A (Brief) Review of the Gaming Landscape

In case you're not in the mood to read this post, let me give you the punch line: Nintendo has disrupted the console gaming industry, the responses to which are just now being fully revealed by Microsoft and Sony. And it isn't pretty. This is not to say, however, that Halo 3 hasn't given the Xbox 360 platform a kick in the butt. It has. But hit games are like hit movies - they are hard to come by. And now that we are in the third phase of the Halo sequel, what is the next smash hit in the Xbox 360 pipeline? Because, my friends, the hits business, whether in music, movies or games, is a tough road for building a long-term, broad-based business franchise. And discount rate at which one present values such uncertain long-term cash flows is very, very high.

In any event, you can read more about the impact of the strong Halo 3 launch on Microsoft's Home & Entertainment (H&E) division performance at ARS Technica 10/26/2007. Read some of the comments; there is more than a dose of cynicism related to Microsoft's booking its $1 billion+ in costs for the extended warranty program in the prior fiscal year, giving them a nice clean slate on which to report attractive future period earnings. I'm not saying that anything untoward is going on, but the latitude that exists in financial reporting makes the analysts' job that much harder. Should such costs be spread out of the time period when the services are being delivered, i.e., the period of the extended warranty? You be the judge.

Turning to Sony, one might say that PS3 is in the process of being "Dreamcasted" by Nintendo. Technical achievements are pretty meaningless if people don't care, and I'm sorry, but PS2, the last-gen Sony console, is far hotter than its next-gen brethren.  From PS^3 10/24/2007:

The latest BAFTA games award ceremony took place last night, probably to the familiar tune of large amounts of drunken revelry and self-congratulations with much fun being had by all. In short, here’s what happened: Nintendo pwned. Well, Wii Sports pwned, to be precise; it scooped up every award from best casual game to best multiplayer game to best game I would marry to my sister.

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Nonetheless, there is something for Sony fans to be upbeat about – PlayStation did manage come away with several awards anyway: Okami won Artistic Achievement and Original Score, while God of War II won Story & Character and Technical Achievement.

Funny thing is though, these aren’t really Sony’s latest blockbusting’, eye-poppin’ titles. Instead they’re now decidedly old school, being for the PS2. That points (yet again) at a glaring hole in both the PS3 line-up and the idiocy of removing backwards compatibility from the current 40GB models. Those old games still make money, are still very good and apparently still win awards. People want them, occasionally more than all that poorly built high definition crap that keeps being shovelled at us.

Right. PS2 is still pretty hot, while PS3 is, well, not. Now consider what came out of a discussion between my friend, N'Gai Croal of LevelUp, and Sony Computer Entertainment America CEO Jack Tretton 10/18/2004:

From Washington, D.C. to Foster City, California, the word of the day is, apparently, "relevant." An embattled President Bush used the R-word yesterday morning during a press conference to explain why he decided to veto a children's health insurance bill supported by both Republicans and Democrats. That's why it echoed in our minds during a conversation yesterday afternoon with Sony Computer Entertainment America CEO Jack Tretton, wherein he used the word "relevant" ten times in just 12 minutes while referring to the similarly besieged Playstation 3 and its predecessor. Was this a confident recitation of the facts or merely a wishful talking point? We'll let you be the judge. But based on what our sources are telling us, if the PS3 had a power animal, the September sales gap between the Sony's flagship console and those of its two competitors would see the PS3 represented by a duck—one as lame as the current occupant of the Oval Office.

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In determining which were the key features that had to stay and which were the ones that could be allowed to go, what was the thinking specifically on backwards compatibility?

The big difference between backwards compatibility on our machine and some of our competitors, you're talking about a machine in the PlayStation 2 that remains incredibly relevant, has a 120 million unit installed base, is going to go on and sell an additional 10 million units of hardware this year. We're the only company that has two relevant consoles, and we feel that the PS2 remains incredibly relevant and remains supported in the PlayStation 2 itself. In the face of our competition, those machines don't exist anymore at retail, so the only way you're going to be able to support that platform or play that platform is through backwards compatibility. We've chosen to focus on PlayStation 2 through PlayStation 2, and focus on Playstation 3 as part of the future and the PS3 software experience.

