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Next-gen consoles need next-gen business models

Next-gen consoles need next-gen business models

Wed 14 Nov 2012 3:00pm GMT / 10:00am EST / 7:00am PST
Business

It's time for a revolutionary change in the game business or consoles will be left behind

Console game sales (at retail) are once again down by more than 20 percent over last year. The high point of console game sales was 2008, and the industry has steadily declined since then. Sales of downloadable content (DLC) have certainly offset some of that decline, but overall the top console game companies have been struggling against this market trend. The top games are selling more copies than ever, but the game that does merely OK (and makes a profit) is an endangered species. Fewer games are being produced for consoles as publishers strive to make every game profitable, and avoid potential losers.

Many observers put the blame for slower sales on the fact that current consoles have reached six or seven years in the market, well past the usual expiration date of console hardware generations (typically four or five years). Late in the console cycle, sales always decline, they say. True enough, but some analysts note the growth in mobile, social and online games may be taking away some of the console gamers, or at least part of their attention and their money.

The hopes of console game publishers now rest on the next console generation. The Wii U launching this week will, in this view, begin the revival on console game sales. New games, with new game play features and better graphics, will boost sales. That hope is missing a key part of the changes that have taken place in the game industry over the past several years. To understand this more fully, a review of game industry history is in order.

"Console games are falling further and further behind games on other platforms when it comes to business models"

The console game business began in the 1970s and grew to the amazing level of $2.3 billion in sales by 1983, mostly on the strength of Atari. By 1985, total industry revenues had dropped more than 97 percent to around $100 million. What happened? The great crash was caused by a wave of crummy games (with the E.T. Cartridge as the prime example) flooding retailers. People stopped buying console games, retailers returned huge numbers of games, and the industry collapsed. It wasn't until Nintendo managed to solve some of the key issues causing the crash that the industry was revived, led by the success of the Nintendo Entertainment System.

The key issue that Nintendo identified behind the crash was the lack of quality control. It wasn't just that Atari's games were bad. The rise of Activision and other companies creating games for Atari's consoles meant that there were large numbers of games fighting for shelf space, and no assurances that any of them were any good. Many of them weren't, and consumers were overwhelmed by the bad games. Nintendo solved that problem by assuring retailers that Nintendo would restrict the number of games released, and through a strict licensing process ensure that all games met a quality standard.

1

The process proved successful, and Nintendo led the rebirth of the console game business. Every other successful manufacturer of game consoles since has followed the general pattern set by Nintendo. The console manufacturer requires game developers to buy development systems (often very expensive), go through a qualification process, and have all titles approved by the console manufacturer before they can be sold for the platform. Publishers selling games in retail stores had to pay a fee per game to the console manufacturer, ranging from $7 to $12 per unit. The process just to become a certified developer can take months, and games can spend weeks or months being approved.

Recently, with the advent of digital distribution on consoles, this has changed somewhat for downloadable games. Developers don't have to jump through quite the same hoops, though there's still an approval process that can take weeks or months to get through, with no assurance of approval. The rules for indie games are even looser on Xbox Live Arcade but there are still plenty of restrictions. Sony and Nintendo have numerous hoops to jump through as well.

The experience of Fez is instructive. “Every developer gets to release one patch for free as part of their inclusion on XBLA, but subsequent patches are expensive - certification costs tens of thousands of dollars,” Rob Fahey pointed out in an article on Fez's troubles. The difficult and sheer expense of Microsoft's process meant developer Polytron felt it necessary to skip putting out a patch for Fez, which was corrupting save games for a number of users. Microsoft's process encouraged a poorer game experience for consumers.

"Part of the success of mobile, social, and online games has to be attributed to the freewheeling environment, where developers are free to choose the business model, implement any sort of design, and make changes or add new content as often as they like"

Meanwhile, mobile games go through a minimal process and wait perhaps a few days to appear in the store. Developers can post changes and new content as often as they wish with no restrictions. Charge any price you like, or none at all. There are some restrictions, but most developers easily avoid problems in getting games into the stores. Games on Facebook have some process to get through, but nothing compared to a console game. Online games have no process at all to deal with, other than technical issues.

