The Next Console Generation

If I saw this in my family room I'd figure the invasion had started.

Some analysts have started to say that we really need a new generation of consoles to turn around the sagging sales of the traditional game business. We're in the third straight year of a slump, and it's true that the current consoles are getting towards the end of the usual console lifespan, as the Xbox 360 hits its 6th year and the PS3 and the Wii in their 5th years. Previous generations of consoles have seen new generations introduced in around year 5 or 6, so by that reasoning we should be due for a new round of consoles.

Nintendo has already announced their next-generation console, the Wii U. Sony and Microsoft have said they are working on new technology, but have no plans to introduce new consoles right now. I'm sure they'll determine the proper time to ship a new console based on how well the Wii U does, and if sales of their current consoles start to slip significantly.

I don't think a new console generation in the traditional sense is the solution to the industry's problems. The usual "next-generation" console would have a significant increase in graphics power, and probably storage capacity and connectivity; a 5x to 10x jump in performance is something we've come to expect. Of course, that would mean substantially higher hardware prices, too. An "Xbox 720" or a "PS 4" would likely have to be priced in the neighborhood of $499 to $599 to offer a substantial jump in graphics. The Wii U is anticipated to be around the level of the Xbox 360 and the PS3, probably somewhat better, and the price tag will probably be in the range of $299 to $399, or maybe even more.

I think this is the wrong direction for console hardware. The sales figures should be telling us that customers thing games are priced too high already, which is why they're buying fewer of them (and buying a lot of used games). Higher resolution means higher development costs, too, and publishers are already seeing budgets that make it very difficult to turn a profit on most games.

The big threat to the current console generation is coming from tablets, smartphones, and connected TVs. They all share the same basic ARM technology at their core, which is very low-power and inexpensive. The smartphone/tablet/connected TV market is an order of magnitude or two larger than the console business, which by the inexorable laws of high-tech manufacturing means the console business won't be able to compete on price-performance. Look, an Apple TV is $99, and with the next generation of chips in it the Apple TV can outperform a Wii, graphically.

Microsoft and Sony, at least, have been working hard to build a compelling online experience and a big audience for Xbox Live and PSN. They should leverage that by expanding the variety of software available to their customers. Open up the development for your platforms, make it easier and cheaper to create titles or all types. Encourage more hardware add-ons. Make a new generation of your consoles, but focus on making them more flexible, extendable, and cheaper. Heck, switch over to ARM chips to get the same cost advantages as the smartphone folks. (Microsoft, you're in bed with Nokia... use their manufacturing expertise. Sony, you've got a deal with Ericsson...)

Microsoft and Sony have the advantage of an existing large audience and the market share and the branding. Don't wait around for Apple and Google to steal those things from you. Push your consoles down in price faster. You can make a more expensive, spiffier one if you really want to, but before you do make the $99 Xbox 360 or the $99 PS3. Make it easier to use network storage, cloud storage, or to plug in a USB hard drive or flash memory. Use your motion control to create a smooth interface to all different media. Microsoft, exploit that Windows Phone 7 connection. Sony, bring Android in to the PS3 and embrace that wholeheartedly. Imagine Sony being the first to bring the Android Market to the family room with games designed for the HDTV screen... they would dominate before Google even has a chance to get started.

Yes, I understand this requires throwing some cherished business models into the compost pile. Recycling those business models should provide a rich fertilizer for the growth of your new business models. If you wait to see whether the traditional new expensive console will fly, it will be too late.

Nintendo, you guys are so far behind Microsoft and Sony in embracing the new digital reality I don't know if you can catch up. You seem to have become aware that something is seriously wrong, which is good. You'll need to make a drastic move to catch up, let alone pull ahead. Start thinking big; call Apple and see if they want access to your brands. Cut a deal with Apple and gain all the manufacturing scale advantages Apple can offer. You can give their technology the very best gaming brands in existence. The combination would be very hard to beat, but it's going to require some daring, unconventional thinking and dealmaking.

I really don't know what's going to happen over the next few years, but if the traditional console makers stick to the traditional game plan, I think they're going to be in deep trouble. If they get creative, they could see a new era of growth. Grab some popcorn; it's gonna be a really good show.

