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Are 4K-enabled consoles backing into a niche?

With 4K TV adoption still low, crafting a message around console hardware that includes most consumers is a tricky balancing act

We're in the middle of a very unusual year in the games business; a mid-cycle year that doesn't feel remotely mid-cycle, containing as it does three major console hardware launches in the space of 12 months (and even more if you count VR headsets as "platforms" in some form). Of those three major launches, one is a reasonably major departure, as Nintendo's Switch reimagines the relationship between home and handheld consoles, while the other two are iterative in one form or another; both Sony's PS4 Pro and Microsoft's Scorpio are presented, in varying degrees, as more powerful and capable siblings to the PS4 and Xbox One respectively, as new members of the family rather than outright replacements.

There are various reasons why both companies have chosen to update their hardware mid-cycle; in Microsoft's case in particular it's very much a relaunch, aimed at leapfrogging the technical and brand advantage that has allowed Sony to put so much clear water between PlayStation and Xbox in this generation. For both companies, however, a key motivation, or at least justification, for the new hardware launches is the requirement to do something about 4K. Having sat around on the periphery for over five years, there's a sense that the 4K "moment" is finally upon us, and neither Sony nor Microsoft wishes to give the other party the competitive advantage of being able to crown itself as king of the 4K hill.

"Microsoft's desire...will be to present Scorpio as a genuinely future-proof option, compared to the stopgap half-measure of PS4 Pro"

It will be interesting, in this context, to see how much airtime the question of 4K console gaming gets at E3 next week. Sony has really already shown its hand in this regard; if you want to play PS4 games in 4K resolutions, PS4 Pro is an option that's existed at retail for several months now. Microsoft's Xbox One S also added a variety of 4K options, primarily for media playback, but the main event will be Scorpio - a device whose technical specifications, as revealed though Digital Foundry well ahead of E3, seem to have been created with 4K gaming firmly in mind. (High quality VR is another possible reason for the specs lining up as they do, but Microsoft seems adamant about not talking about VR on Scorpio this year, leaving Sony as the only player in the console VR space for at least the rest of 2017.)

My suspicion is that Microsoft won't talk all that very much about Scorpio's technical specs at E3 - that the entire point of dumping a lot of information through Digital Foundry ahead of the conference was to avoid overshadowing its software announcements with hardware chatter. I hope that's the case, because what Microsoft really needs to prove at the moment is far more about software than about hardware; Xbox One S was an attractive and well-received update to the Xbox One, essentially solving most of the core gripes about the Xbox hardware, and it didn't really move the needle on sales relative to PS4 for very long. Scorpio's impressive specs are already on record; obsessing publicly over teraflops rather than showing people what those teraflops will actually do for them would be a gross strategic error, and is almost certainly something the company will be at pains to avoid.

What's perhaps more likely, though, is that Scorpio's unveiling will be brimming with references to 4K, much as the unveiling of PS4 Pro was. After all, the official justification for the existence of Scorpio isn't "Sony's beating us, so we had to do something dramatic"; it's about the progress being made technologically, and the desire to have a console that remains on the cutting edge of that progress, of which 4K is a central aspect. There's a good chance that much of Scorpio's messaging will be focused around its status as a "true" 4K console, capable of driving every pixel in that gigantic array without any of the (admittedly impressive) tricks and shortcuts to which PS4 Pro resorts. Microsoft's desire, aside from hopefully allaying disquiet regarding its capacity to measure up to Sony and Nintendo (both of whom have recently been firing on all cylinders) in software terms, will be to present Scorpio as a genuinely future-proof option, compared to the stopgap half-measure of PS4 Pro.

"Even if we assume that 4K adoption will rise relatively rapidly from here on - 30% to 35% of new TVs is probably a fair estimate for 2017 - the reality is that this still leaves 4K as a pretty small niche within the market"

Assuming that 4K is a core part of Scorpio's message - and it is an assumption, though not exactly a very wild guess - it's interesting to think about what this means in terms of actual numbers. Adoption of 4K has been slow; five years after the first consumer 4K displays arrived, only around a quarter of all new TVs being shipped are 4K. Last year, that figure was under 20%, which meshes closely with Sony's recently released estimate that 1-in-5 of PS4s being sold at the moment are PS4 Pros. Essentially, it seems that PS4 Pro has settled into the market as the device you buy if and only if you own a new 4K TV; consumers without 4K, still in the vast majority, are perfectly happy to stick with the existing PS4. This is probably the best balancing act Sony could have performed; it takes much of the thunder out of PS4 Pro, sure, but it's also managed not to upset its existing installed base by making them feel that their system is obsolete before its time.