Riot Games, whose massively successful free-to-play online game League of Legends has created an audience of tens of millions of gamers (and hundreds of millions in revenue), can't see itself doing a version of the game for consoles. “The infrastructure of consoles is so different; we couldn't push out constant updates and changes, or have that direct communication and feedback that is so crucial to our success,” said Riot president Marc Merrill.

2

Free-to-play games have already taken over the mobile game market, accounting for the majority of the top-grossing games on smartphones and tablets. MMOs are almost all free-to-play these days; if EA can't succeed with Star Wars: The Old Republic as a subscription game, it's pretty clear that model isn't viable for new MMOs. The free-to-play online game has become a huge business in Asia both for PCs and for mobile platforms, leading to the development of multiple billion-dollar companies across China, Korea and Japan.

Consoles are just beginning to experiment with the concept of free-to-play games. Sony has allowed some free-to-play games on the PS3, and Microsoft is now beginning that trial as well. Nintendo may consider it some day. Console games are falling further and further behind games on other platforms when it comes to business models.

Part of the success of mobile, social, and online games has to be attributed to the freewheeling environment, where developers are free to choose the business model, implement any sort of design, and make changes or add new content as often as they like. Customers are learning from mobile, social and online games that good games don't have to cost $60 up front. They're also learning that some games can respond to what users like and don't like, add new content and options every week or even more often.

Console gamers are, surveys show, playing mobile, social and online games too. That means the variety of games and their business models on other platforms hasn't escaped their notice. Games as a service, with a stream of new content and updates, is becoming more and more popular on a variety of platforms. Consoles risk getting left behind in the overall marketplace if they cannot offer the full range of compelling game experiences that players can find on other platforms.

"What if Nintendo threw open the doors to developers and allowed anyone to develop games for the 3DS or the Wii U for a $99 license fee?"

The social aspects of games are more important than ever, with connections to Twitter and Facebook becoming a key part of EA's plan to transform its game franchises into 24/7/365 gaming experiences. Ubisoft is also linking key franchises on different platforms through Facebook. Console manufacturers seem reluctant to allow connections to other social networks, preferring a walled garden for their users. Cross-platform play is clearly something publishers would love to have, but console makers want to keep gamers confined to their platform.

Right now Microsoft and Sony are placing the final touches on the technology to put into their new consoles, and exactly how to price them for the increasingly complex gaming marketplace. Nintendo's new console is about to arrive, hoping to carve out a substantial audience before Sony and Microsoft launch their new consoles. It seems strange that a tremendous effort has gone into engineering new consoles, yet console business models are changing very slowly.

There's a huge competitive advantage waiting to be unlocked for the console maker that dares to unleash its business from the shackles of the past. What if Sony made the only console that had League of Legends? Or if Microsoft's new console was the only console where you could play World of Tanks, World of Warplanes and World of Warships? What if Nintendo threw open the doors to developers and allowed anyone to develop games for the 3DS or the Wii U for a $99 license fee?

3

Sure, some execs could have palpitations considering all the things that could go wrong. Copyright violations! Improper content for kids! Pornography! Rampant ESRB ratings violations! Cats and dogs, living together! Mass hysteria! It sounds apocalyptic, but Apple and Google have managed to thrive despite having a minimal process in place. Standards and copyright laws may get violated, but those are quickly corrected.

Ah, but if you throw the doors wide open, you might end up with the App Store problem of hundreds of thousands of games, many of them repetitive or boring or just plain bad. True enough, but Apple and Google seem to be surviving that, too. App discovery is a big problem, and getting bigger for mobile games, but there are solutions being worked on. (Amazon has dealt for years with the problem of finding the right product amongst millions, and has developed some good tools for that.)

The console makers don't have to go the full distance that Apple and Google have gone towards openness. Steps can be taken in that direction, though, like allowing unlimited updates for content or patches, without charging burdensome fees. New ways of monetizing games should be encouraged, not forbidden. How about ad-supported games? Or a premium games channel (which is where PSN is doing some interesting experimentation with PlayStation Plus and the rotating library of free games)? At least free up the publishers to try a greater variety of price points; let the publishers find out the optimal price points for their games. And for cryin' out loud, Microsoft, take Microsoft Points out in the woods near Redmond and give it a quiet burial in between Clippy and Microsoft BOB. Just price your products in the local currency, like every other online store does.

