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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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Steve Peterson

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Steve Peterson has been in the game business for 30 years now as a designer (co-designer of the Champions RPG among others), a marketer (for various software companies) and a lecturer. Follow him on Twitter @20thLevel.

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