Tuesday, October 24, 2006

IDG and the Next-Gen Installed Base

I saw an interesting article over at Next-Gen about International Development Group's (IDG's) forecast for the next generation consoles. I generally consider IDG to be a cut above the rest of these so-called "research groups" that actually consist of Ted and his cousin Jenny working out of their parent's trailer in the Appalachian mountains.

And what they have to say is very interesting, because like most other "professional" analysts, they really don't understand what's about to happen.

Here's what they project as the North American installed base of each of the next-gen systems. The first number is projected sales (in millions) for the referenced year, and the second number is the total installed base (again, in millions):

2007 6.0/11.65.6/6.53.4/4.5

So if you wanted to look at the 2010 numbers to call a "winner" of the next generation, it would be Microsoft, with Sony a very close second. And the Wii would be a distant third.

Okay, let me get this straight. The Wii is going to sell barely more than half the units of the other two consoles even though it's significantly cheaper and offers an entirely unique control scheme which will encourage developers to be more creative. Oh, and the development costs are much lower.


If you've read this blog for a while, you know I've busted Nintendo's ass on a regular basis for being both stupid and strange.

Not this time, though.

Let's review what's going to happen when these systems get launched. The PS3 media coverage will be 100% focused on how expensive the system is and how few units are actually available. In other words, almost all the coverage will be defensive in a marketing sense, and 90% of the interviews the crazy boat of Sony executives have given since E3 have been defensive.

100% of the Wii coverage, on the other hand, will be videos of children using the new controller and laughing. No price controversy. No supply controversy other than everyone saying it's the "must have" toy for Christmas.

So let's compare. You have, on the one hand, a console that costs $499/$599, one game that's generating buzz for the launch (Resistance), and extremely limited quantities available at launch (1 million, at most, by the end of the year, and I'm guessing that 500k-750k will wind up being the actual number).

On the other hand, you have a console that costs half that much (or less) and includes a pack-in game, much higher available launch quantities (and replenishment), and an entirely unique control scheme that will feel totally natural to any kid on the planet.

And they think the Wii is only going to sell 200k more units by the end of the year?

Sure, the PS3 (and the 360) has HD. That's a big deal--to me. And if Nintendo had released a 480p console with nothing unique about it, they would have had a disaster on their hands. For 80% of U.S. television owners, though, 480p is going to look just fine on their sets, and the controller will give them a unique experience compared to the PS3. And there will be plenty of HD owners who will still get the Wii as well, so it's not like 480p is going to shut them out of the HD market.

Here's my stake in the ground about the Wii. Nintendo will do an excellent job of having units available at launch--in fact, if you're persistent, you'll be able to walk in on launch day and buy one (like I said, if you're persistent). By late November, though, every kid in this country is going to want one, and when stock gets replenished anywhere, it will be gone in minutes.

The PS3? A non-factor this year. The 360? The beneficiary of all the people who want an HD console and wanted a PS3, but have zero chance of getting one. Plus the game line-up for the 360 during the holiday season is very strong. So the 360 is going to do extemely well this holiday season.

Does this mean the PS3 is dead? Absolutely not. If they want to drop the price to $399 (a $100 reduction), they can change their relevance very quickly. But given the stratospheric costs to actually make a PS3, that's not going to be easy. And if they don't, they're not going to be able to sell units quickly enough after the early adapters are sated to lower their production costs. Without the installed base, developers aren't going to be able to justify the increased development costs. And without the games, Sony won't be able to sell enough units to lower the price. It's a nasty, nasty Catch-22.

Sony's also behind the eight-ball when it comes to the next-next gen. Ignore Sony's hype about the PS3 lasting forever--technology is going to move forward far, far more quickly than any existing technology, no matter how advanced, can remain relevant. No matter how good these consoles look now (and I see plenty of room for improvement already), they're going to be showing their age within three to four years.

Microsoft will have another console ready to go in 2010 (I believe). At that point, Sony will have come nowhere near recouping the development costs of the PS3. I can't see them having a PS4 ready to go before 2012, at the absolute soonest. That's a two year gap, which probably represents over fifteen million units of installed base. Maybe more.

In other words, Sony is in trouble.

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