3DS, PSP2 May Lose To Smartphones

This is not a picture of the 3DS.

Here's the proof of what I've been saying... the smartphones are taking over the handheld gaming market.


Money quote: "The report, "The Phone Gaming Revolution: Do the DS and PSP Stand a Chance?," found that 43.8% of the phone/DS/PSP gaming market plays games on phones, which represents a significant 53.2% increase over the past year. At the same time, Interpret says that the proportion of those who play on the DS or PSP has fallen by 13%." 

Interpret also said "Gamers appear to be defecting from their handheld gaming devices to phones to get their gaming kicks: a full 27.2% of consumers who indicate that they play games on their phones only (and not on the DS/PSP) actually own a DS or PSP, but do not actively use the device(s)."

So even people who own a handheld gaming device as well as a smartphone are spending more time playing games on the smartphone and leaving the handheld alone. It makes sense; how many portable devices do you want to lug around? You're always going to make sure you have your phone... so the DS gets left behind. As we've seen before, the multifunction device beats the single-purpose device. The PDA got eaten by the cell phone (or what was previously called a smartphone). Who carries a calculator these days? Phones do it. Cell phones are even taking away market share from point-and-shoot cameras... as the cameras in smartphones get better and better. Why carry a camera or a video camera when your phone does a pretty good job?

The prospects for the 3DS and the PSP2 look dimmer. Not that the hardware won't be powerful; the latest reports on the PSP2 indicate it may have almost half the processing power of a PS3. And while the 3DS may have a fairly low-res screen, the 3D without glasses is a neat trick. The difficulty is both of these devices will likely only play games. So you're going to leave it behind if you only have room for one device when you go out, because you always want to take your phone so you can stay in touch.

Another problem for the 3DS and the PSP2 is the parent problem. When the parental units are considering what to buy for their young techlings, the 3DS and the PSP2 will be in the range of $250 to $300. OK, an iPod Touch is $225... and it also plays music, videos, is a high-powered camera and video camera, it surfs the web, sends email, can even make Skype calls. Or for $99 they can get an older iPhone model and make it a full phone, with the data plan. Oh, and games for the 3DS or PSP2 will be at least $30, maybe even more. Versus thousands of free games or games that cost a few dollars.

So it's not about hardware specs; it's about multifunctionality and the business model.  Downloading and installing new software instantly, for free or a few dollars, is far more attractive than having to find a game store and spend $30 and then remember to keep the cartridge around with you at all times.

One more hidden problem: We already know the 3DS will require higher development costs for publishers than a DS, and if the PSP2 has near PS3 level graphics, you can bet development costs will be much higher than for the PSP. Which makes it even harder for publishers to make money, which will make them warier of developing for those platforms, which means not as much software, which means the platforms are even less compelling to buy.

Even at the rosiest assumptions, how many 3DS or PSP2 units would be selling a month? 1 million units would be amazing at those price points... yet iPhones are already cruising at north of 4 million units per month, and Android phones at 6 million per month. And newer, more powerful versions are introduced every few months.

This is a race that does not look good for the dedicated gaming machines.

How could they compete? By opening up to multiple applications and allowing developers to create software as easily as they can for iOS or Android. Have a killer online store for downloading everything, including the latest full game titles you can find in the stores. Have a 3G option to include phone service. Will either Sony or Nintendo do that? Highly unlikely... too difficult and painful for them. I suspect they'll continue to say everything is fine, no cause for alarm, and hope that a massive asteroid strike destroys Apple and Google in one blow.

Nintendo's Very Bad Year

Over at Gamasutra, Matt Matthews has analyzed the sales figures for console game software in 2010 versus 2009, and the results are interesting. As you'd expect, the older systems aren't selling much software; the PS2 really slowed down. The PSP was having a hard time selling software, too; perhaps because developers have been pulling back, and anticipation is growing for the PSP2. The DS's software slowdown is harder to explain, especially when you consider that it still sold 4.5 million units this year, making it the best-selling platform, and it's got a huge installed base of over 125 million. Yet software sales still dropped 12%, far more than average. I think it's partly due to the effect of iPhone games and Android games, but there's no way to know for sure.

The big story here is the collapse of the Wii. It's fallen to third place in software sales, despite having a much larger installed base than either of the other two consoles. Clearly Wii owners just aren't buying much software, and the issue is probably made worse by publishers backing off on Wii support (especially for major titles). The Wii's lack of hardware power will probably hurt it more and more in the next few years, as publishers continue to wring out more performance from the Xbox 360 and the PS..

Also, the HD output of the PS3 and the Xbox 360 will be increasingly important, as the adoption of high-def TV sets increases. Wii titles are going to look increasingly dated compared to titles for other consoles. Worse, the Wii's motion control is no longer unique, as both Microsoft and Sony have better solutions. The only thing the Wii has left in its favor is price, and that advantage will continue to erode unless Nintendo takes some drastic pricing action.

Let's also note that Microsoft is having a great year with the Xbox 360, and Sony is doing well, too. They seem to have finally hit their stride, and third-party support for their consoles is strong. They still have the competitive threat from the Apple TV/Google TV juggernaut on the horizon, but otherwise they seem well-positioned for the next year.

If Microsoft and Sony really want to slide the knife in deeper, they'll cut the prices on their motion control hardware next year (after they've gotten all they can from the early adopters who don't mind paying the premium). This will really make life difficult for Nintendo. At this point, only a new console will really rescue their sales. A price cut on the Wii would help, but it's unlikely to bring back big-time support from third-party publishers. Without that, the Wii will continue to sink into obscurity.

