Sunday, December 13, 2009

Summing up 2009, looking ahead at 2010

As the year is coming to an end, I would like to look at the three consoles and assess their current situation, while looking ahead at their potential performance in 2010.

The Wii is still the runaway success of this generation, but Nintendo obviously has the most to lose from this point on. Astonishingly, some Wii first party titles have remained among the top sellers across all platforms for years. ´Mario Kart´ and ´Wii Fit´ sold as much as ´Grand Theft Auto IV´ in 2008 and are among a total of five Wii titles in this year's top ten sellers in the US so far.

As far as a slowdown in hardware sales is concerned, some observers have overstated the case, I believe. Of course, when comparing sales this year to 2008, the numbers have indeed slowed down significantly. The price cut is the best proof of that. Companies only ever cut the price when the product is not selling. That was true of the Xbox360 and PS3 as well as the Wii. But NPD analyst Anita Frazier recently pointed out how well the Wii is doing still.

While there has been a lot of focus on Wii sales as compared to last year, the system was still the best-selling console system by a margin of 54 per cent. (...)

At this same point in the PS2 lifecycle, the PS2 was down in unit sales by 23 per cent over the previous year, but as history has shown, it continues to have a great deal of life left in it. So focusing on a comparison to Wii's stellar 2008 performance masks the reality of just how well this system is selling.

So do not worry. Nintendo is still raking in the money with both the hardware and first party software. But how well are third parties doing on the Wii? We had this discussion in January 2008 and again in August as well as in October of that year. In the last post, I noted the following:

A grand economic success of titles like ´The Conduit´, ´House of the Dead: Overkill´ or ´MadWorld´ will surely become examples the entire industry will follow. On the other hand, if these titles sell poorly, the Wii will get less and less mature titles and will become a casual console.

By now, it is quite clear that the latter scenario came true. All titles mentioned sold poorly or even abysmal, despite two of them being great games. So the Wii has failed as a platform for mature games by third parties, it must be said. And it is highly unlikely that this will change. In fact, I believe that Capcom may be regretting moving ´Monster Hunter Tri´ from a PS3 exclusive over to the Wii. The game is selling very well in Japan, but international sales are likely to disappoint as was the case with the games mentioned above. Of course, the Wii has become the console of choice for survival horror and Resident Evil fans alone cannot afford to be without ´Resident Evil 4 Wii Edition´, ´Resident Evil: The Umbrella Chronicles´ and ´Resident Evil: The Darkside Chronicles´. But we are still waiting for a decent shooter and a few other genres, notably RPGs, are also understaffed.

Nintendo is even openly criticised by partners like Electronic Arts. Their CEO John Riccitiello has expressed disappointment about poor sales on the Wii platform and noted some problems Nintendo may be facing in the near future.

One, it's a very compelling platform. Two, third-parties can do a lot better on the platform with the right support from Nintendo. They've always been first-party-centric, and they're learning how to be third-party supportive.

My belief is the first platform to reach $149 is going to inherit much of that [PlayStation2] business. (...) The Wii is not gone. But if they maintain $199 and don't innovate, they're going to have a hard time competing with what's already been announced from Microsoft and Sony.

According to Games Industry, Riccitiello made the following remarks in the company's recent earnings call.

To be honest with you, I think the Wii platform has been a little weaker than we had certainly anticipated. And there is no lack of frustration to be doing that at precisely the time where we have the strongest third-party share. (...)

I think driving revenues up on that platform from where we already are, which is up substantially from where we were a year ago, we are reaching out to Nintendo to find ways to partner to push third-party software harder.

Wii is where we are missing it and so I really do think that the opportunity exists to find different ways to partner with first party in this case to sort of help establish in the minds of the consumer legitimacy of some of these other brands when they are going out multiplatform because very, very few multiplatform titles are succeeding on the Wii. (...)

