If you click on a link and make a purchase we may receive a small commission. Read our editorial policy.

End of the line for "razors and razorblades"

The old business model of subsidising console hardware is finished. Welcome to the era of break-even hardware, says Rob Fahey

The console business model is in trouble - or at the very least, in flux. Major changes are buffeting the industry from end to end. We're at the tail end of the longest hardware cycle in memory - the Xbox 360 appeared at the end of 2005, meaning that it's now in its eighth year on the market, consumers are buying tablets and smartphones at a rate of knots, and some of the most interesting game experiences of last year cost less than £10 on Steam or were free-to-play on the iOS App Store. PC gaming, indie development, mobile gaming, free-to-play, tablet gaming, games as a service; all areas that are booming or resurgent, leaving many to wonder what space is left in the market for the inevitable arrival of Sony and Microsoft's next-gen offerings, which will take their place alongside Wii U later this year or in early 2014.

"All areas of the market are booming or resurgent, leaving many to wonder what space is left for the inevitable arrival of Sony and Microsoft's next-gen offerings"

Into the breach of this uncertainty pours a torrent of speculation and crystal-ball gazing. The problem is, there aren't very many uninterested parties speculating on this. Analysts and journalists alike are often more focused on controversy and attention than on accuracy. Publishers, developers and other "involved" types tend, unsurprisingly, to fit the available data to the conjecture that most favours their own business. This isn't dishonesty - the horse is usually before the cart, in that they have chosen this business based on their belief about where the market is going, not vice versa - but it does come with a whopping great side-serving of confirmation bias, all the same.

(By the way, as a quick test to check if someone's analysis is even worth the bother of reading it, try checking to see if they include Nintendo, or if they're conveniently constructing a narrative of the downfall of the entire console market, a specific gaming genre or human civilisation itself based on looking at the second- and third-place consoles of the past hardware generation - a bit like claiming that the 100 metres event at the Olympics was slower than usual, as long as you covered up the bit of the TV that had Usain Bolt on it.)

The narrative which most of those courting attention have settled upon is this one - dedicated games hardware is dead. Squeezed from the resurgent PC (with the vaunted Steam Box in the vanguard) on one side and the rapid rise in tablet and mobile gaming on the other, console gaming finds itself in a shrinking no-mans land, a tragic polar bear, doomed by its own inflexibility in the face of a rapidly changing climate, floating off on a steadily melting piece of once-solid ice. A BBC nature documentary crew will be along to film the final moments shortly, no doubt.

I'm not convinced. The market is changing, absolutely - but more home game consoles were sold in this generation than in the previous one (in spite of the extraordinary success of the PS2 in the past generation, and in spite of significantly higher prices and slower discounting in this generation), and there certainly seems to be a slowly growing "core" audience of over 50 million consumers for relatively expensive dedicated games hardware and software. I'm being conservative, in fact - the number may even be several tens of millions higher, as it's tough to say how much overlap existed between PS3 and Xbox 360 consumers in the early years of this generation.

"More home game consoles were sold in this generation than in the previous one in spite of significantly higher prices and slower discounting in this generation"

On top of that, you've got the 3DS performing pretty well (and that's before it gets the just-announced new Pokemon title, which will probably do wonders for the installed base), with well over 20 million units sold by last Autumn. Not to mention that countless PCs are sold almost exclusively as gaming systems (and I do mean countless, in that nobody is counting them), a number which will certainly rise as Valve's push to get Steam-powered boxes onto the market continues. I'd argue that the market for "dedicated gaming hardware", if that's how we're going to define a console, looks pretty damned healthy from here; the core market is going nowhere, even if the casual fringes are more comfortable as iOS consumers.

I'm not alone in feeling that way. Since last year's immense Kickstarter success of the Ouya console, an Android-based system that's due to appear in the coming months, new console hardware has been springing up like desert flowers after a downpour. Gear like GameStick and NVIDIA's Project Shield are the high-profile ones; plenty of other companies reckon they've got what it takes to make a commercial success out of an Android (or Linux, in some cases) based home or handheld console. I'm willing to wager that 2013 will see more launches for dedicated games consoles than any previous year on record. Few of them will be successful, of course, but they do rather question the "consoles are dead" narrative.

The problem with that narrative is that it conflates under the banner of "consoles" two things that aren't actually the same - dedicated games hardware, and the razors-and-razorblades business model, in which a company subsidises expensive hardware to build market share, then gets their money back from license fees on game sales. The "consoles are dead" crowd are half-right, in a sense. The notion of dedicated games hardware is alive and kicking, more so than ever - but the razors-and-razorblades business model is dead in the water, even if Sony and Microsoft don't seem to have noticed yet.