Nintendo must be hoping the 3DS is a huge success, because there's nothing in the Wii outlook that makes one optimistic. Nintendo needs to get a new console out there by Christmas 2011 if they hope to be relevant to the market, and they are already behind if they really wanted to do that.

It's going to be an interesting year in the console wars...

October Sales Were Scary

They aren't laughing at the sales charts.

Numbers have been shared for the game industry's October sales, despite the best efforts of NPD to put their data behind a paywall. As you might have expected, it's not all that pretty. Total sales dropped 4% over last year, but the real downer is the 26% drop in hardware sales. Software sales were actually up by 6%, and accessories (like Kinect and Move) jumped 18%.

Still, when you consider some of the high-profile software releases lately you can understand why that category rose. What's more disturbing is the huge drop in hardware sales. Nintendo sold just 232,000 units of the Wii console for a third-place finish, a decline of 54%, while the PS3 sold 250,000 units (a drop of 22%, but of course last year they had just dropped the PS3 price at this time). The Xbox 360 was the big winner, with sales of  325,000 units, a gain of 30% over last year.


NPD tried to put a happy face on things by saying that, well, these days not all of the revenue in the game industry is captured by these numbers; there's digital distribution, social games, used games, DLC, etc. True enough, but the key fact is most of the companies dependent on the traditional industry revenue don't see much of this other revenue. Sales continue to be in the dumper, and the happy holidays have not yet materialized. Except maybe for Microsoft, whose Xbox 360 continues to gain due to Halo: Reach and Kinect. I wonder if Microsoft will be able to continue their streak... or if Nintendo will manage to break their losing one.

Nintendo can try to say Wii sales will be fine, but the numbers don't bear that out. And while they are looking forward to the 3DS reviving handheld sales, meanwhile DS software sales sank 32%. Not something to make third-party publishers happy with Nintendo. Of the three manufacturers, Nintendo seems most in need of newer hardware, yet is the one most consistently saying they aren't even considering it. Maybe Nintendo wants to get back into playing cards...

3DS Online Shop

Nintendo has figured out that their online shopping for the Wii and the DS might be less than optimal, so they're planning to improve the experience for the 3DS. They're changing the interface, adding videos and more information, and even allowing (gasp!) user ratings. Software you buy will be downloaded onto a 2 GB SD card (apparently included with the 3DS). You can (somehow) transfer previously purchased downloaded titles from the DSi to your 3DS.

Iwata-san even mentioned that there will be 3DS software for download... though I'm not sure he meant titles that would also be available on cartridges in stores. The real revolution will be when you can buy all software from your 3DS and never have to go into a retail store, and when all your games can be stored digitally in your 3DS so you never have to worry about which game you have with you.

Though Nintendo has even bigger plans for shopping: shopping for real stuff from your Wii, according to this post. Pretty neat, you can actually shop for goods on your TV screen. Imagine if you could do that from your computer, or even somehow hook your computer up to a TV and do that! Oh, wait a minute... something tells me this may not be an entirely new idea.

Here's what their press release says the selling points are:

• Ease of use through the Wiimote
•  Customers can enjoy shopping 24 hours through their television.
• The service will offer over 10,000 items, from including food, fashion and furniture.
• The service will offer exclusive items that will not be sold elsewhere.
• Buyers will be able to make payments via credit card, cash on delivery and payment at nearby convenience stores.
• The service will also allow orders to be placed via the phone.

No word on whether they'll try something like this outside of Japan. I don't think the Home Shopping Network needs to be worried though. Or Amazon. I guess for Japan it's revolutionary, though.

I'm not sure that Nintendo is inventing the future any more; seems more like they're inventing 1997.

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.

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!

Apple Gaining On Nintendo

Since Apple doesn't release sales figures very often, it's hard to be sure. But one research firm has done their homework and says that over 40 million Americans use Apple devices (iPhone, iPod Touch, iPad) to play games... compared to Nintendo with 41 million DS installed base in the US. Plus, the latest sales trends are not exactly favoring Nintendo... Apple is selling over 1 million iPads a month, and more than twice that in iPhones and iPod Touches. Meanwhile, handheld sales are down 25% over last year's dismal sales numbers, which no doubt accounts for Nintendo's dropping the DS pricing by $20. (By the way, manufacturers reduce pricing only when they feel they need to because sales would be better. They will never do it out of the kindness of their hearts because their manufacturing cost dropped... they'll cheerfully pocket the additional profit as long as sales stay high.)

Nintendo is hoping the 3DS will revitalize their handheld sales. I think it will, to some extent; but Nintendo's market share will continue to erode as Apple's sales continue to increase with new models of their handhelds coming out every year. Also, the Android platform is growing like crazy, and games are an important part of that market, too. Nintendo may have a 3D display in the 3DS, but in many other ways the hardware is inferior to these other handhelds; processor, display resolution, orientation sensors, network connectivity, size of the software base, average software price an order of magnitude higher on Nintendo. It's hardly a fair fight any more, and it's only going to get worse.

Nintendo is losing the fight for developer mindshare, too. Even big developers are seeing great returns from iPhone software (like EA, for instance). Plus developers, large or small, prefer the unfettered market of Apple or Android to the regimented, bureaucratic, expensive and unpredictable Nintendo regime.

Bottom line: If you're already a Nintendo developer, you can probably make money continuing to do products for their handhelds. If you're not already a Nintendo developer, you should first make your products for Apple or Android, with far lower risk and expense. If you have a hit there, then perhaps think about a Nintendo version. If their handheld devices still matter by that time.