"There's no technical reason why consoles have to be burdened with cumbersome business practices; they are now just because that's the way it's been for decades"

The point here is that gamers expect more from games these days than just a one-time purchase. Declining sales of full-priced games (those that aren't named Halo 4 or Call of Duty or FIFA) points to a desire for better value, or perhaps lower prices to start with. Much of the game industry's resource in time and money is now headed towards platforms with fewer restrictions on creativity in game design, implementation, and business models than current consoles. Publishers like EA and Activision aren't crowing about huge investments in new consoles the way they used to before a new console generation; instead they're talking about the growth in their digital revenue and their new mobile game divisions.

There's no technical reason why consoles have to be burdened with cumbersome business practices; they are now just because that's the way it's been for decades. Those practices slow development time, restrict the number and variety of games that appear, and generally make doing business with a console manufacturer less attractive than creating for other platforms that lack those restrictions. Consoles used to counter that by offering a much larger audience than PC games could. That's no longer true, looking at the tens of millions that play the top mobile, social and online games. Those markets are bigger at the high end than the best console games, and generate more profitability for a lower investment. That's just looking at the current console generation; is there anyone that thinks the next generation of consoles will sell more units than the current generation has sold?

Changes in business practices don't need to wait on manufacturing, or the right moment before the holiday selling season. The earlier business practices are changed, the better it will be for next-gen consoles, because that will mean developers have more time to absorb the changes and make games to suit them. Sure, the console makers will want to keep their new hardware secret until the launch, so they won't reveal the details to every developer in advance. That's fine, test-drive the changes on the big publishers you already work with. Then, when you're ready to tell the world about the new console, you can also tell the world that anyone can develop for it.

It's time for a revolution in console business practices, and that may have a greater impact on the number and quality of games (and the size of the audience) than an increase in processing power or rendering capability. Differences in polygon count and frame rate from today's consoles to next-gen consoles may be hard to see unless you're a hardcore gamer looking closely, but anyone can spot the difference between $60 up front and free-to-play.

31 Comments

Dominic Roberts
Junior Software Developer

7 2 0.3
Interesting & moderately balanced article, but I struggle to see how the console business and full adopt the mobile model. For someone like me at least, who has bought only 5-10 games this year - I buy them to get several hours of quality gameplay out of them. Sure I like to try out mobile games as they're quite interesting and a bit more creative, but they rarely last more than a month, if that.

What I'm interested to see with the Wii U is if developers and consumers pay any interest to having the power of a console in a tablet, I can't wait to be playing console games on a tablet, no need to hog the tv or still watch tv while you play. And also, it should allow tablet game developers to push their games to new lengths to hopefully create mid range priced games on the Wii U shop, I want to see if that can work but right now I don't see Nintendo pushing for anything like that, although perhaps other third party developers will surprise me.

Posted:A year ago

#1
I believe there is a niche for each platform type, and sure there may be some poachign of business models but I doubt if there needs to be a radical restructuring. It just means its more competitive, and thus the advantages have to all bely the attractiveness of quality, fun, accessibility (which includes price) relative to its platform

Look at the PC. only a few years ago, one would have labelled it dead in the water, but what a amazing resurgence!
its not over till the fat lady sings (or sinks)

Posted:A year ago

#2

Jim Webb
Executive Editor/Community Director

2,266 2,404 1.1
Dominic, the fact they have included Unity in their SDK says a lot already. I understand they've also opened a lot of doors they had shut for the Wii in terms of fees, certifications and such. They've even stated the the back end of the eShop allows for all types of business models which includes F2P, freemium and subscriptions. Seems more like the ball is in the developers court now.

I suspect Sony and MS will also go about enabling easier access to the those business models too.

Posted:A year ago

#3

Jason Avent
VP, Studio Head

139 140 1.0
You'd assume that a hardware transition was the ideal time to start again with new business models because it's like pressing a reset button on everything. But I wonder: with so many things changing and the fact that they've just made a huge financial investment in hardware will the console manufacturers want to hang on to their traditional way of getting their money back? They're already making a big gamble by creating new, expensive consoles and infrastructure. Will they gamble with the business model too? They'd have to be pretty brave. In my view, it's not a gamble but a necessary move to go with the natural flow of what consumers seem to want in parallel and very comparable markets. I can't wait to see how the console audience can be pulled in this direction. There's a massive amount of resistance but also a huge amount of potential. Console publishers are going to have to be really subtle, clever and respectful.

