Note: I took some advice from my brother at my father’s funeral this week. He advised me to go back to writing again full time. This is my first article in 3 months so I’m a little rusty.
EA CFO Blake Jorgensen has said that the development cost per game could be five to ten per cent higher on PS4 than its current-gen systems. Today, we are living in an age where games have to sell 2 million to 5 million units (depending on the game’s overall budget). Who can forget when EA’s Labels president Frank Gibeau said Dead Space 3 needed to sell around around five million to continue to investing in an IP like Dead Space.
Today’s games struggle to break even with two to five million copies on 360 (76 million units worldwide) and PS3 (77 million units worldwide) which is a total of 153 million units worldwide. Think about that. You’re struggling to sell 3 million games to an install base of 153 million consoles sold. That means they are failing to sell their game to 2% of 360/PS3′s combined install bases. [Editor's Note: Not every single unit sold can be counted as individuals, but it's still a massive install base regardless.]
What chance is there to break even on brand new consoles (Xbox 720, PS4, Wii U) with install bases that are starting from scratch with 5-10% added to next gen development costs?
Publishers would not be doing cross generation games (games developed for next gen and current gen) if they thought next gen consoles would build a strong install base quickly. When you see games like Grand Theft Auto 5, Watch_Dogs, and Assassin’s Creed 4 coming to Xbox 360 and PlayStation 3, it will slow down the adoption rate of new consoles like PS4, Xbox 720, and Wii U. It’s the same reason why adoption of the Wii U isn’t happening at a faster rate. Selling a console where the majority of the software is PS3/360 ports is only giving people a reason to stick with their 360/PS3 for another year. Plus, 360/PS3 owners continue to get great software like Tomb Raider and Bioshock Infinite, while a new system like Wii U is struggling to get software at the moment. What’s the incentive of buying a new console when the old consoles get great software support?
The Bottom Line: The longer third party publishers support Xbox 360 and PlayStation 3 with strong AAA software (especially cross generation software), the slower people will jump on the next gen console bandwagon (PS4, Xbox 720, Wii U).
It also doesn’t help that PlayStation 4 and Xbox 720 will cannibalize each others launch sales numbers since they are are launching at the same time and targeting the same types of gamers with similar games and similar services.
If NPD’s statistic that 29% of core gamers will buy a next gen console on launch came true, it gets a LOT smaller when you divide that percent between two consoles. Because let’s face it, the majority of people (aside from the biggest gaming enthusiasts who buy everything day one) won’t buy both consoles in the first 2 or 3 years. Most will just choose one or the other. It also doesn’t help that NPD’s percent can decrease if consumers are not happy with the price announcements.
One trend I’ve noticed recently with the game industry is we always get reports about consoles and handhelds selling out preorders before launch. And then months later, the sales go flat (3DS, Wii U, PS Vita) and all of the analysts and gamers start screaming doomed. (Exhibit A, Exhibit B, Exhibit C) This seems to be quite a trend, and I won’t be surprised when this happens with PlayStation 4 and the next Xbox as well. I have very little confidence that the gaming industry knows what they’re doing with their next gen consoles. At this point, they are throwing anything at the wall and hoping they’ll attract some mobile casual gamers from it.
Breaking down Xbox 360′s install base.
Xbox 360 launched on November 2005 when there were no iPads. The first iPad didn’t launch until 2010. The first iPhone didn’t hit until 2006 and didn’t come mainstream until a few years later. When we talk about Xbox 360/PS3/Wii, we’re talking about a world that wasn’t completely consumed by mobile devices. Today, in 2013, it’s a completely different situation.
Microsoft had a one year head start from its competition (much like the Wii U does today). Xbox 360 sales reached 28 million by January 2009. By October 2012, Xbox 360′s sales reached 70 million. IDC then later reported that Xbox 360 had shipped 76 million units by January 2013.
What does this tell you about consumer behavior?
48 million out of 76 million Xbox 360 owners waited until after January 2009 to buy a Xbox 360. That means 63% of current Xbox 360 owners waited at least THREE YEARS [+ two months] after the 360 launched, before buying an Xbox 360.
