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.

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...

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.

Panasonic's New Handheld -- "The Fiasco"

Sometimes reality is far more surreal than a Chris Nolan film. When I first  saw this news release from Panasonic via CrunchGear, I had to check the calendar to make sure it wasn't April 1st. When you know the details (the few that exist), you'll be wondering if you're imagining this. I'm pretty sure it's real; Panasonic has job postings for engineers in San Jose to work on this. Ah, but you want to know what I'm talking about, so prepare yourself for the impending introduction of... The Jungle.

Wait, what? You thought I was talking about a new gaming system. Well, I am. That's the name Panasonic has chosen for its new handheld gaming device, no doubt because it automatically suggests cutting-edge hardware oriented towards gaming. Or not. I have rarely seen a worse name for a product. Let me explain why... First, the name has nothing to do with gaming, or technology, or online, or connectivity. It doesn't even have any inherently positive qualities that you would like to adhere to your brand. Second, it's not even remotely trademarkable; it's not an unusual spelling and it's utterly commonplace. Third, it's entirely unmemorable; at least a made-up hi-tech name like Gizmondo or N-Gage is unusual enough so you have a chance to remember it. My suggestion for a name: The Fiasco. Or, to make it trademarkable, The Fiazco.

OK, well what about the device? As you can see from the picture above, it looks like an engineer pumped steroids into a spec sheet and called it a product, right after cold-cocking the designer before they could attempt to make it look pretty. It's a clamshell, with lots of buttons, and a full mini-keyboard, and various ports, all wrapped up in a chunky, ugly shape that looks like a Before picture in an ad for an industrial design firm. From the 1980's. All we know is that it has a high-res screen, and a mini-HDMI port, a micro-USB port, and a headphone jack, and it's built on some kind of Linux kernel.

At this point you're probably wondering if this is a North Korean plot to sabotage Panasonic's brand. You may be right. I wasn't sure how much worse this launch effort could be until I went to the Jungle's web site and watched the videos. Yep, it's a North Korean plot all right. The annoyingly 90's retro-hip web design clashes perfectly with the pseudo-snarky withit-wannabe text. I rate this site NFR (No Finger Required to begin evacuating your stomach contents). It's ugly, it's annoying, it's not compelling or interesting, and it's so lacking in information content it could be a standard political stump speech.

Of course, what hardware launch would be complete without a lengthy list of companies developing for the device, and all the cool titles they're developing, along with screenshots and... You have how many? One? The only announced title is Battlestar Galactica Online, a browser-based MMO from Bigpoint. Bigpoint is a German developer known for browser-based games (think Farmville clones). On the web site is a CGI movie from BSG... no gameplay, of course. That would be telling. The only other content mentioned is a video podcast from Machinima, which looks sort of funny... but how is this content for a handheld device that makes you want to buy the device? Wouldn't you be able to put this on anything that plays video?

Listing all the things Panasonic is not doing would be a very lengthy post. Suffice it to say that this is by far the worst product launch I've ever seen in videogame history, and I was there when the Virtual Boy was introduced, and the N-Gage, and the Gizmondo, and the Phantom... The Jungle wins hands down. You would've thought Panasonic would have learned something from the 3DO experience. I can't figure out why someone at Matsushita (the owner of the Panasonic name) would have greenlit this project. Compromising photos? A huge debt to some yakuza oyabun? I can't wait to see more of this train wreck unfold in slow motion over some period of time... I don't know how long because, of course, no timeline for launch was even hinted at. In any event, keep watching to pick up valuable tips on what not to do with your own product launches.

Marketing In A Good Cause

I talked a while back about how marketing can sometimes cross the line and become illegal, as in astroturfing or when you litter the sidewalks with sticky fliers. On the opposite side, sometimes marketing can do some good in the world, as in this case where McCann Erickson is trying to help lower the suicide rate in Serbia. Serbia's got a huge suicide problem, so for their Suicide Prevention Office McCann set up this projector underneath Serbia's highest bridge. It projects the phrase "You are not alone" and the suicide prevention number on the water; you can only see the projection when you are looking down from the bridge.

Very targeted advertising in a good cause. I hope it works; it would be nice to hear in a few months whether the suicide rate has dropped.

If only we had some examples of games marketed to help people. Sure, there are more and more games aimed at education, and some even aimed at fighting cancer. I'm afraid, though, that the standard game marketing in the videogame console business tends to appeal to the lowest common denominators. It assumes, for one thing, that their target audience is male teenagers (of all ages, I guess) with overactive hormones. Perhaps it's true, but it would be nice to see more efforts that presume some intelligence and discernment on the part of the audience.

I guess that would requires games that do the same...