E3 Post-Mortem: Who Won, Who Lost

See full-size infographic here.

Now that the booths have been struck, the loudspeakers turned off, and the booth babes are fully dressed again, it's time to sort through all of the information, misinformation, hype and rhodomontade to figure out who won, who lost, and who's going to be up and who's going to be down in the coming year. Some interesting data on that point was compiled here by Webtrends, shown in the graphic above.

Adding up total mentions on the internet, Nintendo won with 43.1%, Sony had 31.2%, and Microsoft had 25.7%. Of course, it's not just who got talked about the most, it's what people said about it. Nintendo, going into E3, was certainly the favorite to get the most buzz, since they were introducing a new console.

Nintendo's introduction was certainly not an unqualified success. One very independent measure is what happened to Nintendo's stock price, which dropped 5.7% the next day and then another 5.2% the following day. Many people were confused by the presentation, which focused more on the Wii U controller than on the Wii U itself, to the point where some observers were wondering if Nintendo was introducing some sort of tablet gaming device instead of a new console. It didn't help that Nintendo was more than usually vague about speeds and feeds, leaving the tech journalists without much to talk about. Even when it came to game software, we were shown technical demos and some concepts about game design rather than actual games. Clearly this new console is quite far from being ready for release. It feels to me like Nintendo was rushed into announcing the device by the rather alarming drop in Wii sales over the past 6 months, and the disappointing 3DS sales, which between them has left Nintendo in rather poor condition.

Meanwhile, Sony had to spend part of its time apologizing for the massive security problems and the PSN shutdown. They did manage to redirect attention to their new handheld, announcing the name (PS Vita) and the price ($249). The name is about as enchanting as the Wii U name; Japanese companies seem to have problems coming up with really good names in the last decade or so (I still like Super Nintendo Entertainment System, myself). The price announcement was a surprise, and puts Sony in a good competitive position against the 3DS this holiday season. Assuming, that is, that Nintendo doesn't drop the 3DS price before the PS Vita release, which would be the obvious tactical move.

Microsoft didn't have any new hardware to talk about, which left them pushing existing hardware... specifically, Kinect. They showed Kinect enabled for nearly everything, though it was pretty clear that adding Kinect capability to a shooter is not exactly a must-have combo. Announcements for Xbox Live video content and new games were the primary news for Microsoft.

Publishers were, of course, mostly talking about their new titles. Electronic Arts was pushing their new Origin service, a combination of digital distribution and social network. Activision was talking about their new Call of Duty Elite subscription service. Both of these things mark the shift of the industry from purely depending on retail store sales to moving to digital revenue and subscription services.

Overall, I saw nothing coming out of E3 that would help the traditional retail sales market. It's harder than ever for a title to succeed at retail, unless it happens to be a sequel to a best-seller. Software sales through retail stores have sunk for three years running, and while sales of accessories have masked it somewhat this year, it's clear that trend will continue. Digital distribution and other business models are the future of the gaming industry. Some publishers seem to be fully aware of this, others are being dragged into it... and some are closing their eyes and hoping it goes away.

I think Nintendo has an interesting new console that will do OK for them, but it will not be as successful as the  Wii. Sony has a better handheld than the 3DS in their new PS Vita, but it remains to be seen if a $249 dedicated gaming device can really be a huge success in a world of smartphones and tablets with thousands of free games. Microsoft seems to be hoping that their Kinect, expansion of Xbox Live to Windows and smartphones, and the smartphone partnership with Nokia will be sufficient to maintain their leadership position in the console business.

I think huge changes are still heading for the console business, and Nintendo seems ill-positioned to meet those changes. Sony and Microsoft, at least, have worked hard on their networks for their consoles. Nintendo has barely acknowledged its existence. I fear for their future.

As for the game industry, E3 no longer represents the future. The revenue is quickly shifting to digital distribution, social gaming and mobile gaming. Console gaming will continue to be a major force, but it will no longer be the only game in town.

Console Apocalypse Predicted

That's pretty much what the future looks like for consoles, I fear.

