The world will focus on the next generation of gaming at E3 in Los Angeles this week, as over 35,000 industry professionals gather at the LA Convention Center. Sony and Microsoft MSFT +2.06% kick things off on June 10 with press conferences to tout the new PlayStation 4 and Xbox One consoles, which will launch this fall. But the game industry is evolving in such a way that some analysts believe that there won’t be a PlayStation 5 or Xbox Two.
“Will there be a next generation in about eight years? It won’t be in the shape and form we know today with consoles,†said Peter Warman, CEO of research firm Newzoo. “It could be something you plug into TV and gives you access to all the stuff. You might want an Xbox dongle for exclusive IP that works with other screens. I don’t think it will be a box like we have now.â€
I realize this forecast will alarm hardcore gamers, but Warman has numbers to back up his statement. If you look at the current gaming landscape, mobile and free-to-play games are driving the market today. While huge franchises like Activision’s Call of Duty bring in over $1 billion a year, there are fewer big games being developed today. And the industry hasn’t topped its spending pinnacle of 2009 when console gamers bought $14.1 billion on Xbox 360, PlayStation 3 and Wii. DFC Intelligence video game analyst David Cole believes the Xbox One, PlayStation 4 and Wii U spending will peak at about $12 billion by 2016.
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“There’s not a lot of room for growth when it comes to spending on console games in Western markets,†said Warman. “Today’s consumer has three or four screens and the majority of gamers play across all of these screens. It used to be a 50/50 split between PC and console, but now mobile – both smartphones and tablets – and even Smart TVs, are impacting the games space.â€
While Sony, Microsoft and Sony might not be as dominant as they were in the past, Warman said the overall market is slowly rising. He expects a bump around the launch of next gen consoles this fall with cool titles and better performance. But in the long-run, consoles will remain relatively flat because the amount of money being spent and people paying for console games is a mature market. Newzoo forecasts the global games business will reach $86.1 billion by 2016.
Michael Pachter, video game analyst for Wedbush Securities, believes PS4 will retail for $350 and Xbox One will cost $400 (before any potential subsidies from signing an Internet or Xbox Live contract – something being done today with Xbox 360). PJ McNealy, president of Digital World Research, believes the consoles will cost between $399 and $499. But regardless of these prices, the consoles will be in short supply this fall.
“Historically, no console has sold more than 1 to 2 million units in North America in the first holiday on the market,†said McNealy.
Pachter believes Sony and Microsoft will only have a supply of 3 million Xbox Ones and 3 million PS4s this fall for the entire world. So the growth for this year remains the expected price drops that will be coming before fall for the PS3, Xbox 360 and Wii. (I’d also expect a Wii U price drop from Nintendo .)
“The tail for Xbox 360 and PS3 should last till they are at $149,†said Pachter. “Wii is already there, so that tail will be shorter.â€
The newer market that shows plenty of growth opportunities is the free-to-play space, which is now available across all screens, and the mobile market, especially with lower-priced tablets entering the market from big companies like Apple AAPL +0.8%, Samsung and Acer . According to the NPD Group, the number of American gamers has risen from 205.9 million in 2012 to 209.9 million this year. Many of these new gamers aren’t coming to consoles, but to mobile and free-to-play.
“More gamers, in general, and more paying gamers, specifically, is a direct result of the combination of free-to-play games, growth in economy and connectivity in non-mature markets and the uptake of smartphone and tablet gaming,†said Warman. “Initially these new gamers do not spend much but as average spending for these newcomers is expected to rise, the overall market will continue to show healthy growth rates. As a whole that is. It remains a challenge for many game companies that consumers now spread their budget across four typical screens instead of two (PC, TV). Also, Western markets remain relatively flat as a whole as gaming has a mature position amongst consumers and represents a certain value in a person’s life, regardless of how and where he spends his or her budget.â€
When you factor in the speed at which tablets are advancing and the lower price points that Moore’s Law provides, the writing could be on the wall for consoles in the near future. Newzoo forecasts 74% global growth this year and predicts this growth will continue at 48% a year for the foreseeable future. A recent study by IDC and App Annie found that consumer spending on mobile games has grown to three times that of portable game devices like Nintendo 3DS and PS Vita. Tablets are already having an impact on console gamers, which is one reason more developers are connecting console worlds to tablets as second screen companions. There are also big companies like NVIDIA and Intel investing in mobile game technology.
While E3 will answer a lot of questions on who will take the lead in the next generation console battle, the game industry is evolving. And this next gen could be the end of the console as we know it. Not that that’s a bad thing.
