Gamasutra is running a series of articles this week focusing on the game console transition. Our own Matt Matthews breaks down sales trends over the past generation of hardware.
With the Xbox One finally coming onto the market this week, the entire previous generation of consoles will finally have been superseded by new systems. While this clearly won't end the lives of the Sony PlayStation 3, the Nintendo Wii, nor the Microsoft Xbox 360 - they will enjoy at least another two years on the market sliding inexorably into nothingness - I do think this is an opportune moment to look back at the last generation and take stock of what we've all seen.
Before I begin, my focus here is primarily with data from the U.S. market, the one into which I have the greatest view. Building a full global view is an extremely difficult challenge. However, toward the end of this column I have included global digital data across many large companies, which provides some insight into the worldwide market.
A sharp reversal of fortunes
After a thorough drubbing at the hands of Sony and its runaway PlayStation 2 system, both Microsoft and Nintendo entered the new console generation with a lot to prove. But as Sony's PlayStation 3 stumbled after launch, weighed down by the hefty $600 price tag and a truckload of institutional hubris, the Wii and Xbox 360 took off.
The Xbox 360 was helped along by Microsoft's stronger suite of development tools, simpler architecture, and robust Xbox Live network. The Wii flew off shelves for years, as the public simply couldn't get enough of the novel Wii Remote's motion controls. Every developer and publisher jumped on board, as the older tech inside the system made it developer-friendly, though making good motion controls was a challenge.
Within months it became clear that Sony, the presumptive generational favorite in some corners of the industry, was in fact a distant third. Even today, that is still true.
Remember, just prior to the launch of the Xbox 360, the original Xbox had moved just over 13 million systems in the U.S. and Nintendo was just hitting 10 million GameCubes. Their successors are now both past 40 million systems, as of this writing.
When the last generation began, the PlayStation 2 had sold more systems than its competitors combined, a staggering 30 million systems in five years in the U.S. By comparison, after seven years on the market, the PlayStation 3 is just reaching 25 million systems in the U.S. It will likely crawl over the 30 million line when it exits the market in two years.
Regardless, there is a story behind all of this that sometimes gets missed for all the focus on the horse race: The U.S. market moved 105 million next-generation consoles in eight years, up over 50 percent from comparable figure for the previous generation. Put another way, the Xbox 360 and PlayStation 3 together were nearly as large a market as the PS2, GameCube, and original Xbox were combined. In that sense, the Wii - which no doubt brought the most new consumers to the video game aisles - was pure market growth.
Record retail software sales too
While the Wii is still marginally in the lead regarding hardware, the same cannot be said of software. Given the historical data on tie ratios (average number of software units sold per hardware unit), the picture I have for estimated software sales looks like this.
(Note: This is based on a variety of sources, including direct comment by the NPD Group, company press releases, investor relations reports, and analyst comments. In almost all cases, it is known quarterly, so the curve lacks the smoothness we can get for monthly hardware data estimates.)
When the Wii was on fire, its physical software sales figures raced ahead of the Xbox 360, despite Microsoft's platform having a 12-month headstart. When Nintendo and practically everyone else abandoned the Wii beginning in 2010, its software sales rate began a decline which now appears terminal.
As a result, Microsoft's platform is back ahead and, by my estimates will easily break the half-billion unit barrier before it ends its run on the market. That will put it in the same class as the venerable PlayStation 2.
Whereas the hardware market grew by over 50 percent over last generation, the same cannot be said for software. Here, the growth is far more modest, an estimated 20 to 30 percent, for a comparable period of time.
I believe there are several factors at play here. First, I think the Wii was a platform that was shamefully under-exploited by publishers. While Nintendo clearly extracted millions of dollars from the platform using its own software, the same did not happen for third-parties. That's a long and tortuous discussion, best suited for another column, but I hold both the publishers and Nintendo responsible for that underperformance.
Another factor is that at least some software revenue has escaped to the pure digital market, skipping physical retail almost entirely. (Almost, because some people - myself included - buy physical currency cards at retail.)
That digital market grows larger each month, and I estimate that it brought down the growth rate in retail software by about 5 points.
Finally, there have been many important pack-in software titles this generation, like Wii Sports
and Mario Kart Wii
on the Nintendo Wii, the Uncharted
titles on the PS3, and many mixed bundles offered by Microsoft. Since that data doesn't get reported by the NPD Group as part of a system's tie ratio, it is possible that that accounts for the lower growth rate in retail software figures this generation.
The Digital Future Arrives
But, back to that digital market, because that's the other big measurable trend that we can point to this generation. Unlike the data I reported above, about sales in the U.S., this data is all international data.
As the diagram below shows, the digital market from these eight companies totals around $8 to $9 billion in the last 12 months.
From this snapshot, you can see that companies like EA and Take-Two are growing their digital revenues quickly, and others like Activision Blizzard have large and fairly stable digital revenues. Yet others, like Zynga and Gree, are undergoing growth and contraction even over this short window.
You'll note quite a few companies missing from this picture: Sega, Konami, Namco Bandai, Tecmo Koei, Facebook, Google, Apple, Tencent, and others. For some (like Sega) I have some data but not enough to satisfactorily include them in a diagram like the one above. For others, some data is reported but not with enough regularity or transparency.
