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"End of the console era as we know it"

Wedbush analyst Michael Pachter explains why the future of gaming is in the cloud, says free-to-play "should go away"

At the Cloud Gaming USA conference in San Francisco last week, Wedbush Securities managing director Michael Pachter addressed the audience about why games are heading to the cloud - or, "the end of the console era as we know it," as Pachter put it.

Pachter reviewed the history of the console business from 1985 on, when Nintendo perfected the console as the way to play games on the TV (and, as a necessary part of that, restored retailer confidence in the console business). Games were largely single player, and the business model was packaged goods sales for consoles, with a pay-as-you-go model for arcades (which were still a big business at that time). Between 1986 and 2000, this model held true, and developers were able to plan ahead with some degree of confidence. Development budgets were a function of overall sales potential, and brands drove sales. Gaming was "anti-social," said Pachter, and static, while the graphics constantly improved, with the microprocessor and display required at the consumption point.

Between 2001 and 2008, Halo and the Xbox redefined the console market as multiplayer gaming emerged on consoles. Nintendo's Wii and the DS grew the total market, and packaged goods drove 90 percent of the industry revenue. From 2009 to 2011, MMOs peaked and the model shifted to free-to-play, while DLC and microtransactions supplemented game sales. Social games emerged, mobile phones became smart, and the music genre collapsed while the Wii moved "to the storage closet," in Pachter's phrase.

Change accelerated in the market from 2012 to 2013, with the collapse of social games and mobile games becoming a big business. Multiplayer for console became the norm, free-to-play became the new subscription, and packaged goods sales continued their decline. Now we come to 2014, where, in Pachter's words, "Everyone loves mobile; smartphones/tablets are the new consoles." The trends of 2013 continue.

"Free-to-play should go away. I think you need ad-supported, I think you need the Pandora model. I think the game guys are just stupid, they accept something less than they should."

Pachter believes that part of what led the industry to this point was the Wii and its appeal to women, playing titles like Wii Fit and Wii Bowling, then getting into social games and now mobile games. But social games blew it, Pachter says, by "overcharging for a less-than-compelling game experience." PVE emerged with an arcade-style monetization scheme, while PVP continues to evolve and thrive, with games like League of Legends becoming enormous hits. "That's really where all the money is in free-to-play," noted Pachter.

"Even with new console launches, we're still seeing packaged goods sales decline," Pachter said. "The packaged goods market in 2008, the Western market, was $22 billion. In 2013, $11 billion. So, cut in half. Again, some of it supplemented by digital sales, a lot of it shifted to digital software sales from new people like Supercell."

"I heard a stat from Activision, I believe this was in 2012, that 75 percent of the people who buy Call of Duty never play the single-player campaign," Pachter said. "That's just upside down from where it was 10 years prior. Multiplayer has really hurt single-player game experiences. 25 million people play Call of Duty monthly, but that pales in comparison to 2.5 billion people on the Internet. That's 1 percent of the Internet, that's nothing."

"The old single-player game, you paid $60 and played for 30 hours. It runs out to about 15 cents an hour now, you pay $75 and play for 500 hours," explained Pachter, adding in some expense for DLC. He feels that the best and worst thing about free-to-play games is that they are free - more players play games, but the majority of game play generates zero revenue. No other entertainment medium gives its content away, Pachter points out. When will games stop making this mistake, he asks?

"Free-to-play should go away," Pachter said. "I think you need ad-supported, I think you need the Pandora model. I think the game guys are just stupid, they accept something less than they should."

Where we're going in the time frame of 2015 to 2020 is critical, Pachter believes. "Content will be available anywhere, on any device. Devices are getting more powerful - you're not going to need a PC" for most applications, including games. TVs will become more connected. Packaged goods will still exist, so long as there's still a market for single-player games and publishers remain greedy.

"Consoles have to adapt, or they're going to go away," Pachter asserted. Pachter believes big publishers will be looking for ways to get the revenue that Microsoft and Sony currently get for Xbox Live and PlayStation Network. "Activision's going to say, 'If you don't have an Xbox, buy Call of Duty on the PC and play on our network for two bucks a month.' Activision would rather keep all the money, obviously."

