I’ve been wondering about the ultimate future of consoles lately, following my conclusion that I don’t have a good reason to join the next-gen yet. Yes, consoles are still the pinnacle of mass-market consumer games but in this latest generation, some serious cracks have started to appear in the business model, in my view. It’s all to do with the costs and the direction in which the technology of the ‘living room device’ is going.
With the exception of Nintendo, everyone loses money hand over fist on console hardware. Not even counting the research and development costs, on a purely production basis both Microsoft and Sony are burning handfuls of dollar bills every single time one of their machines flies (or in the case of Sony, crawls) off the shelves. The accepted model is that by keeping white-knuckle control of what gets published, they get to make their money back by skimming a cut from software sales (and, I’m guessing, accessories which always seem to be outrageously priced for what they are). It’s an established idea that’s been going for many years, but it does very much depend on your audience buying a lot of your games, and for your console in particular. Exclusives are the order of the day; without exclusives the punter is going to decide which machine to buy based mostly on price, perceived quality, or just brand loyalty. Although in the latter case you have to put up with the kind of people who say ‘.. is the suXX0r’ or ‘FTW’ all the time, which may lead you to wonder why you’d want them hanging around you anyway.
But exclusives is also where the problems start. Next-gen (or should I now say current-gen) games cost an absolutely staggering amount of money to make, and 3rd party publishers often can’t afford to take the risk on a single platform. That’s why when you walk into a shop today, you’ll see more of the same games on both the 360 and PS3 shelves than ever before in the history of a console duke-out. The multi-platform to exclusives ratio has been eroding for some time, but I’m sure I’m not the only one who’s been looking at the shelves, not seeing very much difference between the platforms and thus wondering what the point of having 2 next-gen machines is. If the result is that more people buy the cheapest console, because most of the games are available on both anyway, that pushes the hardware margins even more into the red. All of a sudden it matters much less which console you own. Only Nintendo hardware actually seems to have a large amount of exclusive content, through a combination of novel input (on both DS and Wii) and cheaper production costs, which might not be repeatable in another generation.
So what happens in the generation after this? Surely this trend can’t continue – for software developers as projects get longer and more expensive, exclusivity seems much more of a liability than anything else – increasingly exclusives are the domain of wholely-owned subsidiaries like Bungee and Lionhead, and 3rd parties are increasingly offering exclusivity only for a period of time, not forever. And even developing for multiple platforms is expensive, plus you have a console manufacturer creaming a sizeable amount off the returns from your hard work. As the devices become more homogenised, why should they continue to do it?
Something else is happening in the living room too. While the consoles are trying to become more like home media hubs, with movie and music playing, internet browsing etc, the humble PC-a-like has also entered the same space, with Windows Media Centre, Apple TV, PVRs abound. The two types of machine are converging on each other in the living room, with consoles coming from one direction, the PCs from the other – the games consoles have to do media & general purpose device work better, and the PCs have to do games better, particularly standardisation of hardware & software components. But with efforts like Dx10 looking to standardise minimum PC hardware and MS pushing the ‘Games for Windows’ standardisation, it might just happen.
Regardless of whether the PC manages to sort its own living room problems out, is it really in many people’s interests for there to be several competing, proprietary, isolated machines as the future of the living room? Who exactly is winning from that arrangement? Perhaps the boom & bust nature of the games industry is in part down to the lack of a single inexpensive living room device, like a DVD player, which every consumer can own and know what they buy will work on it, and every developer / publisher can target openly and inexpensively? In 5 years time, the bare minimum PC spec will be easily in excess of today’s PS3, and may even exceed the rumoured PS4 (unlike some previous console generations, the consoles of this generation were technically behind the leading PCs when they were released) – what will be the argument for owning a closed system when an open one is indistinguishable in terms of features and surface quality? Only content exclusives again – and I seriously wonder whether there will be many of those left.
