In recent weeks, nothing has incited more debate around the games business than the question of Nintendo and Sony's new handheld platforms, and specifically, the question of where they will find their audiences and how large those audiences might be. It's an important discussion, because the outcome of this situation is going to be hugely influential on the shape of the games business in the years to come.
Strong opinions have been heard from all sides, some more valid than others. At one extreme we have those who claim that the rough ride experienced by Nintendo's 3DS is entirely down to mis-handling by Nintendo and is no sign of any overall malaise in the dedicated handheld market, and thus bears no ill omen for Sony's PlayStation Vita launch. At the other extreme are those who believe that both devices are doomed by the rapid rise of iOS gaming, which has left their hardware looking functionally anaemic and their software libraries looking ridiculously overpriced.
Both of these viewpoints are naive, at best, but they merely express the outer edges of a discussion which has covered all points in between. The conclusions of more moderate views in the middle are a bit more balanced. Yes, Nintendo mismanaged the 3DS launch terribly, while Sony seems to be approaching Vita with more forethought and flair, but equally there is a real threat to dedicated handhelds from iOS devices and other smartphones. This threat, however, is by no means an automatic death-knell for the sector - and while Nintendo seems much slower to react than Sony thus far, both companies have the potential to shift their business models and strategies to effectively combat or integrate iOS gaming concepts.
Sales of game consoles are only relevant in that they create a larger potential market for videogames for that platform.
Into the mix of this discussion, I'd like to throw another idea. Our concepts of what actually constitute "success" in the realms of games console sales are actually quite skewed by the sales curves of consoles over the past few years, to the extent that some quite odd pieces of conventional wisdom have emerged. The PSP is one of the most successful games consoles ever launched, in terms of unit sales, but will forever be remembered as something of a disappointment thanks to the contrast with the Nintendo DS - a system which it was originally expected to grind into the dirt. The Wii, meanwhile, is regarded with starry-eyed awe as an extraordinary success story by the mainstream press and many investors, which fails to recognise the fact that despite its immense installed base, the system has provided very few publishers with software hits.
This latter example leads on to the thought experiment which I want to propose. We all understand that games consoles are sold on the basis of the "razors and razorblades" model, in which the razor is sold as a loss leader (or at least, a not terribly profitable initial product) on the basis that subsequent purchases of razorblades will push the whole business over into profit. Printers and their ink cartridges work on essentially the same model, as do photocopiers and toner cartridges.
However much we all like to obsess over console sales figures, the reality of a razor and razorblade market is that sales of razors are only relevant in that they create a larger potential market for razorblade sales. Equally, sales of game consoles are only relevant in that they create a larger potential market for videogames for that platform. In theory, your game is more likely to sell a million units on a console with a 20 million installed base than on a console with a 10 million installed base, and so on.
As such, the concern over the rise of iOS devices and their ilk is fairly straightforward. If a large bulk of consumers are pretty happy with their smartphones from a gaming perspective, then they're unlikely to buy a dedicated handheld gaming console, which reduces the potential installed base for the next wave of devices. As a consquence, I think it's an entirely reasonable assertion that the 3DS will not match the installed base of the DS over its lifespan, and suspect that the same may also be true of PlayStation Vita.
A smaller installed base means - in theory - smaller sales of software. There's a tipping point in this equation, at which point developing software for a dedicated handheld platform becomes uneconomical, because the market you can potentially address no longer justifies the development costs. Gamers often miss this part of the argument; they don't recognise the basic fact that dedicated handheld console sales don't have to collapse to zero for this end of the market to be completely dead in the water, they merely need to collapse past an ill-defined point at which publishers and developers no longer feel confident in investing in new product development.
The other factor, though, is the attach rate of software. If developers only care about installed base because it creates a larger potential market, then we must consider that "potential market" isn't a function of installed base alone - it's a function of installed base multiplied by attach rate, generating an ARPU-like figure that's actually more relevant to developers and publishers than installed base ever could be.
The data with which to do these calculations is a bit uneven, because platform holders release their installed base and attach rate data in different ways (some of them more accurate than others, but none of them what you might call scrupulously honest), but even with this imperfect information, this approach results in some interesting outcomes. We can see, for example, how the low attach rate of the Wii effectively cuts the system's installed base down to size, while the Xbox 360's great attach rate is a seriously powerful multiplier on the installed base.
So here's the thought experiment - if we accept that the casual audience cultivated so successfully by the DS has now essentially moved its focus to iOS platforms, can we imagine instead a future for dedicated portable consoles which focuses more on attach rate than on installed base? Is there, in other words, a future for portable consoles that abandons the pursuit of enormous installed base in favour of satisfying a core audience that generates a high attach rate?
Were the Vita to be such a massive hardcore hit, the knock-on effect on PlayStation Suite devices such as the Xperia Play could be significant.
What we're talking about, in essence, is a niche console. Niche videogames are broadly understood - if you've got the measure of a niche market, you can tailor the development of a game (both creatively and financially) to fit that market and build a tidy business for yourself. In recent years, the commercial viability of doing so has been greatly enhanced by techniques which have flowed out of the business model experiments of the freemium market - IAP, DLC and various other strategies for tapping into the big-spending "whales" who populate niche markets.
Can this approach also be applied to a game console? It's a bigger niche, of course - really a collection of related niches which together make up the hardcore game market - but the concept remains the same. A carefully designed console and well-curated software selection is designed not to sell a large volume of hardware, but a limited volume of hardware to a core market which will contain a high proportion of "whales" and drive attach rate (or ARPU) extremely high. The potential addressable market for developers is therefore large not because of huge, DS-style installed base, but rather due to the fact that the installed base contains far fewer dead-weight units gathering dust at the bottom of desk drawers.
It's by no means a bulletproof strategy. Curation of the software library would be an extremely important and tricky task, as would communication and engagement with the consumer base. There's a risk of creative stagnation as developers attempt to offer cookie-cutter clones of successful games, something which of course happens already but could be amplified by the limited nature of the audience. Moreover, there's still the risk that the advancing credibility of iOS platforms could slowly present this more exclusive market with the same problems the broader market faces today.
Yet the advantages of success would be immense. Not only would this be a business potentially every bit as profitable as the existing handheld console market, it would also be a business which offered its platform holder a vast degree of creative respect and credibility among consumers - a "halo effect" which could have a knock-on impact on sales of more broadly focused gaming devices. Were the Vita to be such a massive hardcore hit, for example, the knock-on effect on PlayStation Suite devices such as the Xperia Play could be significant.
No company would ever admit, of course, to deliberately limiting the scope of the audience for their devices. In the face of the relentless progress being made by iOS and other App Store game distribution models, however, it would make sense for Nintendo and Sony to focus on their base. The core gaming audience is still hungry for great games and great platforms. Rather than exerting their best efforts in what may be a hopeless battle against the Apple juggernaut, cultivating and nurturing the high-spending consumers who have stuck with core gaming through thick and thin is a strategy that could serve the platform holders well.