I would point out, by the way, the 50 million number of course includes Asia or Japan and I don’t think any of the Western companies are likely to participate much at all on the Wii platform in Japan, so the addressable market we see is just a little bit below 40 million but that is still an important opportunity.

In the transcript of the earnings call, more background is provided.

Fiscal Year To Date, EA is the #1 independent publisher on the Wii with share of 21% in North America and we estimate 14% in Europe – up 8 and 10 points, respectively. Our non-GAAP Wii revenue is up 50% year-over-year. While we have hit our share goal for the Wii business, revenue is well below expectations due to underperformance of the Wii platform.

The problem is clear. Being such a strong first party publisher, Nintendo itself made most of the money off of the Wii platform. Although it is the clear market leader and will likely remain at the top, Nintendo failed to mobilise third parties. So whatever successor Iwata and Miyamoto are planning, it will suffer from the very same problem.

In fact, a successor to the Wii will in itself be a grand challenge. Normally, companies innovate with one generation and consolidate with the next. At least, this is the way Nintendo has done it so far. With the Wii lagging so clearly behind the competition in terms of hardware power and the competition ramping up their own motion control systems, which will no doubt be perceived as more advanced when they hit the market, Nintendo cannot afford to consolidate.

The next console, which may be called ´Zii´, had better be as innovative as the Wii. And in my mind, the only way this can be achieved is by some kind of 3D visuals. There has been plenty of evidence to support this and Sony is already ramping up their efforts in this department.

Yet Sony has very little money to invest. The corporation has come under intense pressure this year to reduce the price of their PlayStation3. They finally did and sales soared. However, this means that Sony is still subsidizing each unit sold, according to market intelligence firm iSuppli.

Based on a dissection and analysis of the console, iSuppli has determined that the 120Gbyte Hard Disk Drive (HDD) version new PlayStation 3, released in September, carries a combined Bill of Materials (BOM) and manufacturing/test cost of $336.27. At a newly reduced retail price of $299, the latest version of the PlayStation 3 comes closer to breaking even than any previous version of the product.

Losing money on each hardware unit sold some three years after the product launch is probably unprecedented in this industry and it is, naturally, the economics of the madhouse. At the very least, it is a huge gamble for Sony. They are finally selling decent amounts. But will those sales figures be enough to convince third parties to commit to more exclusives and thus spur on sales even more?

Notable PS3 third party exclusives are: ´Agent´, ´Final Fantasy XIII Versus´ and ´Final Fantasy XIV Online´, ´Heavenly Sword´, ´Last Guardian´, ´Metal Gear Solid 4´, ´Ninja Gaiden Sigma´ series, ´Ridge Racer 7´ and ´Valkyria Chronicles´. This list is clearly dominated by titles which do well in Japan, but may not prove to be blockbusters in Europe or North America. As a counterweight to this, first and second party titles appear to come predominantly from the company's North American and European branches, SCEA and SCEE. Yet with the majority of PS3 third party titles also available on Xbox360, which is significantly cheaper and boasts a more impressive list of third party exclusives, the Xbox360 still looks like the better proposition.

I believe that motion control will be the deciding factor. If the PS3's ´Sphere´ can outshine the 360's ´Project Natal´, Sony has a chance to come second this generation. The launch portfolio and the marketing will decide which system buyers will see as the technological successor to the Wii. ´Sphere´ has the advantage that the technology has been around and has been tested by Sony for almost ten years. At the ECTS 2001 in London (before the launch of ´Eye Toy´ for the PS2), I played a technological predecessor to ´Sphere´. Colored swords and maces were simulated on-screen and in real-time. This was only ever used in marginal games like ´Eye Toy Hero´. But Sony sure has perfected this technology since. It is a slim chance (pun intended), but 2010 could yet become the year of the PS3.

