Games Nostradamus

I thought it would be interesting to share the following article from Forbes magazine with you.  It’s an insightful report into the losses at Sony directly related to PS3.  In 2 years Sony have lost $3.3 BILLION.  I haven’t looked into the details of the filing to see if the losses include R&D, which would have been capitalised.  Regardless of R&D, what this loss illustrates is that the cost of developing the next generation of consoles..whether it’s Xbox 3 or Playstation 4 is simply too prohibitive.  Don’t kid yourselves into thinking that this is just Sony’s problem.  There is no doubt that Microsoft will also be losing substantial amounts on Xbox 360.  I would be utterly thrown if they haven’t lost at least $1 Billion and most likely more than that.  Nintendo are most likely an exception to this rule, but despite it’s success the Wii isn’t technically a “next generation” platform.  It’s more of an evolution of GameCube than something new (and hence costly).

So what does this all mean for the future…

1. Firstly, the current generation of consoles will need to have a longer life cycle.  Typically the console manufacturers gain from economies of scale and cost reductions through integration of components over the life of a console.  This normally is reflected in a lower price point at retail (demand is highly price elastic !) as well as eventually dulling the distinction between the economic impact of selling the razor )(i.e. the console) vs the razorblades (the games)  In other words they lose less money (and maybe even make a small profit) as the console enters the later years of it’s life cycle.  Just look at how the original Playstation morphed into PSOne and carried on making good profits for Sony long after PS2 was available.  Only last year PS2 sales ( a vastly different looking box today from the one that was launched in 2000) still accounted for 47% of Sony’s sales in Europe.. A different example of a company getting this WRONG was Microsoft.  The original Xbox couldn’t be reasonably cost reduced as it was over designed and relied too heavily on “off the shelf” components that couldn’t easily be integrated.  So Microsoft simply stopped selling it when 360 was launched….the result was they lost about 4 years of the life cycle of Xbox 1 which would mean they could NEVER recoup their investment in the original Xbox platform.
2. Secondly, if there is truly an effort to design a next generation of consoles underway at Sony, Microsoft or Nintendo, then I doubt of any of them will rush this to market.  Robbie Bach (head of Xbox at MS) as good as said this last week in an interview.  My best guess is that you may well see upgrades and tweaks to the existing consoles…they may even get re branded, but they will essentially be the same consoles with the same capabilities as the current generation.
3. The true next generation will be multi purpose devices.  The ONLY hope I see for the “console” industry is to merge functionality with other set top devices such as DVD recorders, satelite receivers and, in the case of Microsoft…inevitably the PC.  Doing this will allow them to merger R&D expenditure, strive for large scale integration of diverse parts and ultimately to keep prices at a profitable level by offering you, the consumer, the “value” benefit of this integration.   The current generation of consoles does some of this, but it’s fairly half hearted.  Microsoft, for example would be horrified if the Xbox 360 was a great value PC that made it easy for you to run your household on Linux…so they deliberately limit the design in this respect.  Unless they want to blow $2 Billion or more on another generation of consoles, then they MUST find a solution for this and similar dilemmas.  Similarly Sony don’t want to kill the Blu-Ray DVD player business today, so they don’t promote PS3 as a great DVD playback solution.
4. The real next generation will also need to have a broader range of paid for services.  i.e. not just games.  Sony and Microsoft will edge away from Nintendo here.  They have the financial muscle and the key  relationships to develop content related business models.  Both of them already have plans in place to promote movie downloads to you consoles….this is just the start…I can see telephony services (not just Skype….you could have a full home switchboard with voicemail and call management options) In my home today I have an IP based telephony system.  At the heart of it is a box that is not technically much different to an Xbox360…it’s the software on the box that manages most of the functionality that my phone system delvers.  Music of course will be inevitable, but what about Art as a download ?? (Bill Gates personally owns one of the world’s largest digital art and photographic archives !)  The era of interactive digital entertainment is still in it’s infancy !

In conclusion,  I’m saying that there will be a next generation…but they won’t be “Games Consoles” they will be intercative entertainment centres, integrating both existing and new technolgies.  The se devices may well continue to be subsidised, but form a much wider range of paid for content.  The console is dead, long live interactive entertainment !

Gaming
PlayStation Poorhouse
Mary Jane Irwin, 06.23.08, 11:15 PM ET

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Burlingame, Calif. - Like a biblical litany, Sony has repeatedly recited a list of games that it believes will make 2008 the year of the PlayStation 3. However, the company will need more than a good year to climb out of the hole it’s in with the console.

The PS3 has cost the Japanese electronics giant $3.3 billion since its launch in late 2006 because of “strategic pricing” under which it sells the console at a loss, according to the annual report filed by Sony (nyse: SNE - news - people ) with the U.S. Securities and Exchange Commission on Monday. “Even if the platform is ultimately successful, it may take longer than expected to recoup the investment, resulting in a negative impact on Sony’s profitability,” the report said.

PS3 has had a difficult time gaining footing in the market thanks to the popularity of the Wii and the head-start the Xbox 360 got with its launch in 2005. Worldwide sales of the PS3 have totaled 9.24 million. Meanwhile, Microsoft (nasdaq: MSFT - news - people ) has sold over 10 million Xbox 360s in the United States alone.

Videogame console manufacturers follow the razor and blades strategy: Sell your consoles on the cheap and reap profits from software royalties. The problem: Sony’s machine is a mighty expensive razor–the basic model retails for $399. “The console is still too expensive for the masses,” Wedbush Morgan analyst Michael Pachter said by e-mail. “A recession isn’t going to help HDTV or Blu-ray sales.”

Sales started picking up in January, which was the first month the PS3 outsold the Xbox 360, according to market research firm NPD Group, thanks to Toshiba (other-otc: TOSBF - news - people ) tossing in the high-definition format towel on HD DVD (the PS3 doubles as a Blu-ray player).

Gran Turismo 5 Prologue, however, only managed 224,000 units sold in its first two weeks on store shelves in April, according to NPD. While Grand Theft Auto IV, which launched April 29, fared much better with a million copies sold in the first few days, it didn’t help Sony sell more PS3s as expected. (See “Consoles’ ‘Grand Theft Auto’ “)

It’s too soon to tell how the PS3’s highly anticipated Metal Gear Solid 4 will impact June sales.

The year may not even be at the halfway mark, but Sony’s luck will have to change if 2008 will end up the year of the PS3. It will now have to rely on its cast of anticipated holiday hits, such as Resistance 2 and LittleBigPlanet, and the launch of Home, its oft-delayed virtual online community, to drive sales.

There’s always 2009.

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