I honestly think that this generation may see the last of the console wars as we know them. The value statement for consumers for owning a particular brand has been eroded this time (barring the Wii which has managed to etch it’s own identity out), and I seriously wonder whether it will survive another round. Mass-market consumers don’t want a brand war – it works in clothing, or Pepsi and Coke where the items are self-contained and inexpensive. But expensive devices dependent on the provision of expensive media that sits in isolated silos of compatibility – that fragmentation is just a barrier to greater volumes of sales in practice. Can the games industry (and by that I’m mostly referring to the content creators, not the console makers – they are after all the ones that make what the consumer actually experiences), with it’s soaring costs, really cope with that? I’m not sure it can.
Maybe it’ll take another generation to shake out, but I think eventually there’s going to have to be a standard format for games just like there is for every other type of home entertainment (CD, DVD – and yes one of Blu-ray / HD-DVD is either going to have to win or the difference will have to become pointless, as with multi-format players). Then the content developers can make money from a greater homogenised base of people and keep more of the profits themselves, and hardware manufacturers can just make hardware instead of subsidising themselves through other people’s content. It won’t be a PC as we know it now surely, but I think it’s more likely to be the father (or grandfather) of the eventual standard device than any of the consoles – if only because once you take everything else out of the equation – the hardware specs, the gimmicks, the brands – it’s actually the content creators that really matter. It’s the content creators that bring the punters in and do the real selling, not a device manufacturer in their ivory tower. An open device puts the content creator in charge, and all other home media centres are far more open than consoles – and with the internet generation and (wince) Web 2.0 where ‘everyone is a creator’, a closed platform where all and sundry are charged for the right to be creative (or at the least, have strict controls over it) is already looking pretty antiquated as a concept. IMO it all adds up to the eventual death knell of the console business model as we know it.
Let the debate commence. 
May 21st, 2007 at 6:27 pm
Interesting thoughts and pretty much what I believe apart from the Blu-ray / HD-DVD argument. I doubt either will ‘win’ and instead we’ll see them eventually collaborating on a single format with a new name when they finally realise 100% licence fee on current sales isn’t as good as 50% licence fee on what the market would be with a single format which would see sales more than double.
[)amien
May 21st, 2007 at 9:04 pm
My personal “next-gen” console of choice is my NDS. Games are comparatively inexpensive, fun, and available wherever I want. It is by far my most often used gaming system, way ahead of PC/GameCube/PS2.
There is the right combination of different genres available (yes, even in Europe now ^^)
Playing games since C64/Master System times, graphics are getting old, independent of what new techniques are being invented. It matters less and less over time to me.
Your reasoning makes sense to me though and it might very well come to this. Question is, whether I like it.
Actually I feel quite content with the current market structure. High hardware price and limited, mostly embarrassing macho game availability prevents me effectively from caring about current next-gen and I can fully appreciate my NDS without getting green at others. 
With a standard gaming system, my main fear is that we get standard gaming games. Just like all the new Hollywood movies, you don’t really have to watch, you get the games you don’t really need to play. I don’t know to what degree diversification pays on it, so far it does to a degree in that it sells the hardware a vendor can sell their own games on. If you can sell off enough games to make adolescent boys acting out their puberty delusions, is there a need to produce something else?
Can a vendor like Nintendo life there? Nintendo doesn’t do many of their best selling games themself, but instead have (more or less independent) contractors like Intelligent Systems to develop games for their franchise.
Anyway, it will be exciting to see how this current (creative) mess develops. Today all I need is my NDS and the occasional round of Singstar and I’m happy, who needs a stupid plastic guitar anyway…
May 22nd, 2007 at 2:30 am
Key word, Steve, piracy. No doubt the PC will always be ahead of the console curve, they’re already ahead graphically, once we start having 8 cores it’ll be a joke really. 16-32 cores will bring us really close to true VR. But the PC will always be open to piracy, there simply is no amount of lockdown that can stop that. Even if super DRM is invented (similar to the Cell hypervisor, with keys that a software industry conglomerate only has access to), it will be cracked simply because the PC has a bigger market than consoles, and is much more accessable. It’s one thing to tear apart a PS3 and try to get low level hypervisor access, $500 a hit per attempt. PCs would reduce that to $50, $100, probably less.
