May 10, 2020

Console Cycle Wars: The MSFT Empire Strikes Back

I just got back from the GDC and it was great.  The big topic is the coming console cycle shift and what it means for developers, publishers, licenses, and retailers.  The prior console shift helped to make some companies and seriously damaged or killed others at all levels of the games food chain.

Of course, everyone is very focused on the major console makers and their plans.  Specifically, people are really only focused on Sony and Microsft- many developers I spoke to feel Nintendo is not going to fair well in the next cycle: not enough cash, cramped third party relations, and a continued focus on the kiddy market all add up to being a non-contender.  Sony and Microsoft however are going to slug it out and they appear to be adopting different strategies. 

Representing Sony/PS2, Andrew House, EVP of 3rd Party Relations and Marketing for SCE, Andrew House, EVP of Third Party Relations and Marketing, SCEessentially said that Sony felt the PS2 would be a viable platform until 2020 because the huge- and growing- installed base.  According to House and other industry analysts, approximately 2/3 of all PS2 consoles and titles remain to be sold over the next few years.  This means that Sony is basically going to sit back and milk their franchise.  Core to this strategy will be a focus on building cash reserves to fight MSFT in the future and taking care of their third party developers better.  IMHO, I think Sony would be well advised to spend some more time on this as I heard a TON of grumbling about how Sony shafts developers at the last minute w/change orders, makes the certification process needlessly difficult and expensive, and how the dev tools suck. 

Microsoft, on the other hand, is basically ready to scrap the current Xbox (though they would never put it so bluntly) and focus on the Xbox 2 which is due well before the 2020 holiday season.  MSFT is going full bore and is clearly out to win big in the games market after having had only relatively modest success w/the current Xbox.  To pump up the developer community and win as many converts to the Xbox 2 as quickly as possible, J Allard gave a major keynote at GDC and introduced XNA which is the new Xbox internetworking and development architecture that is also clearly Microsoft’s cornerstone in their campaign to win the consumer living room.  As a side note, I also heard a lot of developers praise MSFT for their dev tools, in contrast to the aggravation I heard surround Sony. 

(BTW, check out this image of an alleged Xbox 2 prototype I found.  Sort of cool, sort of dorky.)

SO what does it mean to have Sony milking the current PS2 and biding its time while Xbox 2 races ahead and establishes a solid foothold? 

I think it spells big trouble for Sony.  I suppose it must be very difficult for Sony to cannibalize any current or near future PS2 revenue in favor of more risky future PS3 revenue, but I personally would not let Microsoft get a multi-year headstart on me to control the living room. 

Consider this: the next gen of consoles will have HD quality graphics, be fully networked (important for both multiplayuer/community and downloading new titles/levels, etc), and probably have a whole slew of other options available, such as being a PVR etc.  The next gen consoles will be consumer dream boxes and it is hard to imagine what additional improvements in hardware consumers will be willing to pay more for over the course of a single console cycle.  In other words, the next consoles will be more than adequate for the vast majority of users, meaning once they have one dream console, they won’t bother to buy another.  This is a similar dynamic to the PC industry where sales have slowed for high end desktops because people simply do not need the incremental power and refuse to pay for unnecessary upgrades. 

(For those of you interested in a more theoretical slant on this idea, I would suggest that the good-enough phenomena is a classic telltale sign of a disruptive technology taking hold.  If you want to go into more depth on how Xbox 2 might be a disruptive tech, I would love to hear your thoughts/comments.  You all might also want to take a look at Clayton Christensen’s latest book on disruptive tech, The Innovator’s Solution.  As biz books go, I think it makes for really compelling reading.)

Sony is going to rely on backwards compatabilty w/the huge PS2 library to buoy the PS3, but in an industry so driven by technology and production values, I think that library has less value than might be imagined.  In the meantime, MSFT is going to be really well entrenched in the living room, they will have a lot of developer momentum behind them, and XNA is doubtlessly going to make it much easier for you to share all sorts of things between your wifi PC and your wifi Xbox3.  Getting them out of the living room at that point will be tough. 

