Wednesday, January 20, 2010

Console Post Of The Week (part two): In Too Deep

You might find this amusing.

Yesterday, I mentioned both Microsoft's and Sony's motion control hardware as being released this fall. Officially, that wasn't the case--Sony had said they were going to launch this spring--but I thought that was so transparently wrong that I just ignored it, because I was fully convinced that they would be releasing it in fall. It made no sense to release a significant piece of new hardware in the same time frame as God of War 3 and Final Fantasy XIII, because those two games (with no help) will generate plenty of excitement for the PS3 this spring.

Today Sony officially announced that the PS3 Doohickey is being delayed until this fall.

If I had just mentioned yesterday that the official release date was still Spring, I would have looked pretty smart today. Emphasis on "would", not "did."

Today, let's talk about this console generation, and why it's extending well beyond the length of previous generations.

First off, I didn't think this would happen. I consistently wrote that the successor to the 360 would come in 2011, at the latest, but that isn't going to happen, by all appearances. Let's look at a few reasons why.

First, here's what isn't a reason: the hardware is powerful enough. Not really. Developers still make all kinds of compromises in visual quality to achieve a playable frame rate (check out those player models on the Madden sidelines if you don't believe me), and open world games (which are going to be more and more popular) are particularly vulnerable (translation: they often look ass ugly).

There's no question that a console displaying in HD resolutions is a huge leap forward in processing power from an SD console, but that shouldn't mean that the hardware doesn't need to get better. It does.

There are, however, some overriding factors at work here, as well as manufacturer-specific factors.

First off, we're in an awkward technological moment: the transition from standard definition to high definition. There are no specific numbers on what this has done to the market, but I strongly believe it's had an effect. The 360 and PS3 are "HD toys" in a marketing sense, and when people buy an HD display, that's a natural purchase to consider to show off the new display. So that may contribute to a bit of ongoing demand that's separated from price, which is a unique factor compared to previous generations.

I think that transition also enabled Nintendo to put out a console without HD support and not have it hurt them in any way. They won't be able to do it next time, but the low price of the Wii has certainly been a factor in its success, and only including support for 480P (which they haven't emphasize at all, and don't even include cables for--they have to be purchased separately) surely helped them control costs.

Second, we've had a major economic meltdown worldwide. Look, if I was in control of any of these companies and had plans to launch a console in 2011, I wouldn't do it--I'd push everything back a year. There's still far too much uncertainty right now economically to be confident in committing to a console transition.

Third, and I think this is, by far, the most important factor, the five-year lifecycle has been driven historically by two factors: new players and the failure of existing players. New players usually introduce consoles that are more technologically advanced than existing ones, and when they're successful, they put additional pressure on existing players to accelerate the development of new hardware.

There's also usually a clearly defined loser in a generation, and that player has additional incentive to launch the next generation sooner than the winners.

Now, though, the costs of entering the console market are prohibitive. I keep expecting Samsung to enter the market at some point (it seems like a natural), and Apple might as well, but the potential number of new players is extremely small. So it doesn't appear that a new company is out there to drive the market forward.

It's also hard to pick out the failure in this generation. Well, that's not true, actually--Sony has failed in massive ways. An extraordinarily conservative estimate (cobbled together from their earnings statements, although there is plenty of guesswork involved) is that the PS3 has lost between 500M-1B dollars.

When I mention guesswork, though, what I mean is that the number could be much higher. If the gaming division lost 232B yen during a quarter, and the note on the earnings report is that "XYZ revenue and profit were up, but costs associated with the PS3 resulted in a net loss", it's probably safe to assume that the PS3 actually lost more than 232B, but there's no way to split it out precisely. So that 500M is absolutely the most conservative estimate imaginable, based on Sony's earnings reports.

Iif we expect the PS3 to basically sell like the 360 did in 2009 in the U.S. this year, and Microsoft isn't exactly making a killing with the 360, how do we think Sony will? Remember, Microsoft has a significant revenue stream from Live that Sony doesn't have (Sony will be introducing "Premium" PSN memberships soon, which was inevitable, but who knows what that will produce in revenue). So even when Sony outsells the 360 in Europe (to a slight degree), and dwarfs them in Japan, it's still hard to imagine Sony being more than marginally profitable (at best) from the PS3 in 2010.

That would seem to argue fairly persuasively that Sony should replace the PS3 as soon as possible, but they can't--they're in too deep. They bet their technology wad on the PS3, and even though they're still far, far underwater, they're holding on to the anchor in desperate hope that somewhere, it's attached to a boat.

Sony doesn't humble easily. Hell, maybe they're right. Microsoft isn't going to make them dated with a new console, because Microsoft isn't exactly printing money, either.

Plus, watever the original plan was, it all changed with the Wii.

Remember that scene in Monty Python And The Holy Grail when Tim warns Arthur and the Knights about the rabbit in the cave of Caerbannog? They ridicule Tim, and Bors goes to chop its head off.

It ends badly for Bors, obviously.

I think that rabbit is the Wiimote.

It's dead simple, isn't it? Just knock out some motion control, and it's like having a whole new console! It doubles the lifespan of a console with only a fraction of the technology costs, because it's much cheaper to develop a peripheral than a new console.

Microsoft, in particular, is counting on this, because 360 sales have essentially been flat over the last three years--not poor, but flat. Sony can argue that at $299, they have some pricing actions left (although the PS3, at the new $299 price point, is selling significantly below the levels of the $299 PS2, which must be a concern), but Microsoft is already at $199 for the Arcade unit. They just don't have that much room left. If they want to extend the console's lifespan by several years, they have to pull this rabbit out of its hat.

And hope it doesn't have huge, sharp--well, just look at the bones.

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