Pachter sees this desire to keep all the money leading to big publishers looking for ways to cut consoles out of the loop, even to the point of sending controllers to households along with a game purchase. He believes they will also offer some sort of cloud gaming solution. "They're going to do it, because they're greedy," Pachter said. "When you look at Sony's PS TV, that's really console gaming without a console. PlayStation Now is kind of console gaming without a console. Sony is thinking this through, they see the future."

"I think consoles go away anyway, so Nintendo suffers even if they hit the right console the next cycle - there won't be a next cycle. Consoles are so much less relevant five years out."

"Consoles are going to lose half of their share, and the market is going to grow a lot," Pachter continued. He sees the future as a hybrid model, with roles to be played by mobile devices, set-top-boxes or microconsoles, and consoles, but the era of console domination is over. "Right now there's 1.7 billion smartphones out there, there's 260 million consoles. The number of people playing games has gone up by an order of magnitude, and I think it's going to go up again. There will be 4 billion people playing games in the very near future."

Pachter saved some of his choicest remarks when asked by the [a]listdaily about Nintendo's place in the future of gaming. "Nintendo's got a ton of cash, they're not going away," Pachter said, stating that bankruptcy for Nintendo is "not possible." He enumerated Nintendo's failings, though. "Nintendo still has not figured out online multiplayer, though Mario Kart now has multiplayer. Nintendo hasn't really ever figured out anything digital, though there are Pokemon trading cards going digital for the first time. I read about Mario Kart DLC about a week ago, and it had never occurred to me that there had never been DLC in a Nintendo game before. That's mind-boggling to me. They are more than a decade behind the curve, and they are so insular that there's no desire internally to actually learn from others."

"There's no place for Nintendo," Pachter concluded. "There's a place for their content, there's no place for a Nintendo device. Nintendo hardware goes away, because nobody cares. The only reason anybody buys Nintendo hardware is because you really want to play their software, and I think they're going to end up having to abandon hardware because they're going to get destroyed on the Wii U - they already have been - and they're going to get destroyed even further on the handhelds. Every kid who wanted a DS 10 years ago, the 10-and-younger kid, today wants a smartphone. As I said, I think consoles go away anyway, so Nintendo suffers even if they hit the right console the next cycle - there won't be a next cycle. Consoles are so much less relevant five years out."

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Latest comments (28)

Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.3 years ago
I'm sorry, Pachter but you've been saying this for the past several years and the new console launches smashed all records.

Your credibility has been shunted far behind the line of acceptable. You exist solely because alternative options do not. You have a working knowledge of business, marketing and supply terminology but are crucially lacking in any semblance of video game industry acumen.

The inaccuracies in this one piece alone are astounding. If you were a market research analyst for any other industry, Wedbush would have released you a long time ago.
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Art C. Jones Writer / Blogger 3 years ago
"I read about Mario Kart DLC about a week ago, and it had never occurred to me that there had never been DLC in a Nintendo game before."
...and that's b/c it's not true. Animal Crossing Wii had DLC, if you want to ignore Wii (and DS, oh and the many paid DLCs on 3DS), you can still look at a number of WiiU 1P and 3P games with DLC including New Super Mario Bros and Pikmin 3, which both had it last year. In fact if we numbered the Nintendo titles that have had DLC, it would be a huge list. MK8 is the first? Lots of ignorance there. This is a pretty stunning statement from someone supposedly "in the know," but not as bad as:

"Nintendo still has not figured out online multiplayer, though Mario Kart now has multiplayer."
Now? Now has multiplayer? ??? MKDS had online multiplayer...10 years ago? What are you talking about? How can anyone seriously listen?

I agree w/Jim - there is no credibility in Pachter and has not been for a long time. The fact that news sites still pick up his mindless musings as "news" is shameful.

