The end of the console market as we know it
Ever since the first generations of game consoles, the concept of console wars has been prevalent by both fanboys and industry analysts. The first occurrence of console wars was Intellivision vs. Atari VCS in the early 1980s, but the concept gained public attention during the rivalry between Sega and Nintendo in the 90s with catchphrases like Genesis does what Nintendon’t. For every generation of consoles this has been repeated in cycles. For decades now, the game console market has progressed in a reliable pattern. Roughly every six or seven years, console makers would introduce new hardware expected to completely replace the old.
What makes this market dynamic interesting is that you can have the most successful product the world has ever seen, but when the cycle ends and a new generation of consoles is released, everybody goes right back to the starting line. It didn’t matter that Sony sold 100 million PlayStation 2s—the second it released PlayStation 3, it was back to having an installed base of zero units.
With the release of the Xbox Scorpio and Playstation Neo, this pattern seems to come to an end, favoring more frequent hardware upgrades over long generational spans. As Microsoft’s Phil Spencer put it, this E3 could mark “the start of gaming beyond generations.” It’s going to be an interesting transition.
Like every other industry, the game console market is also affected by disruptive technologies, forcing incumbents to abandon familiar business models.
The rise of mobile gaming has been identified as the main culprit of the disruption of the game console market as we know it. Industry veterans are suggesting that consoles are losing the “casual” consumers to mobile, and it has been predicted for quite some time that mobile would eventually kill the console market. While this statement has been falsified, the mobile gaming market has strangled the handheld console market, and is the fastest growing segment in the gaming industry, accounting for 37% of the total market and predicted account for 45% of the market by 2019.
The exponential nature of technology reduces the cost accordingly. 1 GB of hard drive storage has an average cost of USD 0.019 today, but would set you back USD 11 000 back in 1990. This pace of technological development renders the hardware in gaming consoles outdated at a much faster pace. Earlier, consoles were a way to stay ahead of the price/performance curve compared to PC gaming. But as technology becomes less expensive, PC gaming is no longer reserved to the glorious PC gaming master race and maintains a steady market share.
The transition from cartridges and optical media to digital distribution also fuels this development. With digital downloads that are compatible with every new iteration, Console makers have the possibility of creating a much stronger lock-in to their gaming ecosystems. Much like Apple has done with the App store.
The result of this development is leading the console developers down a path where they aspire to pursue a strategy of combining traits from both PS and mobile gaming. Microsoft is already blurring the lines between the two with Xbox One, and the distribution of indie games through PlayStation Store and Xbox Live Marketplace is based on the same unit economics as the app store. Sony and Microsoft are not the only ones affected by this. Nintendo on their side has had a tremendous success in the mobile games department with Pokémon Go and the release of NES Classic Mini has exceeded everyone’s (already sky-high) expectations. I am almost certain that Mario Run will be a surefire success, but I am more uncertain when it comes to the release of the Switch given the current industry dynamics. Even though Nintendo has familiar gaming franchises with a loyal fan base, the Switch simply does not fit the bill when it comes to the future of the console market.
One thing’s for sure. When it comes to digital disruption, it is not only the century-old industries like banking that are affected. Even fairly young industries are forced to adapt to the ever-changing landscape of technology-driven innovation, and the innovators of today may quickly become the dinosaurs of tomorrow.