Posted:A year ago

#4
I very much agree with this article. Console manufacturers have to adapt to survive and adapt quickly, something that with their traditionally fixed systems they are not very good at. They have to have the ability and confidence to change course mid-cycle if necessary and currently I don't see a lot of evidence of this happening. It's good that the article points out that it's not just pricing, but the whole way that consoles do business with developers that is the problem, and League Of Legends and our own APB Reloaded are great examples. Console manufacturers need to be reaching out to people like us making F2P games - it's a proven business model that consumers love - and they need to be backing this horse into the next generation (and in the current generation too).

Posted:A year ago

#5

Dominic Roberts
Junior Software Developer

7 2 0.3
Too true Jim & Jason, I think I was too impatient to expect to see change even before a platform has launched, I had forgotten the efforts Nintendo had made to encourage more indie type games being released.

And I'm not sure how you'd sell a new expensive system and promote it to a existing users with a completely different way to play/buy content.

Posted:A year ago

#6

Klaus Preisinger
Freelance Writing

1,096 1,058 1.0
I keep reading "new console, new console", as if the hardware was something special. Hardware is getting more irrelevant, because in the end it won't matter which platform renders the graphics sprouting from the few engine left. With Sony's switch to AMD, what is a console if not a PC with tighter branding and a custom OS? An OS which most important feature is its ability to tie into existing networks, TV and *regional payment schemes*.

Traditionally consoles played catch up with PCs in terms of visual fidelity. But looking at Android, iOS and PC, consoles have to catch up with a lot more other things determining financial success in the gaming business today.

I still bet on Valve to win the next generation of console wars? Why? Because they have the best platform to sell games and just lack the standardized hardware.

Posted:A year ago

#7

Andrew Jakobs
Lead Programmer

233 92 0.4
To me mobile and console gaming are two completely seperate camps. Mobile is mostly clumsy onscreen controls and small screens, and console is bigscreen and a decend controller. But the biggest problem for me is the restricting platformshops like Apple's store or the new windowsstore, where it is not possible to install your own stuff on your own device (with windows I mean if you only are using Windows RT based apps/games).

Posted:A year ago

#8

James Verity

132 25 0.2
instead of changing your business model to squeeze as much money out of your customer, why not make something people actually want to keep and feel they havn't bought another piece of junk for trading in... lets face it the quality titles people want to keep are getting few and far between these days...

Posted:A year ago

#9

Adrian Herber

69 23 0.3
Great article, and I agree that next-gen consoles do need to loosen up.

Reading about the Atari video game crash though, it made me think that the iOS/Android game models are awfully similar to the conditions that caused that crash - if consoles went too far that way again could we have a repeat market crash with too many bad games destroying consumer confidence?

Posted:A year ago

#10

Steve Peterson
West Coast Editor

108 73 0.7
@Adrian, I don't see the same issue as the Atari crash occurring with mobile games. The Atari crash was driven by the cost of the games, both to the retailers and the consumers. Retailers had mountains of unsellable games, which cost them money (even if they got most of that back returning them to the publishers, the retailers could have had something else on the shelves that generated a profit). Consumers were angry at spending a lot of money on bad games.

By contrast, mobile games cause no financial burden on retailers or distributors if they don't sell. There are no returns, and Aple and Google have no money invested in any games. If it sells, great; if it doesn't, they don't notice. Consumers who downloaded the game for free will just shrug and download another if it's crappy; they haven't lost any money. Even if the game was a dollar, that's not comparable to spending $60 on a console game and hating it.

Sure, if there were so many bad games it was impossible to find any good ones, that would be a problem. As long as there are some good games (and there's lists of top-selling games) I don't think there will be a problem.

