Rearguard Action

Germany's Gamescom has been rapidly growing in stature as an industry trade event each year - with its increasing importance in global terms being most readily seen from the rapid rise in the number of important announcements made at the event's platform holder conferences. As such, the event's organisers were no doubt delighted this week when Sony and Nintendo took the opportunity to unleash a barrage of major announcements.

Taken in a wider context, though, those announcements start to look worryingly like fire-fighting - and they remain overshadowed by the steady drip of depressing figures from retailers' tills, the most recent being a stat which showed that the UK market has shed a full decade of growth and returned to 2001 figures.

With that in mind, everything from Nintendo's redesigned Wii to Sony's new bargain-basement PSP starts to look like a bit of a rearguard action. Not everyone is suffering equally, and some segments of the market are still seeing growth, but something is rotten in the state of dedicated gaming machines. Slow growth and stagnation are the norm, with genuine decline becoming ever more common - and the platform holders are desperate to jump-start the engine.

Of course, it's not entirely a negative picture. Last week I wrote about digital distribution and the rapid rise of revenues flowing through the industry from digital channels - either simple digital distribution or more exotic business models such as freemium and subscription. These revenues aren't measured in any meaningful or reliable way - we know that they exist, that they're pretty significant and that they're growing rapidly, but that data isn't included in the ostensibly depressing figures we're now seeing each week, which stem solely from traditional and online retail.

That doesn't account entirely for the situation we're in, however, and nor does the wildcard that is the world's macroeconomic malaise (although that's certainly not helping). There are other factors that need to be borne in mind when we're taking the pulse of the console games business right now.

One obvious factor is simply the age of the consoles that are on the market right now. It was noted by several observers that the present sales decline in North America has brought us back to levels last seen at the middle of the decade - which is the point directly before the last console hardware transition. It's normal for the market to take and hold a deep breath at that stage - new machines are coming and consumers slack off from investing in the old generation of hardware.

To a large extent, this explains the Wii's sales problems - Nintendo has, after all, announced a replacement, although the subsequent drop in sales is really only a continuation of a sharp downturn that began long before Wii U confused the hell out of consumers of all stripes at E3. PSP, too, has a replacement on the way which is making its older sibling look tired and unattractive right now. Both of those systems would be entirely expected to have a tough year as the market turns its interest to their replacements.

The PS3 and Xbox 360, meanwhile, are doing relatively well - there's some suggestion of slackening growth in demand, but no real indication that we're going to see a sustained decline for either console in the coming months. They, crucially, don't have a replacement on the horizon. Some commentators suggest that Microsoft may be ready to start talking about the next Xbox by E3 next May; I'd suggest that while both Sony and Microsoft could be ready to talk next-generation in a year's time, both parties would rather not, and will be watching the other side warily to try to avoid being leapfrogged.

You can see just how unprepared we are for a console hardware transition any time soon by looking at the price points being used in the market right now. Sony just cut the PS3's prices, which will put it in a much more competitive position coming into autumn and winter, but still leaves the PS3 as a distinctly premium-priced product - while Microsoft is also sitting at a high price point (for a console that's been on the market for a year longer), and has been keen to actually increase its average selling price by making Kinect bundled consoles into the default purchase.

This is a predictable but nonetheless interesting consequence of lengthening the console life-cycle - a stated objective of both Sony and Microsoft dating back to long before the present generation of hardware hit the shops. Stretching the cycle from five years to six, seven or even eight (if they can get away with it) could work one of two ways. Either the price of the hardware falls at the same pace it always has, and the last few years of the cycle see the consoles priced at a very low, mass-market level - or that pricing curve is stretched to fill the new graph, so prices stay higher for longer, only hitting mass-market level when new hardware is about to appear and fill the gap at the top of the market.

It's the latter approach that has been taken - unsurprisingly. Four or five years into the life-cycle, the present generation of hardware is still premium priced - even after this latest round of price cuts. There are many reasons for that, not least of which is that they're still selling respectable numbers at the higher price point, so there's little reason to reduce it. There's also a potentially worrying consequence, however.

That consequence is down to the Wii - a console which has been at a mass-market price point for quite some time (and yes, the Xbox 360 Arcade is competitive with the Wii, but it's never really rivalled Nintendo's systems as a mass-market proposition). In general, consoles skate along at a high price point for a few years, and each time that price drops, they tap into a new and increasingly casual strata of the market. This time, there's a sense that the Wii may have gobbled up the territory underneath the PS3 and 360. Nobody's quite sure if the old logic works, or if a mass market price drop will actually unlock mass market sales any more.

That's an important factor to consider when you watch the console manufacturers doing their competitive dance - or when you watch retail sales continue their worrying slide. We're at the point in the cycle where consumers are usually being wowed by new hardware and tempted by formerly unaffordable consoles at mass-market price points, bringing in a host of new players whose more casual tastes support a boom in family-oriented, social software.

This time, however, the new hardware is veiled in mystery (and may not appear for years), the consoles aren't dropping in price too quickly (and are being sold in an economy that's really not keen on spending) and the new players have already got a Wii and a few games for it, and are unlikely to contribute to a major casual boom - because the boom already happened.

It's a tough market, and even the inevitability of strong sales in the run-up to Christmas won't be able to disguise that. Sony's super-cheap PSP (lacking WiFi, an utterly bizarre move for a console whose sole reason for existence in its most successful market, Japan, is the Wi-Fi multiplayer of Monster Hunter), Nintendo's redesigned Wii, the PS3 price drops and the probably inevitable price drop for the Xbox 360 in early autumn - these are all normal moves for the industry, but in the present environment, it's hard to say how much demand they'll kick start. We're in uncharted waters; people are getting their game entertainment from a myriad of sources that aren't consoles, and the five-year cycle is in tatters, with Sony and Microsoft desperate to lengthen it and Nintendo off in a different field playing an entirely different ball game. Nervous jitters over the retail figures are justified - because nobody, least of all the once impregnable platform holders, really knows where the market goes from here.