I think open source hardware will change this though. And I think as open source tools continue to improve we’re going to be looking at a drastically different arena when it comes to content creation. But that is a ways out. Maybe 2-3 more generations. The PC will definitely push all of it no matter what.
May 22nd, 2007 at 8:42 am
@Damien: I can’t really see Sony playing nice with anyone else on this, I think the most likely outcome is that multi-format players will make it irrelevant in the same way that CDR+/- doesn’t matter anymore.
@haffax: I actually think an open platform will help counter the ‘Hollywood effect’. Lower the barrier to entry and have a greater, more diverse market and you’ve got potential for a much wider range of content. 360 and PS3 are unashameadly aimed at the same male 18-30 year old range which is why the games are like they are, because no everyday Joe is going to pay 300-400 quid plus 60 quid a game (RRP). Yeah things like XBLA help but the control exercised over it and the devkits is still far too extreme to really diversify. What we need is for it to be possible for a bunch of people on a limited budget to go and make the gaming equivalent of ‘Evil Dead’, because the tools are there, niche distribution channels are easily available, and large numbers of people are potentially targettable. I don’t think the current console system can deliver on that.
@Josh Cryer: The fear of piracy is just a poor excuse. They’re only scared of it because the console manufacturers are so damn dependent of ekeing every single cent out of the software business because the hardware business model is fundamentally broken. If that argument stood, the CD and DVD businesses would not have worked because everyone would be pirating. But newsflash – in actual fact when you take a large number of consumers, only a small percentage of them actually pirate things – most of your audience just go out and buy them – provided the price isn’t extortionate. Games aren’t helping themselves with their outrageous prices compared to other content. They’re stuck in a vicious circle of small audience numbers (relative to other media) caused by limited content and expensive hardware at the next gen level, which causes high prices and a lack of risk taking, thus a narrow audience. Rinse, and repeat. That cycle needs to be broken. Nintendo is trying, and are succeeding in some ways although I think if you took the same idea (concentrate on inexpensive, fun and invention) and put it on an open platform the effect would be multiplied.
May 22nd, 2007 at 11:33 am
A very interesting article, although I do not agree with all the points that you have made.
I honestly do not think that there will be a standard format for games in the future (as there is for CD and DVD), the reason for this is corporate greed. While, as you say it is the content makers that really matter (and I agree with you there), it is not them that are in charge of the gaming community. Each console manufacturer wants the biggest piece of the pie and I cannot honestly imagine the likes of Sony, Microsoft and Nintendo all sitting around a table agreeing on a unified hardware spec. As companies they are each coming from very different places and each has very different agendas, but more importantly, they each want to make as much money as possible and the best way to do that is to dominate the console marketplace.
I also cannot imagine the PC emerging from the dust as a dominant standard format for gaming. The perception that most non-techi people have of the PC is that it is complex, and rightly so. When it comes down to games, people just want to put a disk in a machine and play the damn thing and not worry about patches, compatibility and updates. Also, with PC’s, as they are effective a collection of various parts, and as such there will always be faster processors, better graphics cards and various other upgrades which will muddy any standard format for games.
As much as I would honestly like to see a standard format for games, I do not see this emerging the next generation, if ever at all. In the past, there have been dominant consoles (NES, SNES, Playstation and Playstation 2), but never have they completely muscled out the competition. Even in the handheld arena, where Nintendo have pretty much dominated since the very idea of handheld consoles came into fruition, there have always been other consoles trying to gain a foothold.
What is interesting this generation, is that I do not see any dominate “victor†of the console wars emerging. This could be the first time that there will be a three way tie. As a result, I think Sony will be burned by the experience in the same way that Nintendo was after the SNES, however, I do not think that they will leave the race. Maybe both Sony and Microsoft will look to Nintendo for inspiration and not create the next generation systems at such a huge loss and concentrate less on a spec war and more on what else they can bring to the table.
I’m aware that I’ve been babbling, but to summarise… Standard format? Not likely. Continuing format wars? Almost definitely.