I guess I'm not the only one who sees signs and portents of the End Times... the end of the standard console market. Computing power continues to increase rapidly, and the smartphones have hastened the advances. The 7 year cycle of the home console is now woefully inadequate to keep up with the relentless march of technology. Worse, raw horsepower and pushing polygons is now less important; games are growing more because of business models than 3D models. The advance of technology is being used to reduce the cost of producing HD graphics for a home display, striking the consoles in their weakest point: price.

The real weakness in the console market is the dependence on physical distribution of games. This keeps publishers tied to high price points (now $60), and high development budgets (since you have to put $60 or more of entertainment value in each package) and dealing with retail stores and returns and inventory and packaging. When you take all of that away with digital distribution, you are freed from the need for high price points. Which means content can be of variable length, and lower development budgets are possible. Alternative business models like free-to-play or ad-supported are viable. A huge range of possibilities opens up... most of which traditional console makers are afraid to use.

Why? Because stepping in that direction means pissing off the retailers, who are still responsible for the majority of their revenue. So they take baby steps, and new game companies without a physical distribution legacy are free to grow into that space. And find ways to undermine console makers, like OnLive or Gaikai or Apple TV or Google TV.

I think the 3DS is a harbinger of what's going to occur for consoles. Nintendo's new box, regardless of hardware specs, will probably be in the $300 or more price range and rely on physical distribution of game discs. Those two factors will mean it will never sell as well as consoles of the past, as new business models with $99 boxes begin to take hold in the family room.

Hardcore gamers are still tied to consoles, but even that will change over time as the new wave of boxes develops even greater power and capabilities. Remember, the smartphone-technology based family room boxes (Google TV and Apple TV, et al.) are based on smartphones that get a significant tech boost every year. Apple's last boost (from the A4 last year to the A5 this year) was about a 9x graphics improvement. How long will it take to catch up and then pass current consoles? Far less than their 7-year cycle.

Sony and Microsoft have some idea of what's happening, and are making some moves to cope. But both of those companies are not used to being nimble, not the way Google and Apple are. At least Sony and Microsoft have a chance at maintaining a reasonable market share... I am very worried about Nintendo. I fear they are heading towards just becoming a software company, like Sega did. Sounds like the big tech improvement for their new console will be controllers with a display screen... which is arguably what smartphones are for the new wave of consoles.

It's a time of great changes... and some will thrive on those changes as others wither. Place your bets now, folks, the game of games continues...

AppDroid Apocalypse, Nowish

The face of destruction.

With Google's I/O conference coming up next week, it's a good time to look at what's happening to Google TV and Apple TV. According to this report, Google TV 2.0 will be coming with support for other chips than Intel, Android 3.0, and a full Android Market unleashed. What's that all mean? A lower price tag, since ARM-based chips are much cheaper than Intel's, an easier interface, and better graphics.

Which all means that Google TV may have a chance... if Google has been smart enough to cut some deals allowing content from major broadcasters to be shown through Google TV, unlike the first version. Sorry, Google, but if people can't watch the TV they want to watch through Google TV, don't expect the unit to take off.

Meanwhile, all is quiet on the Apple front... too quiet. Rumors have been bubbling up about the massive data center Apple has constructed in North Carolina, which apparently will be used in some fashion for iTunes. But it's probably connected to Apple's recent purchase of iCloud, and the streaming music service, and the deals Apple's been cutting with major music labels. I suspect even more than that... other rumors have Apple eying Netflix's business.

It all makes sense to me. Apple could certainly turn Apple TV into another huge growth center if they can put the pieces all together. Imagine streaming video deals where you could use the Netflix model, which has proven so popular Netflix now has more subscribers than Comcast. If you focus on streaming content, which you can do if you have a massive data center, then you don't need large local storage... a few GB in an Apple TV unit would suffice, thus keeping the costs of the unit way down. Streaming video, streaming audio, purchases kept in the cloud instead of stored locally... Now you put an A5 chip in the Apple TV, and suddenly the graphics power is now better than a Wii, and closing in on Xbox 360.

Flip the switch and allow the full App Store to be there on Apple TV. Now you're seeing a $99 box that outdoes a Wii for gaming power, easy use of an iPhone or an iPad as a controller (easily outdoing the planned Wii 2 controller-with-a-screen we're hearing about), and thousands... no, hundreds of thousands of apps available. Most of them for free or a few dollars... tens of thousands of games, and thousands of other types of apps, and more created every day.

