The Defining Themes of the Modern Console Market

[Music] good morning um from an atypically sunny london my name's steve bailey i'm an analyst with a company called omdia and today i'm going to be taking you through a presentation about the defining themes of the console market now consoles are a somewhat unique hardware group in the games landscape in that they are specialist devices dedicated primarily to the act of of playing games and have been active for over 30 years now uh and in that time people would often claim that the days of consoles are numbered the consoles are dinosaurs due to die out and be replaced by smartphones tablets whatever but that hasn't happened instead we have nintendo switch setting new sales records and the new xbox and playstation machines can't be manufactured quickly enough to meet demand

so we're going to talk about the value and appeal of consoles through the lens of several key topics and those topics will be split into two groups the first group looks at the outgoing generation of hardware that is the playstation 4 and xbox one these released in 2013 and as is typical for consoles their sales start to decline about five years or so after launch at which point they are replaced by an incoming generation of consoles in this instance the ps5 and the new xbox series s and x it's this incoming generation which will then define our second group of topics so as we said let's begin by looking at the outgoing generation and our first topic is about the industrious use of back catalogues sales of back catalog games have become increasingly important for publishers in the past 10 years

and a number of mid-sized publishers have seen record results on the back of making greater use of their older games and some publishers now even employ legacy portfolio managers purely to take care of this function this side of the business on the screen what you see here is the share of each platform's game catalog that was being sold at a discount via the first party download stores around the end of december last year so on ps4 for example around 1 000 games and bundles that's about one-fifth of the catalog was being sold by a discount and that share is even higher on xbox and switch this is not very common for consoles in the space of a generation we've seen digital discounting go from an occasional thing to a constant and pronounced part of the offering some of this discounting is now quite extreme up to 98 or 99 off the resting price often making these games cheaper than the equivalent of those being sold

on a disk in a box but it's not just about discounting it's about making full use of that catalog that old cattle of games publishers have become much less protective of the launch value of content within certain series and franchises and instead understand that it's it's perhaps worth giving all the content away for free if it acquires customers for your newer titles and brings players into your ecosystem in the olden days let's say pre-2010 or so launching a game console was almost a fire and forget experience you would launch a game for fifty dollars sixty dollars whatever and there will be this intense narrow window of sales and after that window closed with the exception of certain franchises commercial activity would drop off a cliff it was really kind of do or die incredibly front loaded but thanks to digital the current console marketplace has a longer tail to it and with that a broader and healthier

sense of opportunity our second topic is that of digital only hardware and by that i mean consoles that can only play games downloaded via an internet connection and won't take any discs or physical media 2019 saw the launch of the first mainstream digital only tv console the xbox one s all digital edition and it's a hardware tier that we expect to become a standard part of the console offering from sure on out but here's the thing with that console started implementing digital only game catalogs as far back as 2004 starting with xbox live arcade and then expanding to include digital versions of packaged games in around 2009 onward indeed this idea of digital only game content is now very common on all console formats so why was there such a large gap between this and the launch of digital only machines

part of the reason is that xbox attempted to introduce something similar to a digital only console as far back as 2013 with the launch of the xbox one the console was unveiled at a pre-launch event in around may of that year and it pitched the device as requiring an internet connection and for games disks to activate licenses rather than represent any traditional sense of ownership effectively positioning it as an all digital device but the problem with that is that xbox tried to pitch this as compulsory and did so to an early adopter audience and both of those things backfired meaning there was a cooling period before the topic uh could be visited again now this illustrates the care with which you have to approach the console audience especially your enthusiast users this is an audience that you need to appease in order to give your new console its earliest momentum and you don't do that by changing the

proposition significantly and telling them it's it's compulsory matter the wider technical technology excuse me technological trends you have to balance any such progression with the needs of this highly engaged and well-established audience of players who've been playing console games possibly for decades so digital only consoles could have happened quite some time before 2019 but they needed to be offered as an option alongside consoles with disk drives rather than lumped onto the player base as a certain obligation this is a really good example of the kinds of balancing acts that consoles need to be constantly thinking about and in this example it's a case of balancing progression with tradition our third topic is the rise and fall of mixer you might remember that mixer was a user-driven video streaming platform uh similar to something like twitch that was bought by microsoft in 2017.