1. Posted Mar 27, 2020, 11:07 PM ET by Jason McCabe Calacanis

Well worth reading...

... your comments are (say that in a Yoda voice for extra effect).

I'm shocked that Sony would take a "let's wait to innovate" approach--that seems counter to what made them the company they are today.

On the upgrade front, one of the nice things about console--as opposed to PCs--is that they are cheaper (i.e. $1,000 to $2,000 for a PC, $100 to $300 for a console). I could see a portion of the market getting both, but who knows what percentage that is (I'd be interested to hear how many PS2 owners have an XBOX--anyone know?).

Also, the fact that developers are starting to get tired of working with Sony reminds me of what I heard at the first E3 about Nintendo (that was back in 1996 or was it 95?). Perhaps it is a cycle, the new player works nicer with developers because they have to win them over to their platform.

2. Posted Mar 28, 2020, 11:58 AM ET by Sterling

It's not a box

Am I a stickler for literalism? If you're going to introduce a concrete grounding to your branding, in this case introducing geometry terms to the name of a product, i.e. "Xbox" or "GameCube", then aren't you constrained for all time to those shapes? (A "box" is a rectangular prism, like a cube except that its sides do not have to be identically sized.)

So now Microsoft wants to introduce an Xbox that isn't even remotely box-shaped? The key design element of which is actually a circle? That's annoying.

3. Posted Mar 28, 2020, 8:42 PM ET by Gordon Gould

Response to JMC

The new consoles are expected to be quite a bit more expensive, at least at first. Probably around $500 or so which puts them on par w/low-end PC's. That is going to be a major issue at launch.

Also, I do not have the numbers handy, but I believe I have read that the majority of Xbox users also have a PS2 which may argue in favor of people having both. Still, I think that it is crazy to let MSFT loose in the living room for so long before coming after them. It is hard to imagine what will be so substantially better about the PS3 when it launches that Xbox 2 users will also buy a PS3, especially since by then the xbox 2 will be comparatively cheaper as it will have been on the market for a months/years while the PS3 will have a pretty high launch price if they plan to keep all the functionality they have discussed. The PS3 will have the benefit of the PS2 library but I think MSFT is going to make sure they have some seriously cool titles for the Xbox2 launch which will really impact the relative value of the library.

I also agree w/Sterling- that prototype xbox 2 does not quite work from a design perspective. Way to Tron-esque.

4. Posted Mar 28, 2020, 10:29 PM ET by jbelkin

Different Objectives

MS has a couple hidden/not so obvious agendas. Yes, they obviously want a pie of the living room-computer convergence whether that comes in the form of a game set top box or via a media PC and of course, where there is a dollar to be made, MS wants to be there.

The first goal of XBox is to move PC gamers to the XBox. Right now, after they've capture the PC OS dollars from a gamer and maybe a couple games a year from MS games - that's pretty much it ... however, as Bill noted in his memo to Warren Buffet, what they want is continuous revenue stream - and what better than the console VG game biz where not only do you control the set top box but you make money from EVERY game sold on your system and now with online revenue, that's TWO monthly revenue streams.

Does MS want to be #1 in VG, sure - but they're patient - they'll settle for converting 90% of the hardcore PC gamer to the XBox solely for the time being. Since Longhorn is not due until 2020 - that's the transition period for gamers. Don't wait for the new PC to play games - Get the 64-bit XBox2!

MS also needs an XBox2 to fix what's wrong with XBox1 ... it's huge and even swallowing losses, they can't afford a HDD - not to mention the Linux thing - when they can control the whole stream of online storage and or selling a HDD separately.

MS has to be careful because the new corporate focus is just on revenue streams (us consumers buying something once from them just isn't cutting it anymore) - for instance, the online choice of antagonizing EA because they want to control the online processs 100% or their push into phones, car OSes, etc ...