Even if we assume that 4K adoption will rise relatively rapidly from here on - 30% to 35% of new TVs is probably a fair estimate for 2017 - the reality is that this still leaves 4K as a pretty small niche within the market. The jump to 4K is far less dramatic than the leap from SD to HD TVs, and more problematic in various ways; 4K content has been much slower to appear than HD content, for example, not least because of the switch to streaming instead of physical discs, which leaves a huge swathe of consumers incapable of accessing 4K media either due to limitations on their broadband speed or concerns over how quickly they'll hit download caps. As a consequence, consumers clearly don't feel quite as compelled to make the 4K upgrade as they did the HD upgrade, and the low percentage of new TV shipments which are 4K tends to suggest that a great many consumers are choosing between spending money on 4K resolution or getting a larger screen, or perhaps a better sound system, with a majority prioritising other features over 4K.

This is a temporary state of affairs; as prices tumble, 4K will become the default, much as it's become vanishingly rare to find an HDTV that isn't 1080p. However, even once almost every decent-sized TV is 4K, it'll take a long time for the tech to filter into the market, because large TVs are uncommon purchases. My current TV is five years old; I'd still be perfectly happily using a 1080p set I bought about 11 years ago, had I not got rid of it when I was moving country a few years ago. This is far from atypical; if you've bought a TV since decent quality HDTV became fairly standard in the mid-2000s, you're probably not feeling too driven to upgrade it just yet. 4K is good tech and has been more successful than 3D was in driving consumers to upgrade more quickly, but it remains a fairly marginal success.

"How Microsoft manoeuvres to balance out the large and loyal Xbox One installed base against the niche but growing 4K market will have major consequences for its console business"

Given these two data points - the slow uptake and low penetration rate of 4K displays, and the apparent willingness of non-4K ready consumers to simply ignore the PS4 Pro - it's questionable whether a focus on Scorpio's 4K abilities would actually be a good strategy for Microsoft. The future-proofing story is a good one in some regards, but it relies upon the notion that consumers think they're going to upgrade their TV before they next upgrade their console - and since Scorpio itself is so instrumental in compressing consumers' expectations of console timescales, that may not be a successful message. The concern is that the vast majority of consumers who don't have a 4K TV and don't plan to buy one in the next few years will view Scorpio as a console for 4K and thus not relevant to them. In Sony's case, the relatively "stopgap" nature of PS4 Pro allows those consumers to just shrug and buy an ordinary PS4, but it remains unclear whether the much wider performance and branding gulf between Xbox One and Scorpio will permit the same kind of consumer behaviour.

One thing is certain; while Scorpio and PS4 Pro may appear like devices that fill a similar strategic niche, this impression is only skin-deep. In reality, they enter very different markets to fulfil very different roles, and while their relationship to 4K adoption is interesting to compare, the range of strategic options available to Microsoft and Sony for their launches is very different. We've seen Sony's solution to its own unique set of problems play out - ultimately, a fairly safe and cautiously handled solution - and next week we'll start to see how Microsoft handles its own situation. How Microsoft manoeuvres to balance out the large and loyal Xbox One installed base against the niche but growing 4K market will have major consequences for its console business as a whole over the coming year.

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Latest comments (7)

Klaus Preisinger Freelance Writing 6 months ago
best case: people buy into the idea of 4k
worst case: better looking 1080p games
2017 case: the consoles you do not need for the TV set you do not have.

At which point is it cheaper to switch to PC though? Between a 4k console and a 4k TV, there is not much difference in price to a fully fledged gaming PC.
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Jeff Kleist Writer, Marketing, Licensing 6 months ago
Adoption of 4k is "slow"? Only if you don't actually follow the market. HDTV sales didn't pick up until close to ten years after broadcasts began. All the major US networks weren't HD until 2004 or so, and cable was charging huge premiums on boxes and service longer than that. and there were sets on sale. There was essentially zero 4k content until about 18 months ago, so bad that Sony had to provide a media box attached to their own service just to get some movies. DRM standards again not worked out until recently, and 4k streaming (which really isn't much better than 1080) still not much of a thing, with no Disney (likely to change soon), Fox not playing, and limited new title availability.

The average television is replaced every 7-10 years, and considering HDTV sales hit peak around 2010, we're just entering that butter zone. Part of the reason 3D failed to catch on was that a huge percentage of consumers had just bought a new TV and balked at the idea of 4-figure upgrades so soon (a problem Sony has to consider with launching PS5 after Pro)

For gaming, 4k is a waste outside of HDR. No one is making 4k games, defined as games with a consistent level of detail only able to be seen at 4k, as the expense is budget busting. These are upscales, and until consumers can buy an HDR Premium certified set well under $1000, and they see software and hardware n abundance, both online and physical, they're not biting. Microsoft moved a lot of S to people wanting UHD disc playback, and expect them to be right there bundling Scorpio with Samsung. But most people will be buying and playing at 1080p, just as with the pro, and you'll see more and more games not wasting resources over rendering and concentrating on the graphical filtering and effects that actually sell systems and hardware. Anyone remember how Enter the Matrix was one of the first games at 1080i? Still looked like crap ;) 4k/UHD support says "buy me with your new TV", and it's marketing to thecgraphics tarts that jumped ship to Sony for 1080 to come back and thrill to brand new numbers.