Let’s fast forward to January 2011. Xbox 360 hits 50 million worldwide. Subtract that from Xbox 360′s current install base of 76 million.
That means 26 million Xbox 360 owners (34 percent of current global install base) didn’t buy an Xbox 360 until after January 2011.
One third of Xbox 360′s worldwide install base didn’t buy a 360 until 5 years [+ 2 months] later.
If 63 percent of 360′s worldwide install base didn’t buy the console until 3 years later, I highly doubt [most] of that 63% will buy the next Xbox (Durango) in the first two years.
If 34 percent of 360′s worldwide install base didn’t buy the console until 5 years later, they will not be standing in line for the next Xbox (Durango) in the first two years.
This is a problem because they need the install base to grow as fast as possible (the first two years) to offset additional development costs of next gen games that publishers face.
PlayStation 3 faces a similar story, but PlayStation 3 did not have a one year head start like the Xbox 360 did.
PlayStation 3 launched in October 2006, and on August 2009 (two and a half years later) it sold 23.9 million units worldwide.
On February 2013, IDC reported that PS3 reached 77 million worldwide. That means from July 2009 through January 2013, it sold 53,090,000 (53 million) units.
This means 68 percent of PlayStation 3 owners did not buy the console until at least two and a half years after PlayStation 3 launched.
When you fast forward to 2010, it gets more interesting.
PlayStation 3 didn’t hit 35 million worldwide units until May 13, 2010. Now subtract 35 million from the 77 million that IDC reported.
That means the remaining 42 million (54 percent) of PS3 owners didn’t buy their PS3 until after May 2010. Three years [+ roughly six months] after PlayStation 3 launched.
This could mean that most gamers might not be ready for next gen (including Wii U) since they jumped into current gen late into the generation.
What does it mean?
It tells me that current gen started much later for most owners of current gen consoles. With most console generations, a console would peak in sales performance after 2 or 3 years and then decline. But the complete opposite was happening with 360/PS3. You would assume that next gen consoles would be bought by the early adopters who bought 360′s and PS3′s in 2005, 2006, 2007, and 2008. You figure, “Well, those people are tired of their consoles by now. They’ve had them for about 6 to 7 years.” That would be true, but the amount of early adopters who bought those consoles in those years (’05, 06′, 07′, o8′) make up a small fraction of the global install bases for those consoles.
Most people bought Xbox 360′s and PlayStation 3′s really late in the generation. The people who bought a 360/PS3 in the first 3 years aren’t responsible for the huge install bases. Majority of sales for 360/PS3 came in late 2009 through 2012. A very small percentage of consumers bought these two consoles between the years 2005 through first half of 2009. You could blame this on why the current generation was dragged out for so long.
This could mean that most gamers might not be ready for next gen (including Wii U) since they jumped into current gen late into the generation. Also, take into consideration that the install bases of PS3/360 will continue to grow in 2013. In the most likely scenario, the people who bought a PS3 in 2010, 2011, 2012, and 2013 are less likely to buy a PlayStation 4 in the first 2 to 3 years.
Another note: You can’t assume that everyone who was an early adopter of a 360/PS3 will return to buy the next Xbox/PlayStation 4 at launch. Every 6 years, people get older, which means their spending habits, personal tastes, and priorities are going to change.
Below is a chart provided by NPD that shows normalized hardware sales from 1995 through 2010. Take into consideration that this particular chart’s data wasn’t filled out for certain years due to the chart being a couple years old. But you can probably fill in the blanks for the last couple of years.
How much (on average) do consumers spend on electronics in 12 months?
If you spend lots of time on message boards for gaming enthusiasts, you’ll walk away thinking that most people have tons of money to spend on consoles and games. But that’s why they call them enthusiasts. They obsess over their hobbies beyond the norm.
In 2011, U.S. citizen’s average income was $54,134.
When asked how much they spent on electronics in the past 12 months, most U.S. citizens replied that they spent around $1,000. This was the average for the U.S.