Note that all the hit games are now moving into the discount/classics/greatest hits pricing within several weeks to a month after release - we have a stratified audience (well, at least several more but these are the two critical ones). I believe that MS' focus is on the hardcore online PC game players - where the biggest continuous revenue stream is. THey are the ones willing to dump the XBox investment and hit retstart - as they do with buying a new PC every year (ie: also upgrading every month). The XBox is actually a cheap choice in their eyes but to MS, it's not just $40 dollars for the OS and maybe $100 a year in a couple games but $400 (cash flow revenue if not profit), plus $X amount each month for games PLUS $X amount each month for online play. So instead of $150 per PC gamer, they are getting $600+ ... for the PC game player, instead of a $3k desktop, they can get by with a $500 white box Dell and $500 for the XBox (year 1 pricing).

So while from most appearances, Sony & Nintendo are duking it out in the VG market, MS has a different priority first. When XBox3 comes out, that's when MS will have all the PC gamers tucked in place and will go after being #1.

As for developers gripping, when hasn't developers gripped about developing for the #1 platform - they have less leverage. I'm certainly not saying that Sony shouldn't work harder on developer realtions but unless MS is paying for an exclusive, who is not going to do an PS version?

As for Nintendo, it's appears easy to write them off but they hold pretty much all the video game characters that are embeded in pop culture and as long as 'whathisname' is still thinking in brilliant bits and artistic bytes, NEVER count out Nintendo - at least not in forseeable future.

5. Posted Mar 29, 2020, 5:13 AM ET by Jason McCabe Calacanis

$500 for a game console...

... is Sony smoking crack?! $300 is a stretch.. $500 for a game console is NOT going to fly unless these things start doubling as a Tivo or media server or something (like the Gateway Connected DVD player which I have and love at $199!!!).

I bought my PS2 years ago for the DVD player as much as the gaming features. I figured why buy a $300 DVD player when I can buy a PS2 which gives me a DVD player and a game console... perhaps that is the future of these things.

6. Posted Mar 29, 2020, 3:55 PM ET by StickyC

XBox pricing and Linux...

Just a few things: Wasn't the XBox close to $400 when it came out (including a controller and game)? $500 may be a hard sell for a game system, but I'd pretty much expect the next-gen systems to have PVR and home media functionality, which suddenly makes it a much more attractive price point. My guess is, Sony thinks the PS/2 can hold it's own as a non-PVR non-media center game device for 1/3 of the estimated price of the XBox2 and they'd be right. With those features and that price point, Microsoft's competition will be the next round of home media PC's, which will actually not suck by 2020 (unlike the current miserable fare - is it really that difficult to move the child-could-use-it functionality of a TiVo to a full featured PC?).

Is Linux on the XBox really costing Microsoft? I would think it's actually increasing sales slightly. Those folks who want to run Linux on a new platform that may not have previously bought an XBox will. And likely will buy at least one or two games just to see what the buzz is about. If they stop there, that's still about break-even revenue for the loss-leading hardware.

7. Posted Mar 30, 2020, 11:32 PM ET by English Major

Spelling

The word should be "fare" not "fair" in the expression "will not fare well"

8. Posted Apr 1, 2020, 4:10 PM ET by Alex Collmer

A thought about bundled functionality

I know that having the new Xbox function as a PVR/DVD Player/Home Media center makes the $500 pill easier to swallow from an analyst's perspective, but I would be interested to know what percentage of likely buyers will already have a PVR by the time Xbox 2 is launched. With satellite operators bundling PVRs in every outgoing set-top box and most cablers doing the same on all digital cable boxes, that may be less of a perk that it seems now. To put is simply, if I already have a PVR (and I'm assuming that early Xbox 2 adopters are mostly early tech adopters), why would the fact that my Xbox 2 ALSO has a PVR add any value to me. I'm still paying $500, and the only service I'm getting that I don't already have is an upgraded Xbox. Furthermore, by late 2020, nearly every household that would consider a purchase of this nature will already have at least one DVD player.