The entire display and media industry's full push and launch of 4k starts this Christmas, now that the standards and media are out of beta, and both Microsoft and Sony intend to ride it.
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James Prendergast Research Chemist 6 months ago
I think Jeff is correct about the adoption not being "slow". However, I think Rob's point was not speed of adoption but household market share. (i.e. What consoles will be plugged into). In fact, all the main points in the article revolve around that even though they include the word 'adoption'.

http://www.telecompetitor.com/uhd-tv-forecast-to-be-in-33-of-u-s-households-by-2020/

For example: In 2014 they were predicting market shares of 32% USA/CAD, 22% Western Europe and 18% in Asia by 2020 - HOWEVER, that appears to only apply to sets of 40" or larger, with smaller sets remaining the remit of 1080p (you just don't need the increased resolution when you're sitting closer to a screen [for casual consumption of media - not comparing this to productivity use cases]).

http://www.telecompetitor.com/strategy-analytics-ultra-hd-tvs-in-nearly-1-of-2-n-a-homes-by-2020/

In 2016 they were predicting around a 50% market share by 2020 in USA/CAD and, as per the report, as of 2015 the UK had a marketshare of below 5%* and Germany below 3%**.

http://4k.com/news/4k-tv-sales-to-surpass-100-million-units-by-2018-5948/

Here they're saying that in 2015 the USA was predicted to have a market share of around 6%.

http://rethinkresearch.biz/articles/15-years-after-launch-hdtv-penetration-hits-81-in-us-homes/

Bear in mind that, in 2015, the market share was only 81% in USA for 1080p screens. at the end of the day, 4K will be a niche market for the next 3-5 years. To be honest, I think the 4K gun was jumped _way_too_early_ in the gaming industry... For many reasons.

*1 million 4K displays sold, 27 million households in 2015
** 1 million 4K displays sold, 37 million households in 2015
***1.25+6 million 4K displays sold (approx), 125 million households in 2015
(assuming 1 TV per household - which, I think is an underestimate)

Edited 1 times. Last edit by James Prendergast on 10th June 2017 4:09am

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Klaus Preisinger Freelance Writing 6 months ago
Sony sold 16:9 TVs one decade before 16:9 became the production and broadcast standard of TV channels. From Sony's perspective, it has been a decade since they announced 1080p to be the new norm of BluRay and PS3 games (at least some of them). Being the ones who push this hard and this early for a technology that is a decade away from general adoption is just part of Sony's brand identity. Microsoft opposed that at their own peril with HD-DVD, but that seems to belong in the past and we have since entered a Pepsi and Coke situation. There is no need for two consoles to artificially segregate their user bases, there is just a market big enough that it is not a problem at the moment.

What is the alternative for Sony and Microsoft really? If they gave up releasing consoles at the upper end of what hardware can do, they would enter a market that is drowned in tablets and android devices. For better or worse, PS and XB are stuck going down the path of high fidelity graphics. Neither Sony nor MIcrosoft can afford a world where a console is long enough on the market for a $150 video streaming device to have become powerful enough to also run those third party games, such as Destiny X or Call of Duty Y.

The PR push for technologies nobody owns will continue, as it is an enforced result of the situation Sony and Microsoft find themselves in. Nintendo might have the balls to step outside of that vicious cycle, but they have the IPs to make such a move work financially without third party help; for the decade of memberberries at least.
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James Prendergast Research Chemist 6 months ago
When the current consoles are not even powerful enough to run games at 60fps at a 10-year-old mainstream device resolution both MS and Sony have plenty of room to improve their hardware. A $150 device for streaming movies is infinitely years away from having that kind of ability because of market focus, cost, power envelope and user interaction.

Klaus, are you really arguing that Tivo or Roku, Apple TV or any of the myriad android Arm devices are going to suddenly require 200+w, have a well-designed control input, developer and engine support as well as beef up their internals in order to run demanding games? (Sure, less demanding games are on the table but then those devices already exist but do not compete with the consoles )

From a business perspective, that would be like diversifying into a market segment where you have no experience, development pipeline, personnel, or consumer mindshare.

Am I misunderstanding you?
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Klaus Preisinger Freelance Writing 6 months ago
To a degree.