Edited 1 times. Last edit by Art C. Jones on 8th September 2014 8:39pm

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Ron Dippold Software/Firmware Engineer 3 years ago
Pachter exists because industry execs need a witch doctor to cast the bones for them. Even if it's wrong, they can at least point at the prognostications and feel they have some illusory certainty. Basically, there's a market for someone willing to say anything at all as long as it's done with authority. It's not just execs, that's the foundation of the entire palm reading / astrology industry and for the exact same reasons. Or fund managers, who do worse than random, but do it confidently.
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Show all comments (28)
Greg Wilcox Creator, Destroy All Fanboys! 3 years ago
I'll just leave this here: https://i.imgur.com/Et2wgpY.jpg
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Paul Jace Merchandiser 3 years ago
Between 2001 and 2008, Halo and the Xbox redefined the console market as multiplayer gaming emerged on consoles.
That may be true but a big factor that aided in this(atleast in the US) was the fall of the modern arcade from 1999-2002. When the majority of US arcades started closing down those of us who still frequented them needed to get our fix elsewhere. And this is why many chose the Xbox over the PS2. The PS2 may have outsold it by a gazillion to one but those seeking the next evolution in competitive arcade style gaming had only one place to turn and that was the Xbox....unless you owned a PC of course.
there's no place for a Nintendo device. Nintendo hardware goes away, because nobody cares
This could only be true if by hardware he specifically meant consoles. Nintendo has had their ups(Nes, Snes, Wii) and downs(N64, Gamecube, Wii U) when it comes to consoles so I don't expect them to stop making them anytime soon but where they really shine has always been their handhelds. I've said this before but if Nintendo actually stopped making consoles and focused strictly on handhelds I think their profits would rise much faster and there would be much less quarterly loses. They are basically untouchable in the handheld realm and despite all the tablets and smartphones out there people will still shell out $100-$200 for an Nintendo handheld system and their vast selection of first party games.

Edited 1 times. Last edit by Paul Jace on 9th September 2014 2:47am

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Jeff Kleist Writer, Marketing, Licensing 3 years ago
He reminds me a lot of Rob Enderle, a guy who's paid to reach conclusions, and often sits on boards of companies he's supposed to be objectively analyzing.

He's right though, DLC in the form that modern games have, Multiplayer in the firm that modern games have ! MarioKart is the first.

The cloud is a feature that will extend the life of these consoles, it's an accessory, not a system
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.3 years ago
Jeff, that's still wrong on both accounts.

Nintendo has been doing paid DLC for games for over 4 years (free DLC for even longer). Mario Kart simply made big news because it's a big game. Nor is it the first Nintendo game with modern online. Mario Kart Wii, for example, was lauded as a great example of online multiplayer and that was 6 years ago.
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Greg Wilcox Creator, Destroy All Fanboys! 3 years ago
For me, next to his usual "consoles are dead" talk, the most galling thing here is this talk of "the cloud" as still some magical it can do everything wonder (except keep your sexy pics and personal info safe) when it's not at all. In fact, try telling the millions of users of home and portable consoles who still can't get decent connections to get content at home (cloud or not) that they'll soon have no new games or systems to play on thanks to people predicting this will be "the future" and I'd bet you'd see plenty of push back from that segment of the gaming public.
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Greg Wilcox Creator, Destroy All Fanboys! 3 years ago
Oh, and as for this:
Gaming was "anti-social," said Pachter, and static,..
Uhhh... I guess Patcher never heard of or played any of Codemasters' J-Cart games, ANY console fighter port, a ton of racers, action and other console games that were multiplayer couch co-op experiences. Not to mention Nintendo in Japan had a download-only game service for the Super Famicom, Sega had modem gameplay for the Mega Drive before that, SNK had arcade to home play on the Neo-Geo and so forth and so on.

But whatever. He gets paid the big bucks to rewrite history for people who want to make money on that future he's speculating about, so I guess he's just doing his job, right?
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Alfonso Sexto Lead Tester, Ubisoft Germany3 years ago
"Consoles are so much less relevant five years out"
That applies more to whatever this man predicts than consoles. Nobody buys what he says anymore, consoles on the other side are even expanding into China.
Btw, am I the only one that just remembered Bruce here? ;)
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John Karageorgiou consultant 3 years ago
Cloud = repository for gaming content
C
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Robin Clarke Producer, AppyNation Ltd3 years ago
I thought analysts were supposed to predict what was going to happen in the future, not what's been going on for years.

Yes, consoles don't hold the stranglehold on the market they did five or ten years ago.

Another thing that isn't as relevant as it was in the distant past: considering the market in the broad brush strokes of jittery American retailers. The breadth of information and choice available to consumers is wider than ever. How did Pachter do on predicting the PC's resurgence?

