Editorial:
Self-identifying gamers are a tricky market – highly engaged, highly aware but also emotion-driven and with a keen sense of when they are being taken for granted. Sony’s PS4 unreveal spent a huge amount of its time making gamers feel they had not been forgotten, rolling out developer after developer.
Hearts, minds and living rooms
Obviously, the PS4 when it ships will have social TV, video apps and probably some medium-to-tight tight home media center integration. It would be silly for it not to, and particularly silly when Sony also owns a gigantic library of video and audio entertainment. However, its marketeers made the choice not to spend much time talking about those elements until it was in a position to reach an audience that might actually care. General audiences do not generally watch two hours of presentations about a device that will come out at the end of the year, and how many more graphics it will have than the previous device.
Microsoft has taken the opposite tack . Gambling that disgruntled gaming audiences can be appeased by the flash and dazzle of E3, the presentation focused on the things mass audiences – the increasingly mythical middle-class family – do with their gaming devices. The adults watch CSI and sports, the older children watch Game of Thrones and play Call of Duty, the youngest children watch TV and play casual games.
The core gamer audience – those who do not necessary believe that Call of Duty is in its present form a game – can be addressed at E3, the business logic goes. While people outside the game space are actually paying attention, let’s talk about Fantasy Football. It’s not a bad strategy, although it fails to take into account that people who are passionate about games have long memories and also tend to have a disproportionate amount of influence on console choice in precisely the families Microsoft is targeting.
Dead space
In truth, both of the console launches by the big two this year have been unsatisfying, and in part they have been so because we knew pretty much what they were going to involve. The biggest surprise at this launch was the name.
There are some side issues being fought over pre-owned games and Internet connectivity, but at heart supply chain and technical convergence have brought us to roughly where we have to be: two mid-range gaming PCs connected to proprietary app stores, designed for a leanback experience. To quote my colleague Dave Thier:
Both of these consoles still badly need to justify their own existence, and I’m not sure either will be a runaway success. Sony has plenty of time to come back swinging. But what I saw from Sony’s PS4 reveal was more of the same. What I saw from Microsoft was all of that old stuff with a lot more added on top. When it comes down to buying time in the fall, I think we’re going to be looking at two fairly similar consoles, with fairly similar pricing schemes and software lineups.
If watching TV is important to you, Dave adds, then the added TV functionality of the Xbox One may sway you – although Sony will have more to say on TV before the end of the holidays. However, at heart these are not exciting launches because there is not much exciting one can do with the niche both Microsoft and Sony have carved – a loss-making PC which then earns money on licensing fees, and does so by locking in customers to its app store and premium service model. The unexpectedly long cycle time between the last console generation and this console generation has in part been a reflection of this – and it is not surprising that the major console manufacturers and developers are expecting to continue to develop for last-gen consoles for quite some time.
Those lamenting the underwhelming showing of both Sony and Microsoft could perhaps gather a greater sense of event if they consider that this may well be the last major console launch, and the last major head-to-head between devices expected to remain on the market for up to a decade by Microsoft and Sony. In fact, at the end of that decade Microsoft and Sony may well not exist in their current forms.
The second front
In terms of who is “winning” the console war – or rather pre-war – it is probably a wash. However, if initial sales of both are lackluster, Microsoft can comfort itself somewhat, at least, in the knowledge that it has an investment in its own competition – the Windows PC.
(It’s worth mentioning that hardware logistics are iffy. As a producer, Sony and Microsoft both need to balance the reputational risk of running out of stock – along with the risk that a consumer unable to find one console will buy the other in a fit of pique – with the danger of oversupply. It is unlikely that either will find themselves in the position of a THQ – dragged under the waves by the weight of unsold devices.
Nonetheless, in a perverse way, it is better business to sell consoles before but close to the point where a price cut is unavoidable to continue market penetration, because the forces making the price cut possible – evolutionary efficiencies in the production process and incremental cost reduction – make this the point of maximum profitability.)
One of the major downside risks to Microsoft is the specter of the post-PC era. Fundamentally, Microsoft’s fat years came from selling software licenses for boxes under desks and laptops – for the Windows operating system, for Microsoft Office products and for software support contracts. The Xbox was pushed to its currently dominant position in the US console market in part by the spare money generating by selling high-margin software products. Windows, Windows Live, Office and its Server products remain the creators of the mass of its revenues and profits, despite being generally disliked.
The numbers game
Contrariwise, the Entertainment and Devices division, producing a hugely admired and generally liked product, generates relatively little revenue, and smaller profits – its $2.53 billion revenues in Q3 2013 represent anice chunk of change, but less than half of the revenue of Windows, Server or Business, and almost exactly an eighth of its total consolidated revenues of $20.49 billion.
It is big, and important, but Microsoft is not a gaming console company, and it cannot exactly afford to become one – operating income on the Entertainment and Devices division was $342 million. Compare that with the $3.459 billion of the Windows Division. Obviously, there are more factors in play here – Entertainment and Devices is also fighting the long, bloody Windows Phone wars, and only recently sold the distracting MediaRoom set-top box system to Ericsson.
(As soon as that deal was announced, it was clear that the next Xbox was going to push hard on TV, of course.)
The snake in Microsoft’s garden, and one reason the new Xbox is buddying up to the cable box, is that we are using PCs less and less, and finding more and more things we can do with tablets and phones . The kind of hardcore spreadsheet-jockery that Microsoft made its fortune on is becoming progressively more a specialised skill, and one it is hard endlessly to innovate on – ExCel 2011 is recognizably still ExCel in a way that Gears of War is not recognizably Space War. This anxiety is driving much of Microsoft’s strategy – Bing, Windows Phone, the Surface experiment and the tabletization of Windows 8 – a series of experiments the success of which remain entirely uncertain.
If home users find themselves no longer interested in using a Windows machine as a home workhorse, or for their general web browsing and emailing, this raises the question of why they might want a Windows PC at all. To which the answer might be “because the box I previously played games on is about to be replaced by one which is no longer aimed at me, or targeted at my needs”.
Boxes and Windows
Despite real progress on the Mac OS X and Linux platforms (and a proper Steam Box could be a real torpedo beneath the Plimsoll Line of this plan), Windows remains the most promising game in town for desktop gamers. And, as ludicrous processing power becomes more achievable in mid-range components, a perfectly decent gaming PC is not an overly expensive proposition – my colleague Jason Evangelho recently posted a must-read set on building a gaming PC for $750.
Of course, someone who buys one Call of Duty game a year and plays it non-stop is not likely to want to build (or even order) a PC to do it on, or to spend a premium of a couple of hundred dollars to do so. However, for a serious gamer looking for a device that plugs into a TV and provides a high-quality gaming experience, who buys enough games that the licensing premium (and relatively slow discounting) of console games represents a considerable annual expenditure, and who has no interest in a system which tightly integrates motion control or Fantasy Football, the PC becomes a suddenly interesting choice. And the PC, and specifically the PC operating system, is still where Microsoft makes its money. Sony, conversely, is a hardware play in the PC world. It makes the hardware the money-making operating system and retail stores (most notably Steam) sit on.
Microsoft even has an app store selling games on Windows 8, but let’s not go crazy. If there is a downside in this model for the serious gamer, it is that it makes Valve a likely candidate for Microsoft’s next Skype-level acquisition.
Ultimately, which was gamers jump will decide the console war’s next stage. However, Microsoft has the ability to split its offering, intentionally, or not – and even slow Xbox One sales may not be as bad as they seem in that light.