The only thing protecting MIcrosoft and Sony from potential competitors right now is the scale of their operation. At one end of their business, there aren't that many companies which can order from AMD at that magnitude and get those prices and custom designs. At the other end of the business, third parties are stuck with Sony and MIcrosoft, so they have to bend over and pay the licensing fees and accept the margins of the online stores.

At the same time, we see that given the choice, third parties jump ship the first chance they get, which is why big publishers all have their own platform on Windows.

We end up with big publishers and a set of very financially attractive, yet highly expensive to make games, which have a limited number of platforms to recover their costs. If but one platform falls behind, e.g. Nintendo, we can observe that the viability to sell those big third party games fizzles. The internet then is filled with comments about the 'inferior version' with worse graphics and frame rates. Third parties will stop to even bother at that point.

The result is a cycle of dependency. Big publishers need the consoles to recover their costs from the big audience consoles have. Console makers need big publishers to monetize the console audience more often than they could on their own. If you are a console whale buying 10 games a year, Sony cannot supply you and get all your cash. But they do license out that privilege to EA, Ubisoft, Activision, etc, who then monetize the whales more heavily. This grants Sony and MS the money to remain AMD's (or whoever is at the top of silicon) best customer.

Assume for a moment, Sony and MIcrosoft stopped moving forward. Today, only Microsoft and Sony can afford to order 20 million consoles at the power level of the PS4Pro per year and sell them for ~400. Afford in the sense of spending cash and getting it back, instead of just throwing it into a hole in the ground. Sony and Microsoft have the support of third parties which mitigates the risk to such a degree that the costs are not an issue. Amazon, Google and Apple sure have the cash, but currently neither of them has the ability to monetize that specific audience to the degree required to make the project a success. Long term though, Amazon has made the first step by creating their game studio. Further down the food chain, one can say the same thing about Asus, HP, Samsung, etc. They just solder equipment together without even having proper operating systems or tools. Valve on the other hand might have the software know-how, but they do not seem eager to risk their cash on hardware. Having then somebody else manufacture the Steambox means one person more who wants to earn cash, driving up the price and Steambox out of competition. Separation of hardware and online shop revenue only works for wildly overpriced mobile phones, not price-value sensitive gaming equipment.

That brings us to the mid-generation refresh Sony and Microsoft have started doing. Because the main advantage of the refresh is not trying to kill the direct competitor. The mid-generation refresh ensures that the costs of entry to the console market stay as high as possible. The alternative is risking that by mid generation some new competitor turns up; first and foremost the Steambox which is a threat that exists. This is the very nature of the low cost PC hardware market. A $100 nVidia card in 2017 will eat your PS4 alive and ask for seconds. The prohibitive costs to enter the console space and compete with Sony and MS get lower each year is passing. Hence, Sony and MS must have figured to keep up this price as high as possible, lest they want to risk more competition.
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James Prendergast Research Chemist 6 months ago
I can see where you're coming from and agree with your reasoning, right up until the last paragraph. Your points about all those potential competitors lacking expertise and/or cash/size are spot on. In that vein of thought - A PS4 or Xbox One is not just the sum of the $350-400 of components put together, there is everything else behind that.

Sure, a $100 card will beat the pants off of them now, released 3.5 years after those two consoles launched and probably closer to 5 years after they were put together and their specs were beginning to be finalised. A $100 back then was the Geforce 640. The GPU in the PS4 is around about a 7850 (according to google) which was around $250.... there's just no comparison between the two and probably both MS and Sony took a loss on early hardware.

You can't just ignore all that R&D work, all that optimisation, all that software support and integration. Sure, a $100 card in 2017 will beat a $250 card from 2012 but you're not going to put together a computer equivalent to the PS4 or XBO for as little as they are sold or provide the back-end support for developers to utilise.

Let's look at that equivalent list of materials:
- Motherboard, CPU, GPU, RAM, HDD, case, disc drive, OS, mouse and keyboard
You're easily looking at $600 if you try and match the amount of RAM as well.

PC gamer has a cheap PC build http://www.pcgamer.com/build-guide-the-best-cheap-gaming-pc/ at around /$500... but then it doesn't include the OS or controllers and that's not entirely VR ready and the PS4 is capable of VR too...

They also have a budget build which should be fine for VR and that's $800: http://www.pcgamer.com/pc-build-guide-budget-gaming-pc/

OR switching over to Ars, we're looking at $675 (minus OS) https://arstechnica.com/gadgets/2016/03/ars-system-guide-vr-edition-cheap-vr-great-vr-and-optional-4k-craziness/

but a VR ready PC is more like $890: https://arstechnica.com/gadgets/2016/03/ars-system-guide-vr-edition-cheap-vr-great-vr-and-optional-4k-craziness/


You're talking about MS and Sony somehow having put up the cost of hardware for other parties who want to join in but the reality of the situation is that it's a damn expensive business to be in, in the first place...
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