Yeah, this is all coming soon to your family room, once Apple gets all the pieces in place. The media deals are the hardest part. The data center is ready, the hardware is ready. The gaming industry? Not ready. Nintendo, Microsoft, Sony... this is the next enemy you have to fight. Apple has hurt your handheld business, Nintendo, now they are aiming right for your jugular in the family room. Sure, Nintendo has their new console planned... but it will be hundreds of dollars, not $99. And I see no sign that Nintendo is going to embrace the new app business model that has propelled the smartphone business to amazing growth in the last few years.

Just to make it all worse, Apple is on a one-year hardware cycle, where the hardware gets a significant power boost every year. Think the new Apple TV that will be coming, with an A5 chip, is too wimpy? Wait a year for a newer $99 box. Another year or two after that and it will be more powerful than Nintendo's new console.

I still think Nintendo, Microsoft and Sony have some amazing assets in this fight, and a chance to continue to hold significant market share in the future. But unless they start embracing the future sooner rather than later, they are going to see their market share diminish between the onslaught of Google and Apple. The handheld business is just about a lost cause now, though Sony seems to be fighting an intelligent rearguard action with the NGP. Next up is the console business... and I can see that being upended the same way the phone business was upended in a few short years, by Apple.

Developers, get ready to rumble...

Kinect Moving Faster Than Move

A survey from six months ago, before the releases.

Some numbers provided by industry analyst Michael Pachter point to a rather disappointing sales result for Sony, at least when compared to Microsoft. Seems like Kinect bundles outsold Move bundles by 5 to 1 in December. And the two top Kinect titles outsold the two top Move titles by 13 to 1. Microsoft claims to have shipped a total of 8 million Kinects thus far, which is not the same as sell-through, of course. Still impressive, though.

 Ultimately, I suspect Kinect has importance for Microsoft beyond games. They hope it can be a catalyst for selling more Xbox 360s for non-gaming usage, as a useful interface for watching movies and other non-gaming activities. I remain skeptical about that, though I think Kinect has more of a shot at that than the Move. Will either mean a big market for motion control games on non-Wii platforms? No, not unless they're packed in with each and every console sold, which isn't likely to happen any time soon. If ever.

7 Console Gaming Predictions For 2011

In 2011, radiation from 3D TVs will cause gamers to emit a green glow.

The console gaming market is now the "traditional" game market, composed  of software sold in retail stores. Of course, publishers are exploring other business models and types of games, investing in social games, mobile games, freemium games and more. The console gaming market is the bulk of game sales; if you just look at software, it was $10.6 billion in the US this last year (if you add in hardware sales, including accessories, the total is north of $21 billion).

The last couple of years have not been kind to the traditional segment of the business, though. Sales grew an amazing 28% in 2007 to hit a total of $18.85 billion overall ($9.5 billion in software), but the worldwide economic problems of 2008 were bound to have an effect. Game sales in 2008 were up 19% to over $21 billion (up more than 26% in software to over $11 billion), though signs of the slowdown were already showing up in holiday sales. Then 2009  showed up and hit hard with an 8% decline in overall sales to $19.66 billion (software slid to $10.5 billion).

While the year-end figures aren't tallied yet, 2010 looks like a decline again despite a record November that wasn't enough to rescue the year. Total sales will probably end up a few percent below last year (it was down 8% until November, which was enough to make it only 5% lower than last year). What's on tap for 2011?

