Analyst: We Could Be in the Final ‘Console Cycle’
The current generation of game consoles could constitute the last “console cycle” as we know it, says Wedbush Morgan Securities analyst Michael Pachter.
In a massive 210-page report entitled “Money for Nothing: How Ancillary Revenues Can Extend the Console Cycle,” the widely-read industry pundit and financial guru pontificates on most every facet of the videogame industry in 2009. It’s a ponderous read, especially compared to Pachter’s brief investor notes, but it represents the analyst’s broad view of the business as it stands today.
The big takeaway is that for a variety of reasons, the console cycle that we’ve become accustomed to — three game machines fight it out for supremacy, and everybody drops back to the starting line in five years when the next round of powered-up machines hits stores — may be a relic of the past. Instead, each hardware maker will be looking to upgrade their machines incrementally over the next five years, not introduce brand new pieces of hardware.
Pachter disagrees with the “commonly held misperception that consoles can only support software sales growth for a five-year period, and that current generation console software sales will drop dramatically in 2010.”
Xbox 360 and PlayStation 3 still have massive room for growth over the next few years, he says. Pachter points out that 90 percent of all consoles sold in the last generation were at prices under $200, which only the Xbox 360 has reached thus far — and even then, the “core” 360 SKU, the one that comes equipped with a hard drive, has not yet reached that magic price point. (To say nothing of the PlayStation 3.)
Moreover, Wedbush Morgan estimates that “over half of Wii households are nontraditional, meaning that they would not have bought a console but for the novelty of Wii.” While Pachter points out that this is a good thing for the industry because it widens the market, it means that Nintendo may not have crowded Sony and Microsoft out of the market — there might still be room for many more sales of traditional consoles.
Pachter says he expects the Wii to dominate in sales for the next two years. By the time that Wii’s juice finally runs out and a more powerful piece of hardware becomes necessary, he sees Nintendo releasing what he calls “Wii Plus” — a Wii with graphics more on par with 360 and PS3, to make it easier for game publishers to port games between all three consoles.
“In our view, if Nintendo can offer such a device by year-end 2010, it will be in a position to seriously damage Sony’s chances of a comeback this cycle. We would expect publishers to support such a move, given that the cost of porting an Xbox 360 game to the new Wii Plus HD format would likely be lower than the cost of building a ground up Wii game,” Pachter said in the report.
“Of course, the timing of such a launch will depend upon several factors, including the cost of production, the price points of its competitors’ consoles, and the willingness of publishers to support a launch. We believe that each of these factors will shift in Nintendo’s favor eventually, and are targeting fall 2010 for a Wii Plus announcement,” he said.
Pachter also “would not be surprised” to see a “slim PS3″ redesign at the end of this year, and the rumored upgraded Xbox 360 in 2010 with a terabyte of storage.
Although he is engaging in predictions about the far-off future, Pachter’s analysis seems sound. No hardware maker wants to pull the trigger on a brand new piece of hardware right now, and Pachter is correct that all three could be considered the “winners” of the console war if they can all maintain (or find) profitability.
That said, there seems to be one crucial piece missing from this analysis: Disruption. Any analysis of the current console cycle that was written in 2004 would have been completely wrong, since it would likely have concentrated heavily on Sony and Microsoft, counting Nintendo out of the equation.
Indeed, Pachter even points this out in the report, noting that the DS kicked off the current hardware generation “without fanfare” in 2004 and that “few observers appreciated that the Nintendo DS signaled a change in game play” that foretold the Wii’s innovations.
To simply look at Sony, Microsoft, and Nintendo and assume that their current strategies, extrapolated outward, will tell the future of the game business is to court disaster. Should a disruptive idea come from an outside company, it could change the ways that Sony, Microsoft, and Nintendo do business, perhaps forcing them to introduce new hardware to respond to a clear shift in consumers’ wants.
Otherwise known as a new console cycle.
Original photo: http://www.flickr.com/photos/soundmaybe/ / CC BY-NC 2.0
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