2017 and was symbolic of its intentions to develop itself as a competitor in the game space these kinds of platforms define a lot of the modern opportunity around marketing and community and games and microsoft's ownership of mixer would mean that it could be integrated more closely into its own platforms especially xbox one and xbox live more than that i presume that mixer was planned to become a jumping-off point for microsoft's cloud gaming platform in the same way that youtube and twitch could be used for google stadia and amazon's luna respectively however despite the opportunity running such a platform can be a deceptively complex act as you can see from this diagram on the screen on the surface enabling video streaming coverage for games might seem like a simple endpoint but actually implementing that kind of thing involves a great number of stakeholders and a lot of layers it also involves hitting at a certain scale of audience in order to offer the

kind of return needed to drive such a platform when it comes to appealing to the brands and star influences that you have to have on board so microsoft closed mixer in 2020 and then decided instead to partner with facebook gaming uh in the hope that facebook could provide both the needed scale and the influx of new users into xbox's ecosystem what this illustrates is that consoles can't do everything in-house they can't do everything by themselves assure on the one hand they you know there's a way they can operate outside of certain trends but on the other there are certain regards in which they need to embrace the wider technological landscape again it's it's another great example of the kind of balancing act that goes into operating a console our fourth topic excuse me

is about the maturing of a hybridized approach to how publishers make money from games and by that i mean it's become less and less common for games to focus on a single business model certainly in terms of how say aaa games and free to play games sell themselves on console so this maturing has been happening for quite some time and means that even traditional single-player games like delta may cry 5 as you can see from this slide here now have very complicated life cycles where the publisher switches from one approach to another and back again as befits the opportunity this is an important facet of game consoles right you have an audience that is used to using multiple business models and distribution methods that gives publishers room to create all kinds of different approaches to their games so just to to label that point we have some further examples of this complexity on the screen here so on the left you have gta 5 and

overwatch games even after years on the market can still charge a premium entry point even though they both still monetize they direct multiplayer experiences via micro transactions in the middle you have two games that were premium for a good number of years and have now switched to free to play uh and monetization via expansion content and season passes and on the right you have the two two of the biggest free to play experiences on console apex legends and fortnite both of which have released package special editions to capitalize on a certain section of the audience that likes to buy content in such a format a lot of free to play games these days indeed launch with premium adjacent offerings in the form of special editions founders editions uh and so on part of the issue with free to play is that it's often seen as a business model and it's not it's a way of accessing games that can have profound implications for game design for marketing for distribution

and monetization but it is not in itself a business model it's in fact a collection of business models and the same applies to premium games that's why the picture is more complicated than it first appears and helps explain why consoles despite being very old are actually quite stable and adaptable now as we can see from this chart here which covers most of the past decade um this is spend on console content and services premium spend in light blue subscriptions in pink and expansions premium dlc etc in purple now subs and dlc have been part of the landscape for years now uh exhibiting gradual rather than explosive growth and that's going to remain the case for the future what you'll see is a marketplace that offers balanced approach to how console players are monetized where subscription will become a significant and complementary part a net positive

but doesn't obliterate the rest of the landscape okay so with that in mind let's move on to the incoming generation and the topics that we feel will define the next few years for consoles such as playstation 5 nintendo switch and the xbox series first let's look at the topic of generations by generation we mean that there is a cycle at work uh a games console launches and gives momentum across the space of four or five years and then hits a peak and then goes into decline and sells fewer units each year until it's eventually succeeded by a follow-up console this idea of generations is still very important but seems to be poorly represented over the past 10 years we've showed time and again the generations are ending that console hardware will no longer progress in

jumps but that's how it stayed and that's how it's likely to stay for most of the coming decade this chart here shows the annual sales volume for console from playstation from nintendo and from xbox and covers a 25-year period and you can see over the past 20 years some very obvious cycles in effect there's definitely a strong pattern at work here nintendo is where the pla the pattern is least obvious thanks to the impact of the wii u that was its 2012 console that struggled to sell and it essentially curtailed the typical duration of the generation meaning that the switch launched in 2017 instead of hitting say 2019 or 2020 like the the most recent installments of playstation and xbox people are once again saying that this generational transition is going to be slower more protracted because players have less reason or desire to upgrade and i would disagree and say that if it

wasn't for the hardware shortages and the impact of an unprecedented event like the covid pandemic we'd actually see a transition happening at a similar rate to periods in the past thinking back to 2013 excuse me which is when the ps4 and the xbox one launched there was a lot of talk about how the transition would be a lot slower about how the improvements in new consoles were less tangible and less important and to help facilitate that more gradual tradition transition major titles like call of duty battlefield etc offered cross-generational upgrades playstation 2 launched its own cross play cross save cross buy initiatives but if you fast forward from the point to 2015 every publisher we talked to was taken aback with how quickly the generation had transitioned so this expected slowing didn't really happen