• Software sales continue to erode. The overall picture doesn't look great for $60 software titles. While some releases will do well, overall I think the sales decline will continue as gamers move to lower-cost alternatives. And more lower-cost alternatives will continue to appear, and they'll be better.
• Console sales stay steady due to price cuts. Much as they will resist it, price cuts will happen by the holidays for all the consoles, though they may be minor. Or they may be hidden by increasing the value of the bundle you get (an extra controller, more software, etc.) Growth in smartphones, tablets, social games, and F2P (free-to-play) will tend to keep people from console purchases unless the price gets more attractive.
• Big hits are rare, and will get rarer. The high sales points get even higher for titles like Black Ops, but fewer titles will achieve orbital status. The publishers with the megahits may do well, but the ones without will be gasping for oxygen. It's going to be a cruel market.
• XBLA and PSN continue to grow sales. Meanwhile, though, those sneaky little download games will continue to gain despite the barriers placed in their way. (I mean, Microsoft Points instead of dollars? Really? Or how about that interface, and all of the non-existent tools for finding the types of games you're interested in...) Heck, even WiiWare will do better, despite Nintendo's almost criminal neglect. It turns out that customers are interested in lower-price titles they can have via download without a trip to a retail store. Who would have thought that?
• Nintendo finally reduces Wii to $149, then to $99 by Christmas. This one is actually more wishful thinking than a prediction. Yes, it would certainly be sensible for Nintendo to do this, but since they've been studiously avoiding sensible moves lately who can say what they will actually do.
• A successor to the Wii is finally announced, but it won't appear until 2012. Although Nintendo may not actually announce this, and information will just leak out, to avoid ruining already devastated Wii sales. By the time it actually appears the market may be so different that no one will care, unless Nintendo embraces the market changes.
• The 3DS and PSP2 appear to good initial sales that quickly decline to disappointing levels. Partly because the price points will be so high initially. Once the fanboys have gotten their units, less fanatical customers will look at the prices and think about buying a smartphone instead. Many will. Developers in particular will be annoyed, because developing for these new handhelds will be significantly more expensive than the old handhelds, yet software sales will be worse. This will lead to a quick fall-off of third-party support.

Overall, I expect the console business for 2011 to be up somewhat, mostly due to Kinect. Move, and price cuts. The software part of the business (at least the traditional retail boxed part) will be flat. Significant growth will continue to be in other areas like mobile, social, DLC and F2P.

Digital Distribution Is Puzzling

The whole concept of digital distribution is strange, confusing and even frightening. That is, if you're Sony. Here's what SCEE head Andrew House said:


“Digital, for me, still has a challenge in that it doesn’t have the equivalent of that. Browsing is a little overwhelming and too confusing, and that’s the challenge that makes me think there’s a strong role for physical media for years to come.”


He also said that retail's been around for thousands of years because it works really well. OK, I get that... but maybe digital distribution hasn't taken over for retail thousands of years ago was because setting up an online store was really difficult prior to the widespread introduction of iron. Or the invention of electricity.


I have to say it seems like that attitude is more than shared by Nintendo. Ooh, digital stuff is scary. Kaz Hirai of Sony said he feels a digital-only future is at least 10 years away. Actually, I'll go further than that, and say that people will always be able to buy stuff in stores. Radio and newspapers are still around, right? (OK, maybe the newspapers may go away soon...) The real question is when does digital distribution become the majority of sales for games. The answer to that is considerably less than ten years; more like one or two depending on how you look at it.


Sony and Nintendo need to find some people who can figure out digital distribution. Microsoft gets it, though they need to improve the Xbox Live shopping experience and finally go all the way with a full range of titles available online. Avoiding digital distribution merely leaves a gaping door open for Apple, Google, Steam, and others. Worried that the retailers might abandon you? You mean those same retailers who are busy selling used games you don't get any revenue from? Smart publishers are looking at subscriptions, DLC, F2P, and all the other new business models that are booming.


It's a new game in town, and you have to play if you want to win. Being stuck in the old business models is a bigger and bigger risk as time goes on.

Will Microsoft Conquer The Family Room?

The sleeping giant may have been awakened... Apparently Microsoft is looking for engineers to help expand Silverlight on the Xbox 360. (They've already brought Silverlight there to serve as a platform for streaming media and especially advertising.) Or, in other words, they are planning to bring an App market to the Xbox 360, since Silverlight is the primary development platform for Windows Phone 7. Given that they've already said there will be a high level of integration between Windows Phone 7 and Xbox Live, the corollary is obvious: Microsoft wants to bring an App Market to the family room.

Anybody with half a cerebellum knows that Google and Apple are going to be selling Apps in the family room, and that games will be the most popular apps by far (just look at the mobile market). The console makers already have hardware in the family room, by the millions. What they don't have is the business model. It looks like Microsoft is figuring out that they have a head start in the race for control of the family room; all they have to do is start running.