Online multiplayer on console isn't the be all and end all of that market.
Nintendo's games are a big enough draw to keep plugging away with the hardware (although they need to hurry up and unify their platforms).
Free to play isn't going anywhere soon, it's not built on sand and locked to a volatile platform like SNGs were.
The usual technically illiterate "wishful thinking" approach to where hardware is going (no, smartphones and tablets aren't going to "catch up" with dedicated platforms - hardware power isn't the issue there, whether millions of users are willing to pay full price for games is; no, streaming isn't going magically stop being hamstrung by input latency) is as bad a prognosticator as ever.

(Oh, and Nintendo have been doing paid DLC since day one of the Wii digital store. Ten years behind the curve, huh?)
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Nick Parker Consultant 3 years ago
@ Alfonso, Yeah,where is Bruce, a perfect debate for him?

I'm one analyst of many in the industry but one who actually worked at the coal face with Nintendo, SCE and a publisher (Infogrames!). Pachter gets paid to bring business to Wedbush; some people buy it, others don't but he choses to deliver sometimes controversial sound bites to fulfil his remit. I don't.

As for the cloud, it's a delivery mechanism, one that will work effectively for those with the best connectivity but it will surely change the time and places we play games as connectivity improves.
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Daniel Trezub QA Analyst, GameLoft3 years ago
Do not ever say anything against Nintendo in a videogame-related website. Even if you are talking to educated and experienced industry professionals, everybody tends to take it as personal if you say something bad about the beloved Nintendo (or Sony, or MS, or whatever is your gamelove company).
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Donald Dalley Freelance writer 3 years ago
Saying something "bad" about a company is different than spreading disinformation. Disinformation or ignorance about something needs to be stamped out with a vengeance.
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Nicholas Lovell Founder, Gamesbrief3 years ago
Advertising has its place in free-to-play games, but the majority of my clients make more money from In-App Purchases than from ads. I suspect that this dislike of free is more about thinking they are like Steam sales (bad in that they train people to wait for discounts) rather than a nuanced understanding of free-to-play (which requires companies to earn the right to be paid for the entertainment they are providing).
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.3 years ago
Daniel, Donald is correct. And worse than just dissemination of misinformation is that Pachter is in an influential position. He's paid for his factoids. Clients buy his reports. Investors pay to hear him speak. The more influence you have, the harder your fallacies will be scrutinized. And it just so happens that Pachter is unfortunately highly influential and yet has an absolutely abhorrent track record.

He's even openly admitted his prognostication skills are poor and then bragged that they didn't have to be for him to be employed. Millions if not hundreds of millions of dollars have been invested based on this guy's insight. That's a scary notion to even entertain much less grasp the reality of it.
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Kingman Cheng Illustrator and Animator 3 years ago
Jim has pretty much nailed it in his first post. Pachter is as reliable as a chocolate fireguard.
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Why is this chap given any coverage again? No one cares when I constantly spout rubbish. Why is his drivel front page news?
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The one simple chunk in this brilliant insight is that for Cliud to exist, connectivity has to exist, totally...right now, I can barely get any mobile signal outside Vancouver, and I swear in areas near the Dorset Coast they never even heard of GPRS or wifi....

So unless the world is bathed in continuous waves of connectivity, the cloud is just for folks living in built up infrastructures ...so it's unlikely to happen till 2045, at least! (Because that's when some bowfins reckon we can install our brains into digital artificial bodies)
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James Coote Independent Game Developer 3 years ago
This analysis is nearly spot on, except for the cloud stuff (I think download to device will win out, due to the nature of mobile not always having reliable connections, nevermind fast enough to stream). But essentially, Steam or PS Now or UPlay will be apps I download onto my tablet or TV, through which I buy games, play them online with friends.

Edit: Even single player games, if they appear on more than one platform/app, I'll probably by them on the one where all my friends are and where I choose to hang out the most. Even now, I'll wait 6 months after a game appears on EA Origin or GoG to see if it appears on Steam. The power of "all my games and friends in one place" shouldn't be underestimated.