Posted:A year ago

#11
In my opinion, there is one important thing missing in this article: the mobile model has created a highly saturated market. I remember a talk from Ted Price at this year PAX where he says that in 2011 there were more than 41.000 iOS games in 2011. And another talk from where he gives data that more than 99% of the released iOS games were losing money. So this model can be fine for users: they can have some free 'toys' every day, to play and drop. But what about developers? How many of you know a mobile developer who has released a mobile game just to make less than $10.000?

Edited 1 times. Last edit by Carlos Abril on 15th November 2012 12:00am

Posted:A year ago

#12

Paul Jace
Merchandiser

925 1,381 1.5
I would also like to see new business models, particularly new retail games that cost less than $60.

Posted:A year ago

#13

Steve Peterson
West Coast Editor

108 73 0.7
@Carlos, the problems of saturation in the mobile market is worthy of its own treatment. The problem for developers has changed from one of getting access to the market (being able to produce and distribute games, or find a publisher) to one of finding the audience (being lost among tens of thousands of other games). It's a better problem to have, I think, since at least you can get your game to some customers without having to go through a gatekeeper or a huge pile of capital to produce boxes of games. But it's still a big problem, and getting bigger.

Posted:A year ago

#14

Adrian Herber

69 23 0.3
@Steve. Thanks for your response, good points why a crash like before is unlikely as so many cost factors have changed.

I do wonder if we are approaching a kind of market crash occurring in mobile though - We already have a consumer expectation that mobile 'app store' games will be cheap but also anticipating them to be lacking substance and quality. This results in the market being hostile to higher quality games being launched in app stores at higher price points (although some notable games seem to doing alright). I've seen comments from numerous developers on here that Android is proving a difficult market for them - are we heading for a future where most small game studios go bust or give up trying to be profitable making games for 'app store' markets? After all, even without distributor and retailer costs etc, there is still development costs to cover.

A possible way to break this loop is the Windows 8 & Ouya app store model of the initial game download being free and then any costs being in-app - after there has been some chance to play the game. This may allow games to first prove their quality and then be able to charge more to unlock the rest of the game - a mechanism that allows the makers of the best games to make more money while mediocre games will get less buyers, regardless of what price they were asking. @Carlos I think you're seeing the same problem as me here, the market needs to provide some mechanism for superior quality and/or larger games to be recognisable and acceptable to cost more.

Posted:A year ago

#15

Bruce Everiss
Marketing Consultant

1,692 594 0.4
Excellent article that covers most of the bases.

An additional point worth making is that of numbers. Currently there are between 1 and 2 billion smartphones active in the world. Over the next handful of years this will increase to 7 billion as all the dumb phones and feature phones are phased out. So the mobile market is set to more than triple in numbers in the immediate future.
Also there is the fact that phones as a gaming device have a hardware cost of zero! They get thrown in for free when you buy your telephone.
Finally there is the march of the 7 inch tablet. Soon these will be 1080p and with the march of horsepower from ARM will easily reach PS4 processing power levels and then more. ARM is the fastest growing processor architecture in history and is just moving to 64 bit device designs. The ability to have multiple cores and not only turn them on and off but also to clock them according to demand makes them immensely power efficient. AMD have seen the way the wind is blowing and have just jumped on board. Microsoft have switched, after many years of soulus X86 support to now supporting both processor architectures.

Posted:A year ago

#16
Popular Comment
It's okay everyone, Bruce is here - he's got this one;)

Posted:A year ago

#17
The pc is dead!!!!, oops sorry this was 10 years ago, the new fashion is "consoles is dead!!!!", What happen in the next 10 years.. ?

Posted:A year ago

#18

Jim Webb
Executive Editor/Community Director

2,266 2,404 1.1
^Uh...we're all dead?

Posted:A year ago

#19

Bruce Everiss
Marketing Consultant

1,692 594 0.4
@Guillermo Aguilera

It wasn't the PC that was dead. It was high price boxed games at bricks and mortar retail. Once they changed their business model they boomed again with services like Steam and the explosion in Flash and FTP MMOs.

The problem with the console is that they are locked into high unit cost games, physically distributed. And they have been outflanked and left behind. The model now is digital distribution, FTP and an app store. Next generation consoles can do this. Will they?

