Silent-Q.com

I’ve been watching the console wars with some interest. This go around has vastly more drama than previous ones and I’ve struggled to put it into words why. I got to thinking about it and realized that we may be watching the beginning of a paradigm shift in how game companies approach hardware, features, and extras.

Console subsidization has almost been a given since the 90’s. As initial hardware releases became more expensive, game companies cut back on amenities. No more pack-in games. Only one controller. It even got so bad, for a while there it looked like Nintendo was going to release the N64 without any video cables (their premise was that most N64 users would own an SNES, which used the same cable). Conventional wisdom holds that if you eat some loss on the console, you can make it up when royalties from the games come in. But the current generation is challenging that in some very interesting ways.

Let’s look at the three approaches to the current console costs and extras.

Microsoft
Microsoft launched the Xbox 360 first in November 2005. It was a given that MS was eating at least $100 of cost on these machines (probably more on Premium systems) but MS gave only what it had to. The Core system is quite possibly the biggest joke on gamers out there. You can live without the wireless controller but the hard drive was left out. The 360 without a hard drive is a truly gimped system indeed. No original Xbox backwards compatibility (the original had a HDD standard), limited flash drives for saves and downloads (Xbox Live Arcade had a 50MB limit on games for a long time as a result) and no ability to take advantage of video on demand over XBLA. It basically robbed you of some of the best features of the 360. As a result, most people with Core systems on launch day were those who got there after the Premium ones were gone. The Core system has never really enjoyed success as a result. It’s no surprised MS has stopped production of that SKU.

The biggest hit, however, seems to be Microsoft’s pocketbook. No matter how you look at it, the 360’s biggest problem has been the growing number of bad hardware units out there. Microsoft, realizing that they had to address the issue or bury the system, finally relented and set out to fix the hardware problem. The reported price tag for this fix is around $1.5 billion (that’s billion with a B). It’s a painful lesson but MS wanted a next gen console they could push to market early with minimal subsidizing. As a result, corners were likely cut that have cost them (one theory is that the processors didn’t have heat sinks, which is something newer models, like the Halo 3 boxes, have). It won’t push MS out of the console business (those pockets do run deep) but I’m willing to bet that the next Xbox console has a hard drive standard and all the cooling necessary. I’m willing to bet they don’t try so hard to win the race to market, either. He who releases first does not necessarily win.

Sony

The PS3 was released in November of 2006. Unlike the 360, the PS3 has had minimal hardware issues. But Sony has not been immune to the subsidizing problem.

First, the PS3 has everything built in from the start. While models do vary some (number of USB ports, wireless, memory card reader) none of these change what the system can do (cell processors, Blu-Ray). And while the PS2 Emotion chip removal is a sore spot (only the 20GB and 60GB models will have them and future models have limited compatability, if at all) it’s not necessarily a deal breaker.

But while Sony avoided the MS mistake of cutting corners and rushing to market, it created another one. The PS3 cut no corners and it showed on the price tag. The PS3’s largest problem has been simply getting people to buy into the machine. It tried what the PS2 did: they built more into the machine that what the market needed at the time to give it longevity. That worked well for the PS2 because, at the time, not everyone owned a DVD player and it was a major selling point: buy a PS2 and get a gaming system PLUS a DVD player all built into one. Gamers could convince the wife/parents/roommates more easily with that tidbit.

But the PS3 is a bit ahead of its time. The Blu-ray player is definitely a boon and I think the PS3 has the longest lifecycle on the market as a result (I’d say 5-6 years based on the PS2 and the raw power of the PS3). But not everyone sees the need for a High Def video player. Regular DVD players sell for as little as $20 with decent component output (the best a non-HD player can get) and most people still do not own a HDTV (let alone a 1080p model), where the Blu-Ray really shines.

As a game console, $600 was a much harder sell. As a High Def Video player, it was not as hard of a sell (it was the cheapest BD player on the market at launch) but that market is still limited. I know several PS3 owners who aren’t gamers at all. They wanted a BD player for their HDTV and got a multimedia center for free, courtesy of Sony. That may play to Sony’s advantage when they start offering on-demand videos over PSN but it doesn’t help the gaming aspect.

The result has been sluggish sales. Nintendo and MS have run rings around Sony and some third party publishers have been reluctant to make PS3 games due to the low sales numbers. Sony has also lost over $2 billion on the PS3 so far. Sony has responded by phasing out the 60GB model and adding a new 40GB model at $399 with 2 USB ports and no memory card reader just in time for Christmas. In probably the best supporting argument I’ve seen, the 40GB model is said to have no backwards compatability with PS2 or PS1 games either.