so it's not outrageous to suggest that the same thing would happen again and from that perspective i think something like the xbox series s variant a cheaper stepping stone into the next generation is arguably more of an experiment than a necessity at this phase in the in the generation now this next chart shows just how many years consoles continue to sell after they've been succeeded the blue shows how many years each console was the primary offering that is it was the latest and best machine available uh from that manufacturer and the pink shows how many years after um it was succeeded that it continued to sell over 100 000 units per year once it sells less than 100 000 per year we consider it discontinued for the sake of this graph um and i think people tend to be surprised by this in how quickly consoles fade from sales activity the ps2 had a lot of time in the sun thanks to

the console discovering um a long tail of activity in emerging territories around the world but apart from that i wouldn't say there's a huge change over the years um in that ratio of the pink to the blue perhaps the pink portion is becoming slightly larger over time but this is a 25-year picture and what we're seeing here i think goes against this idea that hardware generations are dying out so a question that follows on from that is what share of unit sales happens when a console is the primary offering which is in the blue versus what happens when it's been succeeded which is in the pink and i think the picture is even starker sure illustrating just how much of the console buying tends to taper off once a new machine enters the picture now with the ps5 and the xbox series x console selling for 500 there is the possibility of this picture changing for them because they could enact a much greater extent of price drop later in their life cycle in their

twilight extending that pink area towards something more akin to the playstation 2 than the ps3 or the ps4 so this idea of generations doesn't just apply to hardware of course but also to content and disservices and when we say content we just talk about the games themselves uh how much distinction is there on the content front between generations and this is a part of the picture that's becoming more fluid on screen what you have here is a measure of content overlap between hardware generations so we can see that for xbox um the overwhelming majority of the available game catalog works on both old and new consoles but for playstation the overlap is much smaller now this data is based on store listings so the playstation figure is actually going to be a bit higher as there are a number of ps4 games that also work on ps5

that are not listed as such on the stores themselves but i think what you see here is still an effective indicator as it illustrates the respective intentions of the manufacturers this overlap is something that xbox has been deliberately working towards for the past five years whereas for playstation it's a more recent endeavor we often get asked whether this idea of cross-generational functionality will cause the hardware transition to slow down or to speed up and i think it doesn't either of those things what it does offer is protection it keeps people in your ecosystem it keeps players on your machines that's the important thing with backwards and cross-generational compatibility if new hardware is in short supply it means your old platform still has a strong content supply and if someone buys the new hardware but new exclusive content isn't ready yet then updated versions of fan favorite games keep them active on your new hardware it's about the ecosystem play basically

and that brings us neatly to our second topic for the incoming consoles and we'll start by talking about something we've we've referred to plenty of times already which is balancing acts over the years it's been very easy to dismiss consoles as outdated to call them dinosaurs say that they're about to die out but they are still here and they are still going strong and that's because they are this deceptively complex collection of balancing acts and quite adaptable with it ten years ago people were saying that cloud gaming would kill consoles but now consoles are one of the best places to explore the potential of cloud gaming um apple tv was supposed to kill consoles but didn't steam boxes were supposed to kill consoles but didn't likely because the manufacturers realized how difficult it was to pull off the right balance between price performance evolution accessibility and

so on now consoles are not invincible of course they are always right for disruption but their ability to represent multiple forms of distribution and business model can make them resistant along with an audience that is highly engaged and happy to spend a lot of money next we look at how the messaging has changed in recent years by manufacturers when it comes to how they approach uh facets of their respective ecosystem playstation remains the most balanced and i don't think there's much to be said there on that front at least not compared to xbox and nintendo so let's start with xbox xbox has been putting great emphasis on its content library subscriptions uh game pass and xbox live ultimate in recent years drawing that conversation away from hardware somewhat and signaling a change of emphasis for the company now this change makes sense for xbox

what we have here is the total number of consoles sold over the past 20 years by manufacturer and this is not to disparage xbox you understand um launching a console takes billions of dollars and a staggering amount of effort and to sell this many machines is it's an enormous achievement indeed but it's an area where xbox is unlikely to see much growth and this helps explain its change of emphasis into a services driven uh arena as a company it's it's an area where it has much greater experience and potential and it's it's you know attempting to get a head start on the future and aiming to arrive there before its rivals do so xbox's game pass strategy has three distinct phases the first is the short term phase which was between launch in 2016 and 2020 where the object was to reframe the conversation around xbox in which i think it has been very successful then you have the long term goal from