Posted:A year ago

#20

John Bye
Senior Game Designer

480 451 0.9
@Bruce, current gen consoles already do digital distribution and free-to-play just fine, and Sony and Nintendo are already pushing for games to be released digitally and via retail simultaneously. I'm sure we'll see that expand with the next gen. And who knows, maybe Sony and/or Microsoft will even sell their consoles through a monthly subscription model - MS have already experimented with this for the Xbox 360, and Sony's PlayStation Plus service is ideally suited to this kind of service-driven business model.

Posted:A year ago

#21
What John said. Digital Distribution will presumably be more of a mainstay for next gen, and I'd imagine the prices can possibly even come down a bit - right now the full price titles are artificially high to avoid pissing off bricks and mortar. And re app stores, they're already there, just not that big. I have NHL Gamecentre on my PS3 and, when the billionaire owners aren't arguing with the millionaire players about money, watch hockey on it, and am currently getting through Sons of Anarchy on Netflix via my PS3. Sure, Apple and Android are ahead at the minute, but I would imagine the new consoles will be about much more than just video games.

Posted:A year ago

#22

Tim Swan
Technical Director

10 9 0.9

Posted:A year ago

#23

Steve Peterson
West Coast Editor

108 73 0.7
I think publishers are being very careful to avoid angering brick-and-mortar retailers, which after all still account for the majority of thier revenue. Price parity, or even disparity in favor of the retailer, is going to be a given for some time to come. Publishers realize the future is in digital distribution (mostly; there will still be a market for collector's editions with nifty physical extras), but the challenge is getting there without a huge financial upheaval.

Posted:A year ago

#24

Andrew Goodchild
Studying development

1,244 401 0.3
"Currently there are between 1 and 2 billion smartphones active in the world. Over the next handful of years this will increase to 7 billion"

Wait, there are just over 7 billion people in the world, does this mean starving Somalian 2 year olds will be owning Galaxy Aces next year? Or are us westerners just going to simultaneously use 4 phones each?

Edited 1 times. Last edit by Andrew Goodchild on 16th November 2012 7:40pm

Posted:A year ago

#25

Jim Webb
Executive Editor/Community Director

2,266 2,404 1.1
Andrew, I've tried that argument with him. His answer is yes to both.

Posted:A year ago

#26

Andrew Goodchild
Studying development

1,244 401 0.3
I suppose 4 phones will compensate for the 3 hour battery life when playing World of Artillery on an iPhone 7s.

Posted:A year ago

#27

Andy Samson
QA Supervisor

235 179 0.8
"Finally there is the march of the 7 inch tablet. Soon these will be 1080p and with the march of horsepower from ARM will easily reach PS4 processing power levels and then more. ARM is the fastest growing processor architecture in history and is just moving to 64 bit device designs. The ability to have multiple cores and not only turn them on and off but also to clock them according to demand makes them immensely power efficient. AMD have seen the way the wind is blowing and have just jumped on board. Microsoft have switched, after many years of soulus X86 support to now supporting both processor architectures."

Okay, so the minute I power on this machine and as soon as I boot up the game, instead of watching a loading screen I'll be seeing my battery getting drained as fast as the game could load a level. Eventually going kaput in less than a month due to frequent recharging.

Posted:A year ago

#28

Doug Paras

117 61 0.5
F2P is such a scam imo, you get the game but to enjoy it at all you end up having to spend a doller here or 10 dollers there and by the time things are finished instead of spending 60 dollers you've spent $160.

Posted:A year ago

#29

Andrew Goodchild
Studying development

1,244 401 0.3
@Andy. Only if the case doesn't melt, or burn your hand so you drop it first.

Posted:A year ago

#30
People should look at zynga to see the dangers of free to play. User acquisition costs go up, revenue per user and total users go down as more developers use it and the monetization strategies are forced to be more invasive. Mobile is heading that direction.

The future is definitely digital but probably more episodic with paid and unpaid extras rather than pure FTP.



Oh there is actually one place where true free to play can actually work. When you give everything in the game away for free and then make the money on the merchandising rather than ads or IAP. This way it doesn't ruin the game design or the overall experience for the gamer however it obviously only works for certain markets (mainly kids games or at least games that can be marketed to kids like Angry Birds).

Edited 1 times. Last edit by John Owens on 17th November 2012 1:28pm

Posted:A year ago

#31

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