Nintendo

Let’s be honest: when they announced that the Revolution was being renamed to Wii, you laughed and then realized that they weren’t laughing with you. People were planning funerals for Mario and Nintendo seemed to be on the ropes. This was the once-brilliant company that blew the video game market wide open with the near-legendary NES and made itself a household named for video games, much like Xerox did for copiers. But the N64 showed that Nintendo was slow to react to the market (no optical media and expensive cartridges limited profits and how much data a game could have) and while the Gamecube did better than the N64, it still lagged far behind the PS2 and Xbox. Worse, Nintendo said that the Wii would have a pack-in game, no DVD playback support, and that their $250 price point would earn them about $50 per console. A console that cheap and underpowered by comparison without any hope of a HDD or extra features seemed doomed to failure. There were also slim pickings in the third party department, which is what kept the GC lagging behind. The Wii seemed to be for Nintendo what the Dreamcast was for Sega (except Sega didn’t look like they were out of their minds). I honestly felt Nintendo would probably fade out of the console market and fall back to their handheld division, one area where Nintendo also defined the market and has stayed on top of ever since.

Boy were we wrong.

The Wii is selling so well Nintendo is unable to meet demand. Nintendo is making money so fast that they are now worth more than Sony. That’s even more impressive when you consider that Sony is an electronics company in general and Nintendo only sells video games. In short, the Wii pretty much prints money. Revolution was the codename but it seems to be the buzzword in the industry right now.

So what happened? Nintendo got the market right. Let’s say you’re Joe Consumer and your kids are bugging you for one of those new game consoles. Which do you buy?

A - A $600 PS3 with no game (and a poor selection of $60 games at the time)
B - A $300 360 Core with no HDD and no game
C - A $250 Wii which comes with Wii Sports

Now, as a gamer, you might protest and bring up all the features you get for the higher price but we’re not talking a gamer, we’re talking parents, the people who do a great deal of toy buying without really knowing what they’re getting into (i.e. 12 year old kids playing Grand Theft Auto: San Andreas and finding the Hot Coffee mod). The Wii looks really attractive in that it’s the cheapest AND it has a game so you can play right out of the box. To the uninformed consumer it looks like a steal. Who cares if it doesn’t play DVDs or has 3 processors? It works right out of the box. If you’re a parent buying for the holiday season, that looks like a winner. And that makes Nintendo a winner in both installed units and in bottom line numbers which, unlike MS and Sony, are in the black.

Is it a fluke? Maybe. But Nintendo is now sitting on a mountain of cash and, with over 5 million units sold worldwide, it’s attracting third party developers like mad (some of whom have moved away from the PS3 to work on the Wii). It remains to be seen if gamers in general will adopt the system but the Wii seems to be solid hardware (no mass dead unit problems) and it seems to be OK in the graphics dept. Add in that Nintendo is re-releasing old classics over their Virtual Console for money and that the DS is selling over a million units a month and I think Nintendo is back to stay. Even if they falter on games like they did on the GC, the Wii cannot be called a failure like the GC was.

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So what does this mean for the next generation beyond this?

First, I would expect more standardized hardware. Guaranteed HDDs and probably some sort of HD media support. Even Nintendo is going to be hard pressed not to include some sort of HDD in their next system (although HD media support remains to be seen). The multi-SKU system is confusing and you run the risk of making your less educated customers irate when they realize that they bought a system with less functionality. Worse, game makers can’t assume that a customer has it or they will sell less games.

Second, I would expect less cut corners. Put out a quality system off the bat or people will avoid you until you can prove you’re stable. Don’t skimp on core components either.

Third, we really don’t need the kitchen sink. Game consoles should play games first and foremost. If you can add in bells and whistles without a lot of cost, do it, but don’t force us into something new because your other divisions would like you to buy their products too or because you envision yourself becoming the second coming of the home theater. If it means your console has a lifecycle of 4 years instead of 6, I can live with that. I’d prefer not to wait 2 years of that 6 waiting for the price to drop so enough people can adopt the system so third parties will be driven (not pushed) to develop for it.

Fourth, keep in mind that the lion’s share of your target market are not made of money. While I am not afraid to pay for quality, many people are. And if you put out consoles that nobody can afford, not enough people will buy them. They will buy the cheap, low end model because they don’t recognize the quality or value of the pricier models. Joe Consumer is generally not someone who reads gaming magazines or knows that that the next tier console has 10x the games. He’s the one standing there going “I’ll take the one with the free game”. Go stand in any video game section of any major store the day after Thanksgiving if you don’t believe me.

Fifth, bring back the pack-in game. Who wants to spend $600 for a system that is technically impressive but requires andother $50-60 just so you can use it? I can buy a laptop for that much and it works out of the box. Granted it’s not the best comparison but there are people who think like this. If you charge more then so be it but stop making games the hidden fees associated with gaming consoles. Make them work out of the box again. Both Sony and Microsoft seemed to have picked up on this and followed suit with Nintendo.

In the end, I think that we may see that value in the next generation will not be defined by how many gadgets or how quick to market you were, but by the value you bring and how cost effectively you can do it.