Did Jack just learn the word "relevant" and is so excited that he has to use it in any and every context possible? Why can't he just say "We are protecting our cash cow called PS2 while the market (hopefully) catches up with our whiz-bang multimedia player called PS3?" Because that would make Sony look like it failed at PS3, something into which they've got way too much money and way too much ego invested. I recently wrote about this issue of backward compatibility, so I don't need to belabor the point, except to say that Management's rationale for why it has been stripped out is a bunch of malarkey. But anyway...

Happy birthday, PS2. Are you 1, are you 2, are you 3... I'm 7! And even at the ripe old age of seven, you are still kicking a** and taking names. From Destructoid 10/25/2007:

I'm thinking that Sony is not only celebrating an old friend, but also quietly hoping to conjure up images of its future. After all, it was not all that long ago that Sony wasn't feasting on humble pie, and we were all madly in love with everything they threw at us. Things might look a little dim for them right now, but a turnaround is anything but inconceivable.

As the Xbox 360 continues to struggle with hardware failures (warranty or not), Sony has the perfect platform in which to make their rise back to the top complete. They've already taken steps to make the PS3 more affordable. Now they need to throw everything at their disposal towards helping (nurturing relationships) developers give us the newest batch of memorable games to brag about at the next birthday party.

You've got to look at some of the statistics provided by Sony in that post. The PS2 numbers are truly mind-boggling. Problem is, is this a sign of strength or merely a sign that the PS3 is just not making it? Hmm... Dean Takahashi drew some interesting conclusions from September's NPD numbers, with stunningly bad news for Sony. From the Mercury News 10/19/2007:

One piece of news that came out this week was that Sony pleaded with third-party developers not to abandon its struggling platform. That change in attitude is a marked difference compared to the arrogance of past years. The argument is that the PS 3 will show its strength as developers learn how to make games for it. But developers know they can staff four or five Wii teams with the same number of people it takes to make one PS 3 game. We may have a glut of Wii games soon, but that’s not as bad as not having enough games on the PS 3.

I made the development cost argument about a year ago, and it has played out pretty much as expected since then. And even the positive arguments that are out there for Sony are simply weak, weak, weak. Targeting moms with a low-cost media center? Huh? From Joystiq 10/22/007:

"I had written off Sony's PlayStation 3 game console as a flop, but it may be time to reconsider," opines Seattle Times columnist Brier Dudley, suggesting that the PlayStation 3 digital media center might defuse (and diffuse, as it were) the bomb in his mind. In his article, Dudley points to all the pieces as they drop into place: a $399 price point, an impending firmware update to improve the system's music streaming interface, a torrent of downloadable content on the PlayStation Network and the increased appearance of the PS3 in the home entertainment section of stores.

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Unfortunately, this proposition hinges on several other technological factors. Does mom have an HDTV? Can she tell the difference between a Blu-ray and a DVD? With the latter format still effortlessly bulldozing HD-DVD's and Blu-ray's minute battlefield, it seems too early to play the "It plays HD movies!" card as a means of broadening the audience. If Halo 3 and Wii Sports are any indication, games are still the most effective console salesmen. Is exchanging third place in one market (where moms are already spoken for) for a number one spot in a niche really the solution?

Duh. If I've said it once I've said it 10 times, people buy consoles to - yes - play games. All that other stuff may be welcome to some, but for many all it does is result in a high-priced, over-powered gaming console.

And what of our friends at Microsoft? They're upping their bets across the board, whether it's buying aQuantive for $6 billion, buying a 1.6% stake in Facebook at a $15 billion pre-, etc. And they did just report blow-out earnings, driven largely by their desktop franchise. As it relates to Xbox 360, once one moves beyond Halo 3 things aren't so rosy. They are trying to re-engage the casual gamer, after a failed attempt around a year ago in the wake of the Viva Pinata launch that was given the short shrift by their own marketing team. From Destructoid 10/15/2007:

Viva Piñata is a game that many people adore and yet it didn't do very well at all. According to Rare's James Thomas, Gears of War and Microsoft's marketing strategy are to blame. The two titles were set to be big Christmas releases, but while Gears was promoted out of the arse, there was sadly no room in the budget to give Viva Piñata the exposure Rare felt it needed.