Oh by the way… Nintendo FTW (Just to irritate you)
May 22nd, 2007 at 12:20 pm
I definitely agree that the PC as it exists now isn’t good enough as a living room gaming machine because of the variations, but that doesn’t mean a non-closed system that is standardised couldn’t work – it has in every other area of consumer electronics, once the tech has levelled off (which consoles are now doing). My issue with the current console state of affairs is that success is predicated on being the ‘winner’ – hence why the XBox project has just haemmorraged bucketloads of money for years despite looking successful on the outside. MS expects to make their money back by being the dominant console player, as does Sony, and a 3-way split is likely to be pretty bad news for both of them.
Manufacturers may want to control things, but the amount of cross-platform titles mandated by soaring production costs suggests that control is an illusion now. It worked in previous generations because the cost model made more exclusives practical. That’s why I don’t think history is necessarily a good guide here. In the end the corporations can be as greedy as they like, but if the punters can’t tell much difference between the brands it just turns into a price war, which isn’t compatible with the business model they’re in (which is based on being able to charge a premium because of your lock-in). Nintendo is only doing well because they’re cheaper and have a unique angle, to a regular consumer I bet the only difference between the PS3 and 360 is the price tag.
I personally think if both MS and Sony get burned by a diluted audience in this generation, they’ll both have a really hard time convincing investors that making a new proporietary console is worth the investment. Maybe they’ll just scale back a bit on how ambitious they are (like the Wii did), but then there’s the fact that the arcade industry basically died because it lost its edge. If my Apple/MS based home media centre can do the same stuff (assuming the standardisation / plug&play issues are sorted, and they’re getting there, especially on Apple), why would I need a console too?
And let’s not forget, it’s not that long ago that the console business wasn’t in charge, at least in Europe. The Spectrum, C64, Amiga, Atari ST did very well as standardised non-closed (in terms of development & publishing) platforms in the 80′s, and I don’t see why that couldn’t happen again, given the right device.
May 22nd, 2007 at 3:24 pm
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May 22nd, 2007 at 7:18 pm
We’ll see I guess.
I don’t think consoles are going to go away – I think they’ll just get closer to acting like PCs in the ability for developers to create content for them. For example, if you took XNA and expanded it so that any user could download XNA games, for free or for money, and have less restrictions on how programmers could develop for it (use C++ instead of C#), then you’d have a platform where it was open enough that you’d see more people programming for it. Also, if you sold your software/game then it could be through a proprietary marketplace (Xbox Live Marketplace or Sony’s Playstation Network), where the platform holder gets a cut of the profits.
I believe this is the direction consoles are heading.
I don’t think we’re going to see a completely open platform like the PC take over the livingroom for a gaming platform. Piracy is too rampant. You might say that’s not a valid answer, a cop out, but it’s the truth. I also doubt there’ll be a single unified platform. I wish there was, but I don’t see it happening.
If anything I see more major players joining the fray, such as Apple.
You’re right about exclusives of course. It’s pretty much the platform owner’s first party developers that are going to be developing exclusive content from now on.
By the way, Microsoft may be losing money hand over fist, but that’s always been part of the long term plan even when the first Xbox came out. I can find you articles where they’ve said immediately after the first Xbox launched that they will lose money on the first generation Xbox, break even on the second generation (and grab as much market share as possible), and make money for the third generation Xbox.
Like I said, we’ll see
May 22nd, 2007 at 7:24 pm
There is already a company banking on an open standard for cell phones. They are offering a completely open-source kernel and apps as well as hardware! The goal is to allow a market like what Steve describes where hardware and software are completely independant and you can mix and match then as you see fit! Check it out at OpenMoko.org. This should make for an interesting preview of what may happen with gaming consoles! Hopefully this will take off!
May 23rd, 2007 at 8:47 am
Yeah, I know MS planned for the money loss, but they’re assuming they’ll make money on the XBox 3 by being the ‘winner’. Time will tell whether that’s actually the case.