Of course, if Microsoft really wants to compete with Apple with apps, they have to meet or beat Apple's environment. That means no big upfront fees to develop (Apple charges $99); no huge bureaucratic process to wade through for app approval (Apple's process is not transparent, but for the most part you just send in the app, wait a few days, and it's in the store); a reasonable cut of the revenues (Apple takes 30%). Microsoft can certainly improve on what Apple offers, certainly in the realm of helping customers find apps. App markets in general have poor interfaces and limited tools for finding apps you're interested in. And don't neglect the importance of in-app purchasing!

With some work, Microsoft could use this effort to jumpstart interest in the Windows Phone 7 offerings, and perhaps build up some market share worth mentioning. (Unlike Zune.) What's holding Microsoft back? Perhaps the prospect of thousands of low-cost or free apps and how that might hurt the business of selling higher-priced games. Well, as they say in business, sometimes you have to eat your own young, or your competitor will. Better for Microsoft if they're the ones revolutionizing the business model, rather than Apple or Google.

Of course, if Microsoft is just looking to hire someone now, that means they're quite a ways from actually having something. They are late to the party, given that Apple can flip a switch at any time and have an App Store going on Apple TV.

2011 is going to be a very interesting year for game developers and marketers.

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...

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.

Microsoft, Nintendo's Barriers to Entry

Creating console games has been something that big companies do, or smaller companies only when they have a contract with a big company. Historically, console makers charged big bucks for development systems -- upwards of $50,000 not so long ago, and more than that you had to apply and they had to accept you. Then each game had to pass an evaluation in order to be cleared for manufacturing... which took months and cost a lot of money to manage.

You'd think it might be easier these days, at least for developers creating games for the online stores of Sony, Nintendo, and Microsoft. Hah! This interview with some local developers in Santa Cruz has them recounting the lengths they had to go to... posting videos on YouTube to get Nintendo's attention, waiting 5 months just to get to talk to someone at Microsoft. With all that, they still don't have an easy path to success. Imagine how difficult it would be to post an update or an add-on to a game.

Contrast that with Apple's process. You want to be an iPhone developer? OK, $99 gets you the development software. You'll need a Mac to develop on, which would run you another $700 if you don't have one. Build your App and upload it, and wait for approval. Usually it's less than a few days, and your product is in the store. Of course, you have to tell the world about it, and bring the customers in... Apple is no help there. But at least they don't get in your way.

Sony, Microsoft, and Nintendo are all failing to take advantage of the next great revolution in software. The App market has been a huge success, by lowering barriers to entry and creating a vast array of free and low-cost titles that are easy to download and install. This is all possible in a family room, but the Big Three are still too locked into their retail partners and $60 software pricing. They fear a rebellion by their retail partners and third-party developers if they tried to open the floodgates to small developers and free-to-play software.

Apple and Google face no such limitations... I'm sure the AAA titles on consoles will still attract an audience, but there is going to be some big changes coming and the landscape will look very different in a few years.

Kinect Revisited

Microsoft is being coy about Kinect's lag issues; the lack of responsiveness in this interview was deafening. Concerns are still an issue, as this article on 1Up shows (Rare denies it's a problem, but then says in their Kinect Sports title it's 150 ms, which is nontrivial for action gamers); and showing the Kinect on Jimmy Fallon you can see where lag is still a big problem.

Meanwhile, Microsoft's online store has Kinect priced at $149, so I guess I shouldn't give Microsoft the benefit of the doubt about holding off on pricing. Looks like it's a done deal at the $149 price point. Which seems odd for a device clearly targeted at casual gamers, who can get a Wii for just a little more (if they don't already have one, that is). Hardcore gamers might drop $149 if the hardware made their games cooler, or there were interesting titles that were Kinect-only, but that doesn't look to be true at all, or even possible given the amount of lag. Perhaps you could enhance gameplay a bit with Kinect, but not if your buddy online kills you every time because he's using a controller.