What's killed razors-and-razorblades? Not, as you might expect, free-to-play or casual or social or any of that stuff. That's just froth; important froth, but nothing more than bubbles on a much larger tide. The economic movement that's killing off the razors-and-razorblades model is much slower, more basic and vastly, vastly more important, and it's to do with the cost of manufacturing - of building real, physical things. While our attention has been focused on digital distribution and F2P business models, something insanely important has been happening elsewhere - quietly and largely unreported. Manufacturing of electronic goods has become easy, accessible, fast and - most of all - cheap.

"Manufacturing of electronic goods has become easy, accessible, fast and - most of all - cheap"

Ten years ago, if you wanted to build a console, you had to be Sony, Microsoft, Nintendo, or some other giant firm. The R&D and set-up costs required to put high-performance chips onto a motherboard and send that off to manufacturing were immense. The set-up costs for manufacturing itself ran into tens of millions, and the number of units you had to order to justify the costs of getting a production line running were huge. The overall costs were so high, in fact, that in order to get your product onto the market at a reasonable price that consumers were willing to pay, you'd have to take on yet another huge cost - subsidising the hardware - and then you'd need to spend on marketing to build an installed base and on developer relations to make sure you had software, so you could recoup your sunk costs through software licensing fees. The price tag on a launch like that was billions.

Today, two big things have happened. First, the price of cutting-edge (or very close to cutting edge) hardware has fallen off to much more acceptable levels. This has been a gradual process for years. We all pay so much attention to the ongoing "hardware cycle", in which last year's gear costs half as much this year, but this year's gear has replaced it at the cutting edge, that we often miss the bigger, longer-term picture - a piece of kit which cost $1000 last year only costs $500 this year, but its cutting-edge replacement only costs $950. The cutting edge drops slowly but surely towards affordability. From a manufacturing standpoint, this also means that truly cutting edge tech is sitting there in off-the-shelf packages which you can drop onto a motherboard without spending years in an R&D lab.

The second process has happened much faster, as first China and Taiwan, and latterly south-east Asian nations like Thailand and Vietnam, have come on-stream as manufacturing sites. Once, "Made in China" meant low-quality plastic goods; today, a start-up with modest resources can have an extremely complex and high-tech piece of electronics being made on a production line in China or Vietnam with minimal start-up costs and low unit prices. The barrier to entry into this market has fallen through the floor.

Why does this kill razors-and-razorblades? Two reasons. First, it means that being a "console platform holder" is no longer the big deal it once was; once, it meant you had billions to invest and a huge commitment that few other companies could rival. Today, it means far less, and far more companies can get involved on some level in creating and providing dedicated game hardware. Second, it means that the actual advantage to the consumer of having their hardware subsidised is increasingly small. Companies like Apple and Samsung manufacture consumer hardware in the form of tablets which, far from subsidising, they sell on for a significant profit margin - now, nobody's going to say that an iPad is cheap, but they sell at a price consumers are pretty happy with, and as a consequence of Apple not needing to recoup money from software, the App Store teems with free, free-to-play or incredibly cheap software, something a console maker in the razors-and-razorblades model could simply never permit.

"Hardware remains important, but only as a base specification and as a statement on the consumer's part. With hardware commoditised, the software platform is the new console"

Where does this leave the console market? Actually, in a pretty healthy place - but perhaps one that Sony, Nintendo and Microsoft are going to struggle to adapt to. The market for dedicated game hardware isn't going anywhere, not least because the purchase of a dedicated games device is a statement on the consumer's part - it's a way of saying, "I'm a gamer, I love this hobby, I've made an investment in it", and that's a seriously powerful thing, not to mention being an action that marks you out as a valuable consumer who's going to dump a lot of disposable income into games. The new platform holders, however, aren't going to be those who control something like the PlayStation, a single hardware model with an exclusive OS and distribution system behind it. Rather, they will look more like Valve and its Steam platform - a software platform and a set of specifications, running across a variety of hardware from different manufacturers - or, less commonly, Apple with iOS, a software platform and a much tighter set of specifications, running across a variety of devices from the same manufacturer.

The hardware remains important, but only as a base specification and as a statement on the consumer's part. With hardware manufacture commoditised, the software platform is the new console. When I look at the proliferation of Android and Steam powered gaming devices that are emerging now or set to appear in the coming months, I'm not sure I see a single "winner" out of the whole mess of them - but there's no doubt that Android and Steam themselves are clear winners from the whole situation. I don't know if Sony, Microsoft et al., still wedded to the old ideas of subsidising a closed-box system and imposing strict business rules on software as a consequence, understand that yet. Their learning process may have to be a speedy one. Dedicated games hardware isn't going away - it's set to thrive, if anything - but there's no guarantee that Xbox or PlayStation will be among the names on the boxes.

Related topics
Author
Rob Fahey avatar

Rob Fahey

Contributing Editor

Rob Fahey is a former editor of GamesIndustry.biz who spent several years living in Japan and probably still has a mint condition Dreamcast Samba de Amigo set.

Comments