I don’t really buy the XNA / PSN model. In practice who can sell games is heavily restricted, and has to be because the platform holder has to have their finger in the pie. XNA can only sell to people who subscribe, which I reckon is going to exclude the majority (it will mostly be a developer swapping service I think), and only a minority get to have more open devkits and sell to the general public, because MS are (understandably) worried about flooding the channel with too many potentially rubbish games (although actually XBLA has been a bit thin on the ground for original content). Really it needs to be completely open but that’s not really compatible with the model they’re following. Now, if they allowed 3rd-party affiliate sites which could carry any content, that would be something, but I can’t see it happening. I just think the amount of control required of the console model is actually stifling content creation to some degree, and a more open model may give the consumer more of what they want. Or rather, give more consumers something of what they want, which is the same thing in numbers terms.
In the PC space there are lots of people making bucketloads of money ‘off the retail radar’, like Runescape – this is impossible in the console model. They’re trying to make the online service model work, but the more open PC device already has it going on – it’s a demonstration that if you have an open platform that most people own, relatively modest development costs can capture a significant minority audience and be completely viable. Just like the movie induistry, which the games industry is always trying to emulate and yet almost never gets beyond mimicking the summer blockbuster, both in terms of relative cost and target audience. All media has to have a way to target niche audiences on a modest budget to be diverse, and thus to mature. Nintendo have addressed that to some degree although the DS and Wii still don’t come even close to PC / DVD player market penetration.
May 23rd, 2007 at 3:45 pm
“…has to be because the platform holder has to have their finger in the pie. XNA can only sell to people who subscribe”
That’s the current situation, but if they open it up to anyone, and allow developers to push games onto the network and sell them then they still have a finger on the pie right? MS has stated in their XNA goals that they want to open up the content delivery to everyone. I assume the only way they’d do that is if they also had a way to make money from it.
“Really it needs to be completely open but that’s not really compatible with the model they’re following.”
It doesn’t need to be completely open – it just needs to be open enough that there is a low barrier to entry for developers. If you have to use their marketplace that’s not such a bad thing, for example. And just making it so any sales you make give them a percentage of the pie does follow with their business model.
May 23rd, 2007 at 3:56 pm
They’ve stated that as a goal, but they also justify the extremely rigourous XBLA certification process by saying they don’t want the channel flooded (which is understandable). I’m not sure how you square those 2 positions without having multiple sites (or at least sub-sites) which have a specific focus – which is exactly how the Internet works, ie open
If you tried to shove all the gaming communities on the net into one site it would be kinda busy. Maybe they’ll keep XBLA as the certified area and create a separate community area, which will only work if it’s easily categorised / searchable, but I’m not sure it works as well as having self-managing special interest communities. We’ll see I guess.
May 24th, 2007 at 1:24 pm
My guess with XNA is that MS will open up another channel on XBLM through the Creators Club that will allow for XNA certified demo games to be downloaded freely by gold membership XBL accounts. These demo style games will most likely have feature restrictions(multiplayer limits, game size, etc) and you will have to pay to get the full games. Also full games will probably have restrictions as well in terms of online multi-player support where game server hosting is needed. This will be a higher level service for XNA game makers that will obviously cost more money and require higher levels of certification. MS will dictate fees like any game publisher would and they’ll sit back and rake in the bucks on every purchased Creators Club game.
May 25th, 2007 at 2:09 am
I agree, Sony and Microsoft aren’t unaware of Nintendo’s success. For sometime now the are probably thinking ‘what did we do wrong?’ and planning how to beat Nintendo in the next gen console.
Only the future can tell.
May 27th, 2007 at 1:25 am
You’re actually incorrect about console losses, at least on one point. Microsoft has been making money on the 360 for some time now. About $75 IIRC. The bill of materials has gone down since they launched.
The Wii has been profitable since launch of course, and the PS3, well, good luck with that Sony.
May 27th, 2007 at 2:13 pm
Well, as from around November last year, the 360 cost around 40% less to make so we were told, and the word was that the manufacturing cost on the Premium was $75 under the RRP. However MS doesn’t get the RRP obviously (damn those retailers), plus you have distribution, marketing etc etc. If they’re lucky they’re breaking even on the Premium now, although it’s unlikely they are on the Standard. Even with the cost cuts the hardware is still a poor revenue source, it’s just a vehicle for the software revenue.