Others are excluded because they are portals for others, like Nintendo and GameStop. These also happen to be two of the most transparent companies about their digital revenues. If every company were as faithful reporting their digital sales as Nintendo and GameStop, we would have a much better take on the health of the market.
(For the record, Nintendo's annual digital revenues grew from $120 million in September 2012 to $247 million in September 2013. GameStop reports on a different schedule, but the nearest comparable figures would be from $134 million last year to $152 million this year.)
Microsoft and Sony are particularly obstinate about digital data, despite being two of the most important players in this area. Until they begin to contribute to this discussion, we will have to rely on figures like the following from Electronic Arts. (Click for a larger image.)
Look at that rate of change on the right half of the slide (which shows trailing twelve-month revenue), especially for the console and smartphone/tablet segments. Not only is the revenue on consoles 85 percent larger than than it is on the mobile side, but its showing a growth rate equal to that for the mobile market.
Clearly, not every company is EA - but this is still instructive. There is plenty of digital business on consoles, and even now, at the end of a generation, that revenue is still growing. And, I should add, I'm not cherry-picking a quarter with data favorable to my point; EA's investor presentations have shown this kind of console digital growth consistently for over a year.
Last generation, console hardware exploded to over 100 million systems in the U.S. alone, with software sales destined to pass 1 billion units by the end of this year. With Sony having already announced a million PlayStation 4 systems sold in the U.S. just in its first weekend on the market, it looks like there is the potential for at least that system to experience strong sales for the near future. Within a week, we will also begin to have our first indication of how Microsoft's Xbox One will fare.
Both of these boxes will continue to sell millions of units of software at retail, much as their predecessors have done. After all, that has been at the heart of the year-long discussion the industry has been having about preserving the right to resell software packaged on physical media.
However, that graph I showed above with the total software sales for each console will be meaningless for the coming generation. With each passing year, more and more consumers will buy their software digitally and bypass retail altogether. Retail software sales will continue to contract, but will still be materially important even five years down the line.
Microsoft and Sony are well-prepared for this new generation, as they long ago began building the infrastructure for this kind of business and have fashioned themselves into the channels through which consumers can buy a range of software, from tiny indie titles up through the biggest blockbusters from the likes of Activision and EA.
The Xbox One and PlayStation 4 will begin with a huge push from third-party publishers, especially on the digital storefronts. From their public statements, we know that Take-Two saw impressive growth in its digital revenues from the likes of Borderlands
and Grand Theft Auto V
on consoles. Activision's Call of Duty
franchise thrives on the sale of purely digital add-ons and the slides above show that EA is committed to the digital future on consoles.
Together, the new platform holders and the third parties will likely push both of these consoles to successful levels, in part because of the new digital opportunities.
However, for Nintendo, I cannot see a happy future in the console market. At the beginning of the last generation, Nintendo appeared as surprised as anyone that motion controls and the Wii brand took off so quickly. Now, at the beginning of this generation, Nintendo appears to be just as surprised at how unpopular its new Wii U is.
This is the inherent danger with buying completely into a new type of game machine each generation - you cannot know how it will go. The same market that made the Wii a hit is now judging the Wii U a dud. In either case, if you removed what makes each machine unique - the motion controls on the Wii and the Game Pad on the Wii U - all you'd have left is a last-generation console, with little else to recommend it other than Nintendo's own unique software library.
It's not that the Wii U is a bad machine. Rather, the company opted to add cost without adding enough value. And that value can be created, even now, with the right software. But no one, not even Nintendo, has yet shown how to realize that value, or how to sell it to consumers.
The utter failure of third-party software on the Wii U will now seal its fate. In both the U.S. and the UK, two Western markets that loved the Wii and said so over and over again with their dollars and pounds, the Wii U is failing to move hardware and software, and by the beginning of 2014 it is hard to see any third party announcing anything new for the Wii U.
At that point, the Wii U simply becomes a channel for Nintendo's own software, and little else.
Consider this thought experiment: A big third party publisher, like Activision or Electronic Arts, decides it wants to be free of platform publishing fees and makes its own hardware platform to exclusively host its unique software. So, for example, titles like Madden
, would all be available only on EA's own platform because it believes it can command that kind of loyalty from its fans.
Would consumers buy into that model? Will they buy into it from Nintendo? I ask because that appears to be the future of the Wii U.
Of course, the next year will tell us much about where each system is headed. Microsoft has bet the Xbox One's future on being both a game system and a first-class media device for the living room, all integrated with Kinect. Sony's heavily invested in its Gaikai streaming service, a big part of what it believes will be the future of video games, but the service isn't even available for the PS4 launch.
Throughout all this change, the one lesson I would take from last generation is that video games are now as mainstream as just about any other leisure time pursuit. From mobile to console to home PC, each person playing a game is part of the industry, and likely to pay money for the privilege to be there. The big question is not whether billions will be made on video games - this is now settled - but rather who will make those billions and how.
Regardless of the outcome, for me at least, watching the industry's fortunes play out will be just about as fun a playing the games they make.