Most interestingly I think from our point of view, it was interesting to see how the marketing budget was split last Christmas, because obviously everyone knew that Microsoft were publishing Gears of War and Viva Piñata. Yet, so much of the money went towards Gears of War, which is going to sell millions anyway. It was a bit of like, "What about the other franchise?" I think we got left in the wake somewhat.

Of course, Microsoft is now keen to get its hands on some of Nintendo's 'casual' market (as stupid as that buzzword is) and will surely do a lot better in the future, but there's no denying that with more promotion of the Xbox 360's less gritty titles, it could shed that irksome 'shooter box' stigma a lot faster.

I think, however, the biggest irony is that whenever I play Gears of War online, one of the most popular juvenile insults heard is "Go play Viva Piñata." It would seem that the game does get all the promotion it deserves ... from the very game that took its marketing budget.

But at the end of the day, does Microsoft have a chance in hell of successfully courting the casual gamer? Cynicism abounds, especially in the wake of Microsoft's latest attempt at broadening its appeal, the Xbox 360 Arcade system. From The Digital Gamer 10/23/2007:

Last winter, Microsoft attempted to court The Casuals with Viva Piñata, a game that was too cutesy for adults, but too complex for kids and anyone else new to videogames. As a result, and despite being really good, Viva Piñata failed to generate any kind of mass pre-teen/casual migration to Xbox 360.

Today’s announcements represent Microsoft’s second, concerted, annual attempt to muscle in on Wii’s lucrative monopoly over casual gamers.

This effort still feels too little, too late though. An entry level hardware specification and DLC tailored for kids doesn't fix the parent-intimidating back catalogue of hardcore games, or the intricacies of the (relatively) complex hardware – the Xbox 360 proposition is still far-removed from the plug and play immediacy and budget-priced novelty that Wii delivers so well. And the promise of any amount of digital content lying beyond a perceived iron wall of connectivity issues isn’t going to change that for the masses.

All righty, then.  How now, Nintendo? Pretty good. Pretty, pretty good. First of all, consider this little factoid from dsfanboy 10/22/2007:

You know, we never thought about this ourselves, but the ratio of people to DSes in Japan is pretty amazing. With an estimated 127,433,494 people living in Japan and 18.11 million units sold in the country, it comes to about 1 DS unit for every 7 people. If you want to go by a different figure, VGChartz has the handheld selling 19.72 million in the area, bringing that figure down to 6.4.

When you break the numbers down to something more personal like this, it really makes the weight of the sales figures that much more significant, wouldn't you agree?

Now we all kind of knew this, but seeing such a figure in black and white is pretty crazy, eh? And then there is all the excitement around Wii Fit, all primed for mega-release. From Wiifanboy 10/23/2007:

It's been a while since we've seen anything on Wii Fit, but Dengeki Online has an update that includes several screens, a shot of the boxed set, and a video preview of the fitness title. The Japanese release date is getting closer and closer, and we can't wait to gauge public reaction to the title. Critically, of course, the nongame continues to be lauded; Popular Mechanics recently named it one of the top ten "gadgets" of 2007, and it's not even out yet!

Wow. But core to Nintendo's success is getting developers to write for its DS and Wii platforms, and this "sharing of the wealth" is being felt all across the gaming industry. Consider Ubisoft's blow-out first-half numbers. From GameDaily BIZ 10/23/2007:

Yves Guillemot, CEO of Ubisoft commented, "Ubisoft has turned in a very solid first-half showing and has continued to win market share on new-generation consoles. For the first nine months of the 2007 calendar year Ubisoft was ranked as the leading independent publisher for the Nintendo DS, as well as number 2 on Wii, number 3 for the PlayStation 3 system and PSP system and number 4 for the Xbox 360 system. The strong sales performance and our positioning on high gross margin consoles has led to a sharp profitability improvement for the first half of 2007-08.