Bottom line: The Kinect looks like a loser to me. It will sell some units, but the Wii was there years ahead and already captured the market, and still has a price advantage. The Kinect will not be for hardcore gamers, and unless it sells a lot of units quickly (which seems highly unlikely at $149), developers won't be rushing to support it... and it will never take off. Perhaps they can incorporate the technology into a next version of the 360 (if there is one), and at that point maybe advances in processor power can make the lag issue go away inexpensively. Until that happens, don't expect much from the Kinect.

Sony's Move? A little better, because at least it offers a $49 entry price (which quickly mounts when you look at all the other stuff you probably want to buy, though... and then each player will need one, too). Lag should not be an issue, so it's possible to see the Move being used for action games. Still, it all comes down to installed base. If Sony can get enough units out there fast enough, developers will support it. I predict mediocre success; more units than Kinect, and another reason to buy a PS3, but not a huge industry boost.

Meanwhile, Wii trundles forward... and if either Kinect or Move starts to look like a threat, Nintendo can drop the price to $149 and stab their grandiose dreams through the heart.

It's kind of sad when you think of all the marketing effort and dollars that went into these motion control devices. That was their best shot? Wasted effort... should have spent more pushing their games. If they really wanted an influx of players, they should have cut deals with social game companies or opened up their download markets even more. That would have been a... smooth Move? Added some Kinect energy to the game industry? I guess Wii'll never know...

The Big Three Offer Small Change

E3 has been interesting viewed from afar. It's clear the classic electronic gaming industry (console games with a dash of PC gaming, though non-MMO/social/Flash PC gaming has been waning) is in trouble; sales were down 8% in 2009, and sales this year look to be in similar dire straits without a booster shot. So aside from a slew of sequels, what is being offered by the Big Three (Microsoft, Sony, Nintendo) that represents a possible sales jump?

Microsoft is offering Kinect, its motion-control peripheral, for $149, and a dozen titles that look very similar to the Wii's greatest hits -- simple sports. The Achilles Heel of the Kinect is not just the high price point; it's the fact that it sucks up a large part of the 360's processing power, to the point of causing noticeable lag even in the simple games being shown. This means the Kinect will not be of much use to the power gamer, which represents most of the current 360 audience. So Kinect must be aimed at the casual gamer... who's already got a Wii, or for about the price of a Kinect alone could get a Wii (I expect to see the Wii at $149 by Christmas, unless Nintendo wants to continue losing share). The Kinect's price point means it won't get a large installed base any time soon, if ever, which means we won't see any games that require the Kinect... which means even less reason to buy one. Net result: No big industry impact.

Sony is trying a similar tactic with the Move, though at least it's only $49... well, of course, you need to add the Navigation controller for $29.99... and that's only for one player, so you need to double that to $160... and you probably want a Playstation Eye, which is $39.99... so you're looking at $200. Which makes it even more expensive than Kinect and not as cool. And again it's unlikely to be appealing to hardcore gamers -- certainly not from the types of games they are showing for the Move. Sony is also pushing 3D display technology, which has a possibility of appealing to the hardcore... but it's hampered by the cost of the display, which currently runs at $2,000 or more. Sure, Sony will try to push for 3D-capable TV sales, but no one would expect that to be a significant market share for many years. Again, no big industry impact.

Nintendo is throwing all of its weight into the 3DS, which is their new DS-style handheld with a no-glasses-needed 3D display. Nice, but how useful will the gimmick be in actual gameplay? That remains to be seen. Meanwhile, no attention to the Wii's price point or its aging technology, and no hint of any innovation in business models. I think the 3DS may stop the hemorrhaging of DS sales, but it's not going to ignite a revolution. The iPhone 4's and iPads will be busy leading that charge.

The problem for all of the Big Three is that they're seeking to appeal to casual gamers, yet those who are the most likely targets for that have either already purchased a Wii, or are busy playing Farmville or iPhone games. Once Google TV and Apple TV bring inexpensive or free-to-play gaming to the family room, the ability of the Big Three to gain significant numbers of casual players will be next to nil.

Meanwhile, executives at third-party publishers are busy saying nice things about the new hardware offerings and how great it will all be for the industry. Which is the best they can say, given the situation. Meanwhile, they are looking for ways to grow that don't require reliance on the Big Three. Because it looks from here like the console era is drawing to a close.