Nintendo is definitely most vulnerable in that kind of world as their online/social features are the least advanced. However, MiiVerse is great for kids! Really well moderated, a sort of "My first social network". If Nintendo can get over their phone phobia, it'll only take a Moshi-Monsters or Club-Penguin type hit and they'll be right back in the game. They could even release their next console as Android powered (under the hood), to make it easier to develop for and moreover, so they don't waste time building a proprietary OS, yet still appeal to those diehard Nintendo fans who want a physical box, and indulge in their hardware innovation tendencies.

Edit 2: Oh and also I disagree that F2P needs to go away. Yes gamedevs (esp. indies and on mobile!) undersell themselves, but I reckon we'll get more sophisticated in the way we design games to be broken up into more bite-sized chunks suitable for IAP/DLC. Already seeing that with things like The Walking Dead, proving the episodic model can be successfully applied to games to break up a series that might once have been a long single player campaign sold as a single contiguous game.

Edited 2 times. Last edit by James Coote on 9th September 2014 8:57pm

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Jamie Knight International Editor in Chief, Playnation3 years ago
I'll just leave this here.......

http://i.ytimg.com/vi/WwdBuP3b950/0.jpg
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James Berg Games User Researcher, EA Canada3 years ago
"Free-to-play should go away," Pachter said. "I think you need ad-supported, I think you need the Pandora model. I think the game guys are just stupid, they accept something less than they should."
Seriously? Ad Supported as a go-to business model? This is silly, even given Pachter's very, very low bar. AS is like f2p but annoying.

And it's not "game guys" that are "stupid", it's mysterious, magical "market forces" that decide where the money goes. Glad following the money isn't what he's paid to do.
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William D. Volk CCO, PlayScreen3 years ago
I'd love for Free To Play to go away, but I don't see it happening. There are enough "Greater Fools" that would pick negative price points, if they existed, and in many ways (incentive ads) they already do. This has driven a "race to the bottom" in mobile and casual. As long as devs believe they have a chance for the next "Clash of Clans", they will play the lottery that is the casual/mobile game industry today.

Edited 1 times. Last edit by William D. Volk on 9th September 2014 10:29pm

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Jeff Kleist Writer, Marketing, Licensing 3 years ago
The Wii lacked modern voice chat or a friends system, and DLC in the form of season passes and such. Essentially the WiiU is XBLIVE 2007.

The cloud, most people think of just as a giant hard drive. Destiny is a "cloud" game titanfall is a cloud game, The Division The Crew, all cloud games. Patch there is thinking OSNow, where the games are run on the servers, and the end hardware is irrelevant. This will happening in some forms I'm sure, but it's just too damn inefficient in most cases. Microsoft has demonstrated the offloading of physics and AI tasks to the cloud to improve system performance, and I believe that will help extend this console cycle quite a bit, both longevity and technologically. I suspect the future of subscription gaming looks a lot closer to EA Access than OS now, especially with the industry standardization on x86 likely going nowhere.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.3 years ago
Speaking of running from the cloud, isn't Dragon Quest X on 3DS completed run from the "cloud"? Yep, 10 years behind the tech curve.

And to show why cloud only gaming can be a problem, Square Enix has had to stop shipments of the game because their servers cannot handle the influx of gamers fast enough causing massive instability in the game.
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Patrick Frost QA Project Monitor 3 years ago
Completely convinced that these articles appear on GamesIndustry.biz simply to stir up the boards and unite them against the "common enemy".

Personally I totally recoil at the word "Cloud" now. It's a horrible term that is almost meaningless yet is used as a buzz word.
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Rafa Ferrer Localisation Manager, Red Comet Media3 years ago
The funny thing is that he says that F2P must go because it generates zero revenue (besides the big players out there) and then he gives the argument that the user base has grown exponentially.
Right now there's 1.7 billion smartphones out there. [...] The number of people playing games has gone up by an order of magnitude, and I think it's going to go up again. There will be 4 billion people playing games in the very near future.
But Mr. Pachter, this growth is mostly due to your dreaded F2P and the culture of "everything for free", so lots of that 4 billion wouldn't pay for games with a gun to their heads, according to your 8-seconds younger self. No F2P means no such 4 billion (profitable or not, not relevant here, because hey.) So, make up your mind and quit using facts like you pick cherries, Mike.

Edited 1 times. Last edit by Rafa Ferrer on 11th September 2014 6:16pm

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