, used game sales, and so on, which constitute an increasing part of the total consumer spending on games. NPD says they will cover the totality of consumer spending in quarterly reports, though. (But I wonder how accurate those reports will be; what are their data sources? Will companies involved with digital distribution be giving NPD their numbers? That "total consumer spending" is spread across a very large number of sellers, and I really question NPD's ability to get any kind of statistically significant data on the entirety of the field.)

NPD does go on to say that they will release some numbers here and there when they talk about a specific title, and of course the publishers who subscribe to NPD are free to state numbers themselves if they so choose.

It does make me wonder if part of the reason for this shift is the negative effect of two years' worth of reporting a slide in sales figures. Did NPD's subscribers put pressure on them to make this move, hoping to staunch the flow of bad sales numbers (under the theory that bad numbers leads to bad press, which leads to more bad numbers)? It can't have been happy-making for publishers and manufacturers to see independent numbers released every month to show how badly they're doing. Especially if NPD's numbers aren't tracking a significant part of their revenue, if publishers are getting more revenue from digital distribution, DLC, subscriptions and other things.

In a way, this underscores the current weakness in the traditional channels, and the continuing slide in the share of total industry revenues the traditional channel represents. Marketers are going to have to make do with fewer hard numbers, or find other ways to get the data that is relevant to them. I for one will be trying to dig up info from other places, and I'll post it here as I get it.

3DS Too Pricey For Japan, Survey Says

Apparently the 3DS connects to your bellybutton.

A recent survey of 1,000 Japanese consumers by Getnews.jp showed that 80% of them felt the 3DS, priced at 25,000 yen for its release in Japan ($299 at current exchange rates), is too expensive. One would think that this feeling would make them less inclined to buy the unit. But Nintendo isn't buying that idea; Iwata-san says that the device will still be cheaper than purchasing a home console, as they do not require add-ons such as screens.


"You do not need any other hardware devices to be connected in order for you to play with it," he told investors recently.

Nice try, but I'm afraid the judges will have to score that one as a miss. I think it's pretty safe to say that everyone considering buying a videogame console already has a TV set of some sort, so you're comparing apples to horse apples, so to speak.

Nintendo is feeling pretty cocky right now about the 3DS after all the nice things that were said about it at E3. In fact, they used that as justification for charging a premium price for the device. On the heels of that came word that 3DS software will likely be priced higher than current DS software.

The really fascinating thing is how disconnected from reality Nintendo appears; are their marketing folks not reporting properly from the field (gathering intelligence about the market is one of the tasks of marketing)? Let's look at the points of disconnect one by one:

The people at E3 who liked the 3DS were industry folks with a vested interest in seeing it succeed. Yes, there were magazine reviewers there who liked it a lot and their jobs don't depend on it's success directly. But all of the retailers and publishers and their employees have some very good reasons to hope Nintendo's new hardware succeeds. If it does, they stand to make more money. You weren't putting the device in front of consumers in proper focus groups; you were showing it to people who are desperate for something, anything to turn around the industry's sales trends of the last two years. Nintendo, you've confused those guys with the actual market that buys or doesn't buy your product. Your marketing team should be interviewing potential customers, not inhaling their own press releases.

The entire DS line is tanking. Sales are down 20% over last year, which should be a hint that things are not all rosy. Even after you dropped the price by $20, sales didn't recover. Software sales are even worse. Everybody's sales of traditional videogame hardware and software is down, many by double digits, for the second year in a row. The economy worldwide is still wounded, and the consumers in your core demographic of 15- 25 are hurting the worst for jobs. Your response: $299 for the console and higher prices for the software. That sure would be nice for your bottom line, considering Wii sales are also dropping, but only if it actually works. If people don't buy it, you'll have to drop the prices... and price-protect the inventory already out in the channel, and hope like hell that the early high price hasn't permanently branded the console as too expensive.

The competition is tough and getting tougher. Nintendo may like to think that with the PSP only hitting about 25% of DS sales currently that they've won the console war and it's all over, everybody who wants handheld gaming will just buy whatever Nintendo puts in front of them. (Have they not seen The Jungle?) While the current PSP is weak, Sony is likely to introduce the PSP2 soon, and it will certainly offer some additional mojo over the current one. But the real threat is the iDevice (iPhone, iPod Touch, iPad) and Android markets; together they represent over 10 million units sold every month (and growing!) with over 50,000 games with an average price of $3, and tens of thousands of free ones. Downloadable, carry your whole library of games with you at all times, plus you have an incredible array of other functions at your fingertips... and they are cheaper than a 3DS (depending on the unit and how you buy it). With this competitive reality, you're going with a premium price and no new initiatives in downloadable content?

The 3DS may well have a good initial sell-in, and do pretty well for a while. But every month that passes will see the DS market fall further behind the handheld gaming curve as the inexorable math of 10 million units per month beats down on Nintendo's sales numbers (1 million per month, perhaps, after a few months... if they are lucky). A year of that math and it's pretty clear where all the developers will be headed.

 And it's not in Nintendo's direction.