It could all go wrong, however. Let us not forget that IBM discontinued the Cell chip line, after Sony had talked the chip up to be the ultimate CPU, soon to revolutionise not just personal and super computers but also household electronics. This decision has ramifications for a possible PS3 successor, or rather betrays Sony's future plans (because if Sony had planned for a Cell-based PS4, IBM would not have discontinued the chip line). It seems highly unlikely that such a device would have a Cell-based chip, which in turn spells a high research and development budget. Quite obviously, this is money Sony does not have and/or is unwilling to invest. So, the worst case scenario is Sony no longer planning a PlayStation4. As unlikely as this might be, it is certainly a possibility.

It seems that there is next to no news regarding the Xbox360 at this point in time. And this is good. Unlike with the Wii and PS3, no third party is complaining about the platform, no analyst is heralding an imminent doom and most gamers seem content, too. Everyone is happy with the console's performance, it seems. And there is every reason to be.

Third party support is arguably the best among the three. Exclusive games of note include ´Alan Wake´, ´Lost Odyssey´, ´Blue Dragon´, ´GTA IV DLC´, ´Dead Rising´, ´Beautiful Katamari´, ´Lost Planet´ (timed), ´Gears of War´ and ´Mass Effect´ series, ´Too Human´, ´Ninety-Nine Nights´ and ´Prey´ series, ´Splinter Cell: Conviction´, ´Ridge Racer 6´, ´Quake 4´, ´Left 4 Dead´ series and ´Dead or Alive 4´. Alongside Microsoft's own efforts concentrating heavily on family friendly gaming (albeit this is more evident in their marketing than in the actual software output), I believe the 360's portfolio to be the most balanced overall, particularly as traditional gaming (without motion control) is concerned.

Of course, the console business has been an extremely costly endeavour for Microsoft, leaving nothing but a bill of around six billion US-Dollar by 2007. And while the division (which also includes the Zune player) is at least making money, their operating income declined 66 percent from 2008. As is the case with Sony, Microsoft still appears to be subsidizing most SKUs, since they shipped more consoles in 2009 than in 2008, while operating income fell.

Xbox 360 platform and PC game revenue decreased $161 million or 3%, primarily as a result of decreased revenue per Xbox 360 console due to price reductions during the past 12 months, partially offset by increased Xbox 360 console sales and increased Xbox Live revenue. We shipped 11.2 million Xbox 360 consoles during fiscal year 2009, compared with 8.7 million Xbox 360 consoles during fiscal year 2008. Foreign currency exchange rates accounted for a $74 million or one percentage point decrease in revenue.

It is fair to say that Microsoft bought its way into the home console business. But considering that the company has the financial stamina to continue investing in the project, this may yet turn out to be a worthwhile enterprise. I have always said that if Microsoft had known the full extent of the necessary investment, they would obviously never have entered the market. But now that they are in and seeing some success, they are here to stay.

They are still clearly in second place and ´Call of Duty: Modern Warfare 2´ selling more than double on Xbox360 than on the PS3 in the US underlines their dominance in their home market. While the console will probably never see sustained growth in Japan, it is doing very well in Europe. And a strong position in two out of three territories, as well as the number two worldwide is not a bad place to be.

Just like I noted above, Microsoft's fortune will greatly depend on the public perception of ´Project Natal´ as opposed to Sony's ´Sphere´. I see the Wii as unbeatabale in this generation, just like the analyst cited above. But Nintendo will lose reputation to either of the competing motion control technologies. And ´Project Natal´ has some very compelling features. No controller at all is a great proposition for everyone who does not want videogaming invading his living room and cluttering up the space. The downside of it is that it is not easily suited for all kinds of games. I do not see any chance of playing a shooter with ease. And even for racing games, I doubt that it will deliver the precision needed. That will not be too much of a disadvantage if a game like ´Milo´ can bring a new level of artificial intelligence and interaction to gamers. If done right, this game alone has the power to keep Microsoft ahead of Sony for the remainder of this generation.

Sources: see above
Thanks to:
Joystiq, Joystiq, Joystiq