2025 onward where game pass and ultimate aim to drive the bulk of xbox's console business it's a vision that's coherent and to which the company has made a huge huge commitment however we still have this middle phase between now and 2024 and in that phase the company has to continue selling hardware and really start delivering on its first party software in order to scale up the audience for game pass and xbox live ultimate anyway if you want to know more about subscription and cloud a colleague of mine named george gigi ashley is running a separate talk at gdc on those very topics next up we'll take a look at nintendo whose strategy by its own admission has become hardware focused again for my money that is a shift away from when the console launched and it seemed to be shifting more emphasis onto nintendo switch online um but when it comes to the use of

switch online people are asking why is nintendo not putting more and more weight behind the online service but you know first of all it's typical of nintendo doing its own thing at its own pace um few companies have the strength of ip that nintendo does and it's preferring to exercise control over its ecosystem while it still can um for now that means prioritizing getting people out to switch hardware first and foremost arguably this is going to change especially towards the latter half of the hardware cycle when the successor to switch is lining up for release and i think at that point it will become a priority to shift people into an online ecosystem as that makes it easier than to migrate in between generations of hardware now there's an interesting thing happening when it comes to this idea of ecosystems and it's the more seamless things become for consumers the more complicated they become behind the scenes

subscription and cloud may simplify the offering for consumers but behind the scenes things actually get much more difficult to to track and to implement it's why this idea of people being able to play whatever they want whenever they want on whatever device they want is a long-term challenge that's going to take many years to solve and so one big part of the problem there is is where is the player acquired where are they retained where are they monetized and these potentially now become very fragmented questions that make things a lot more difficult from an operational standpoint to put it more generally across the next decade the business is entering its third wave of complexity not just console but i think the entire market i'm not really sure if we're really ready for it um it's obviously nice to talk about this unified seamless offering for consumers but the tensions between companies and platforms in terms of who owns the ip who owns the user

experience who owns the infrastructure is only just beginning there are going to be lots of clashes and fights over this in the coming decade and i think apple versus epic is just the beginning anyway we're not going to dig into that too much further here we're going to move on to the third topic which is heartlands now there are some very interesting battles taking place when it comes to the key regions in the console marketplace such as in the us between xbox and playstation as you can see here we have the install base which is the number of consoles sold by generation across the past 20 years um and how playstation weighs off against xbox there now the us is the biggest console market in the world it's also the main stronghold for xbox um it's where xbox 360 pushed ahead some 10 years ago and it's where xbox one held

the most steady despite the challenges that the format faced so the question is what's going to happen next we're currently forecasting playstation and xbox's neck and neck but there's obviously a major major tussle taking place here playstation is is now headquartered in the us um and is aligning itself with big western brands such as spider-man if playstation can hurt xbox sure it could limit the growth that xbox has ahead of it for the next three or four years conversely of course xbox has shored up its position in the us via acquisitions like when xbox bought bethesda recently for many billions of dollars all the headlines were about xbox bulking out game pass which is completely true but there's also this matter of reinforcing its position in the us we should not overlook that on a similar note let's look at europe which remains a challenge for xbox because

both historically and arguably in the near future the cachet of playstation remains just too strong for it to make much of a dent in things um but again this could explain the value of a services first approach from xbox a different tac might end up giving it the kind of traction in europe that hardware is failing to generate for it finally we have japan and this time we're looking at playstation versus nintendo and we're also including handheld here because japan is very mobile oriented one thing to keep in mind sure is that since we don't have a full cycle picture for ps5 we've used the ps4 the lifetime in store base and it tells us that even if ps5 sells as well as ps4 this encroachment from nintendo will still continue so could we perhaps see a future where japan one of the biggest console markets in the world becomes the exclusive

playground of nintendo and finally we touch on the topic of curation and discoverability oh excuse me here on the screen we have a three-year picture of what's been happening on nintendo's switch in terms of content released digitally onto the platform the blue bar shows how many games have been released on the platform which was around 700 games in may 2018 oh so um that was just one year after release i thought this unprecedented volume would slow down but it's just kept that release late release rate ever since recently hitting 5 000 titles which is a record for for a games console we also have the pink line which shows the percentage of the game catalog that's under 20 at any given moment so at any given time in the past three years around 80 percent of the switch's

catalog is selling for under 20 bucks it's a lot to have to compete with in terms of visibility uh if you're releasing a game onto the platform the topic of of discoverability remains critical for consoles because the manufacturers have to be able to demonstrate value to content partners if you're going to release a game onto my machine you know what return is there for you what value why should you bother primarily this is done via establishing an install base of hardware which represents an audience of potential users and therefore buyers but increasingly with digital and connectivity facilitating so much game related content what's the point of releasing your game onto a platform if it just gets lost in the crowd and it's not as if there aren't a growing number of alternative platforms out there to release your games onto again it's it's one of many many balancing acts that console manufacturers have to perform anyway

that brings this presentation to its end um thank you for tuning in i hope you found it enjoyable or at least interesting have yourself a good gdc and take care of yourselves out there in these crazy times [Music]