The success of the DS and Wii platforms becomes a self-fulfilling prophecy, as a virtuous cycle of strong unit sales (and orders-of-magnitude lower development costs than for the competing platforms) fuels developer interest which creates a better game library which drives additional unit sales, etc. Nintendo is right in the middle of this mutually beneficial dynamic, and it is hard to see this success abating any time soon. And with success comes strength and confidence, and Nintendo is starting to consider changing the playbook on the release calendar. From Eurogamer 10/24/2007:

Nintendo of America's outgoing vice president of marketing says that the company is "starting to look at the annual calendar differently" in terms of release date timing, rather than just stuffing everything in Q4.

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"The first two quarters of the year tend to be more quiet. But now we've seen some evidence of sales in that period.

"Other than the holiday quarter, I think the traditional way of viewing it is not necessarily a slam dunk. I think a really good product can be a slam dunk any time of the year."

Asked to explain the change, Kaplan suggested that it was down to the Wii and DS systems' ability to act as "a quick hit of entertainment", whereas traditional system which might be more suitable when "kids and families can spend more time playing or during holidays".

And not wanting to get completely stomped by the Wii/DS phenomenon, Microsoft and Sony are certainly not standing still. They are trying to engage - and now. From the Financial Times 10/18/2007:

Sony announced a $399 PlayStation 3 for the US on Wednesday while Microsoft confirmed that it would launch a new $279 version of its Xbox 360.

The moves increased price competition with the Nintendo Wii in time for the crucial holiday season sales period.

The Wii remains the cheapest of the next-generation consoles at $250.

But Microsoft signalled that its Xbox 360 Arcade would be challenging the Wii for the new audience that Nintendo was bringing to gaming.

“Arcade becomes [for us] the ability to bring in a new set of audiences. They’re probably a little bit more casually focused, they’re looking for a new family experience or they’re more price focused,” Robbie Bach, head of Microsoft’s Entertainment and Devices division, told the Financial Times.

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The $399 PS3, available on November 2, costs $100 less than Sony’s cheapest stand-alone Blu-ray player.

Jack Tretton, president of Sony Computer Entertainment America, said: “If consumers buy it as a Blu-ray player, they will find other uses for it; this is a great multimedia machine.”

He announced that Sony was also cutting the price of its premium 80Gb PS3 by $100 to $499.

So they're trying, as one would expect. Problem is, the fundamental issues still remain. Sony thinks it is selling a multimedia player that is going to find broad appeal among non-hard core gamers. Microsoft thinks that Arcade will be its answer to the Wii and will engage the casual gamer. Time will tell, but both the Internet conversation and my own sense after reading the gaming tea-leaves for the past 15 months make this a hard, hard sell. Make no mistake - Nintendo is leading the gaming discussion right now, the discussion that is trying to engage a much broader array of potential users than ever before. And the industry's only real response to the carnage it has wrought since its launch - a 7 year-old platform called the PS2. It's catch-up time, folks. And the latest offerings clearly aren't cutting it. So you're cutting price to stay in the game. But price alone does not sell a platform to the casual gamer. Fun does.

Comments

[Joe]

I'm a new reader to your blog and I have to say, its very brilliant and I use the R word- relevant. A personal fav space of mine- gaming. I have resisted the lure of the Wii for many months now but with the stream of titles coming out on the Wii, its almost proving too hard to resist. If the Wii is winning hardened gamers like me over, I can't imagine its effect on the masses....

If the Wii has as long a shelf-life as some of the best platforms around- the original Nintendo, PS 1/2, Nintendo looks like a home run here. A pity I didn't see this when DS's were flying off the shelf in Japan...Do you think Nintendo still looks compelling at these valuations- 29x trailing P/E?

[Jason]

I agree the Wii is absolutely mauling the much neglected "casual" space. But I think Nintendo needs to be cautious as well. Most of the good games on the Wii are Nintendo first party (heck, I don't own any non-Nintendo games on the Wii).

I think it remains an open question whether or not the Wii can provide truly sensitive motion controls, most of the mechanics that I've seen that work well take advantage of fairly simplistic motions. The common complaint I see against a lot of games on the Wii is sloppy motion controls. I don't know if this is simply because developers aren't used to the hardware, or if it is a hardware limitation. The latter is a lot worse for Nintendo.

My suspicion is that if publishers continue releasing garbage games on the Wii, Nintendo's reputation may suffer as well.

Regardless of what happens, competition is always good for gamers.