Ultimately, for the Xbox to succeed, it seems to me that it's game play alone is going to have to justify its price, unless they figure out some new and unpenetrated technology that they can bundle in their which actually will add value to the equation.

9. Posted Apr 2, 2020, 1:46 AM ET by samuel setters

STOP PICKING ON SONY

Why are you all hating on Sony?After all thats what MicroSoft did.Was sit back see what Sony had cooking in the oven wait a year or so then release there console.I personally think they deserve a taste of there own medicine.I think Sonys systems are better then MicroSofts.After all look at there release dates for there last crops Xbox came out way after Sonys.I have my hard earnd cash marked for my Ps3 just like last time when i sat in line 12 hours waiting for its realese.

10. Posted Apr 10, 2020, 9:54 PM ET by pppppbj23

What Ever Comes First.

I really feel a rush for the next generation consoles. I will buy what ever comes out first because i am tired of playing 2-bit games no having graphic weak games. I truly cannot wait for the Fall of 2020. Are You guys ready for the Next-Gen????

11. Posted Apr 14, 2020, 3:18 PM ET by Tony Elison

Sony may still have an edge

The notes are very informative and I think the reasoning and analysis is also excellent. The one thing I would point out is that I don't think Sony is necessarily delaying PS3 by stating that they believe in a long lifecycle for the PS2. My understanding is that PS3 is on its way for a 2020 launch and that much as PSOne continues to sell hardware and software after PS2's launch, Sony hopes that PS2 will also continue to "have legs."

PS3 is reputed to be a family of products with "tiered options" to suit needs and budgets and I believe that this is a smart strategy to avoid being priced out of teenagers' wallets. Games will drive purchases of these devices, and here I think Sony has an edge unless MSFT wants to lose so much money that they subsidize many, many more exclusives. Power of incumbency and a 6x distribution edge does wonders for developer loyalty.

Even assuming XBox2 launches a full year before PS3, and XBox2 matches PS2's penetration rates, they'll have at the very most a 10mm unit lead on Sony. That will leave 60mm+ console owners up for grabs yet, and Sony's still the incumbent, so they have more than a fair shot at retaining their market dominance.

12. Posted May 7, 2020, 4:57 PM ET by YESID

PS3 Xbox2

they look pretty sweet

13. Posted Dec 15, 2020, 3:11 PM ET by SilverMan

Nintendo will never be number one again but will remain in the video industry for a while because a company that was once number one and loses that spot never gains it back. I do not think that sony will gamble and release the PS3 after the XB2, who said that sony was going to do that???

For the XB to overtake sony in one generation is preposterous. The XB has not even really broken free from nintendo and is struggling with nintendo. Sony owns over seventy-percent of the gaming industry. Sony is has a huge game selection and an already established huge fan base.

Why do people so quickly jump on the XB's bandwagon so quickly? Is it because people like newer products better? I think that microsoft and XB fans need to shut their mouths until the next generation to see if microsoft has what it takes to win the console wars. XB got beat plain and simple by the PS2, so just face the fact and accept it. Geez.

You might also like - Disruptive Innovation In The Gaming Industry…

I am a sony fan and I will admit this: the XB was much more powerful than sony, but that is not enough to win a console war. Sony had a huge fan base, the largest selection of games, and killer third party support. How can people just automatically assume that the XB2 will be more powerful than the PS3. The PS2 may have been technically inferior but the PS3 will have incredible technology. Until then I commend Sony for winning their 2nd straight console championship.

You might also find the following post interesting - The Xbox One Year Later

Please keep your comments relevant to this blog entry: inappropriate or purely promotional comments may be removed. Email addresses are never displayed, but they are required to confirm your comments. To create a live link, simply type the URL (including http://) or email address and we will make it a live link for you. You can put up to 3 URLs in your comments. Line breaks and paragraphs are automatically converted — no need to use <p> or <br> tags.

Related Post: Holiday 2014: A Gaming Retrospective