In Accenture’s chart below, you will see a list of countries with two bars. The top bar (darker blue) is the average income. The bottom bar (lighter blue) is how much consumers spent on electronics within 12 months.
Bundle.com did their own research on U.S. consumer spending on electronics from April 2010 through April 2011. The following data below is data provided from the U.S. government. transactions from Citi, and third party data providers.
One thing to notice is that according to Bundle’s infographic below, the U.S. average spends $48 per month on electronics. Multiply that by 12 and the U.S. spending average on electronics would be around $576 for 12 months.
Accenture’s data says average U.S. spending on electronics is around $998 while Bundle’s data says they spend around $576. So who do we believe?
First thing to point out is that both Accenture and Bundle agree that the average U.S. citizen does NOT spend more than $1,000 on electronics in one year.
What makes Bundle’s information interesting is that they break down the data by cities, ages, household types, and annual income.
According to Bundle’s data, the “average” U.S. citizen between the ages of 26 through 35 does not spend more than $46.83 per month on electronics. This means that the average 26 to 35 year old U.S. citizen doesn’t spend more than $561.96 in a year. Again, this is an average. Some cities have higher rates of unemployment and poverty than other cities. This is factored into the average.
Here is why this information is important: According to the ESA, the average gamer is 30 years old and has been playing for 12 years. Sixty-eight percent of gamers are 18 years of age or older.
So let’s say a 30 year old is going to spend “roughly” $561.96 on electronics for the entire year. If a game console like PlayStation 4 or the next Xbox releases at $400…that person just spent 71 percent of the average U.S. citizen’s electronics budget (not including games, accessories, or paying for online membership services).
With this information, do you really believe most U.S. citizens are going to buy more than one next gen console in a single year?
But what electronics do they buy when they ARE spending money?
Nearly 60 percent of all 2011 consumer electronics sales were driven by the top five categories; PCs, TVs, tablets/e-readers, mobile phones, and video game hardware
In 2010, video game hardware only made up 6.4% of sales in electronics. In 2011, video game hardware declined to 5.6%.
On February 2013, it was reported that Apple took 1 in every 5 dollars spent on U.S. consumer electronics.
Here is a chart below so you can see how money was spent on electronics in both 2010 and 2011 in the U.S.
A person on twitter named AGTURBO9000 told me, “This gen is the only gen where a 2nd and 3rd place console shipped over 75 million units”. He’s right. It’s such a rare thing in gaming history that I can’t see all three consoles being super successful again unless somehow, the expanded market from Wii/Kinect/PS Move decided to all run back to them.
SCENARIO ONE: What would happen if next generation followed the same pattern as generation 6?
PlayStation 2 shipped 105 million units globally by the end of 2006. On the other hand, Xbox 1 shipped only 24 million units and Nintendo GameCube shipped a depressing 21 million units worldwide. In this situation, the market decided that PlayStation 2 would be their primary console, and the market saw GameCube/Xbox 1 as “secondary” consoles. Guess what happens when two consoles fight to be people’s “secondary” console? The market splits up the install bases of GameCube and Xbox which explains why their install bases were so small (and so close).
For next generation, we’re expected to get 5 consoles:
- PlayStation 4
- Xbox 720
- Wii U
- Steam Box
Reminds me of the 5th generation where we had 5 consoles to choose from:
- PlayStation 1
- Nintendo 64
- Sega Saturn
- Atari Jaguar
This brings us the following scenario. What if next gen was more like the 5th generation (N64/Saturn/PS1)?
Ouya and Steam Box remind me of 3DO and Atari Jaguar because they are systems that will would appeal to very niche audiences of gamers. You might think “Steam’s audience isn’t niche!” Steam’s PC market isn’t niche. The idea of Steam’s audience ditching their PC’s for a Steam console hybrid? Yeah, that’s niche.
SCENARIO TWO: What would happen if next generation followed the same pattern as generation 5?
One main console will be super successful like PlayStation 1.
Second main console will be a moderate success like Nintendo 64.
Third console will flop like the Sega Saturn, but it probably won’t sell as bad as the Saturn.
And I predict the two niche systems will barely make much of an impact for more than a few years.