Grumpy Gurevitz: The next generation might be more than just a new set of consoles

Will we be so happy with the dawn of the 'next generation'?

If you stop and think about the videogames market and how it works, it becomes clear that it has not changed too much in terms of its business model. A company creates the hardware and then it releases its own games for the system, which consumers buy. In addition third party firms create games for the system and they have to pay a license to be able to put their game on a format which will play in the console. Consumers then pay for the consoles and the games. A ‘pay as you play at each step of the way’ model.

In recent times this has been coupled with DLC, where you can add more content to your primary purchase through additional purchases. The casual game and MMO sector have both impacted upon the traditional game model, by offering either very cheap games (the store owner acting as the publisher in effect), free to play (but with built in microtransactions – essentially a DLC-only model with no initial purchase), or a subscription based model with no microtransactions. Some MMOs have even tried to offer a mixture, for example DCUO on PC and PS3 offers a range of ways to access content. 2011 even saw Call of Duty attempt to move out of the ‘pay as you go along’ model and offer a subscription based service, called Elite.

Whilst current consoles have been largely 'pay as you play' platforms, Xbox did introduce a yearly fee to access network functionality, whilst Sony created PSN Plus to introduce a content and added value service proposition.

However despite these changes grabbing most of the headlines and being the focus of many podcasts across the gaming media, in the last week or so it has become very clear that the elephant which is about the enter the room is that of subsidised hardware via ongoing contracts with consumers.

Anyone who looks across to the tablet and iPhone market has seen how by leveraging the value in the networks, Apple have been able to make expensive and hard to purchase pieces of technology available to the masses. The hardware is cheap or free, the consumer pays a monthly fee on a contract for 24 months (which includes the network service charges) and then apps are the DLC, which are either free or in a ‘low value and charge as little as possible’ pricing trend. Whilst Apple takes 30% across the board of all app purchases, they were in profit the moment you took the phone or tablet and app revenue is simply icing on the cake for them.

Now it’s been simpler for Apple to take this approach with the networks and their customers, as the purchasing habit of dealing with subsidised hardware with long term contracts existed long before the introduction of the iPhone. Most phones worth owning have a face value of £350-£600 and so it’s been through the use of long term contracts that networks have offered access to the latest model in exchange for a long term commitment to their services. Ironically when older and cheaper phones are on offer networks need to package in additional offers to make the value proposition of a long term commitment still ‘worth it’ in the eyes of the consumer, over a ‘pay as you go’ deal. Hence networks and shops have offered game consoles as part of the deal. The subsidy is buried within the monthly fee and everyone is a winner. Additionally, the networks often used their size to leverage a huge deal with the hardware manufacturers to boost the value proposition of the model to the network’s advantage.

Pay £100, sign a 24 month contract for £30 a month and bingo you've been ripped off! But it's worth it, right?

Due to the ‘must have factor’ of the iPhone and iPad, networks have not had the same type of success when it comes to negotiating a deal on the price of the phone and in addition, they have had to share part of the monthly fee with Apple. Either way, it has allowed networks to get customers to commit to 18-24 month contracts which gives them longer term stability, and has allowed many customers who would never have been able to purchase an iPad or iPhone the ability to get one, and change it every two years.

In parallel to this, we have also seen the growth and success in the development of ‘all you can consume’ network and content services. Cable or satellite firms offer ‘value’ subscriptions which include, phone line rental, broadband, premium TV and in some cases mobile services. This ‘all you can consume for a price’ model is seen as transparent (even though it is not), where the consumer knows exactly what they have to pay and in return get all the benefits.

As the new consoles start to approach, each with their list price of £450-£600, it’s clear that they just will not sell. Not at those prices, in this market and with the competition including everything from the current generation of consoles, to tablets and phones and online services such as OnLive being embedded into smart TVs. Additionally, the old model of selling the console at a loss whilst making the profit on the game purchases is looking shaky at best. We have already established, in previous articles, that we are buying fewer AAA games. So the number of licences the console manufacturer is going to receive will diminish (you can see this with Nintendo software sale data of their 3DS platform where the range of software is much lower than that of the DS generation). Whilst downloadable game purchases are rising, the income derived from those are nowhere near the level where they can start to replace the income that was previously derived from the myriad of boxed titles, which used to be released weekly on the PlayStation or Xbox platforms in years gone by.

Seriously, it would be cheaper to get a bottom of the range phone on the most basic contract, with a Xbox thrown in than do the Microsoft $99 deal. And this way you might actually get one with a hard drive....

The result of this? Microsoft has released a cheap $99 Xbox and Kinect package subsidised with a $15 a month contract. In other news Sony is looking to add tiers to its PS Plus membership. Some tiers might cost as much as $20 a month but offer guaranteed delivery of top AAA titles at the time of launch and built-in access to services such as COD’s Elite and others. It would not take a genius to suggest that Sony might even try to tie such contracts into the launch of a future console, allowing those who cannot afford them to have a way of paying over time, whilst also gaining other added value services.

However, might the console firms do an Apple, and start ‘selling’ the consoles via the cable, satellite and communication firms supplying our broadband? For sure there has been cooperation before, but never a truly subsidised model as currently is the case for top of the line smart phones. Is it so hard to see BT in the UK offering the latest PS4 for free or only £99 if you sign up to their top of the range network package which includes phone, broadband and TV for say £60 a month? Perhaps for £80 if it includes PS Plus too? In return you would have the hardware, and all the content you would ever want to get the most out of the hardware.

So how does this reshape the market? Well publishers would make less, as the hardware manufacturers would in effect promise them a cut of the subscription to include their game or service in the offering. The amount on offer would be guaranteed, but be less per unit than if we had all bought boxed copies. Everyone might end up self publishing or publishing via the console manufacturer. Have you seen the beta for the PlayStation Suite? It’s essentially offering full-blown access and the ability to develop for PSVita and compatible platforms without an all expensive SDK – in other words, Sony is considering moving to the Apple iOS model for the majority of its content with games such as COD, Uncharted and God of War still providing a premium channel.

Cloud based gaming has firmly recast gaming as a service, more than just a hardware owning experience.

In addition it might mean the end of multiple console owning gaming fans. At least initially, as unless you are willing to pay a high non subsidised price for your ‘second’ console you will have to wait until the technology is no longer new and hence affordable on the old ‘pay as you go model’. Of course, if this model is successful it could mean life cycles of consoles shrinking from 6-10 years to 2-4. After all the subsidised model has allowed Apple, Samsung and their competitors to bring out new models yearly. Ironically this pace of change, with new handsets which are more than evolutionary updates, has actually hurt most of the industry. Only Samsung and Apple are really making any money in this space with other firms hurting (Nokia) or treading water (HTC).

Nintendo is normally a 'generation' behind. Perhaps in this case it will be a business model behind, picking up customers who are not yet prepared to make the jump to monthly contracts?

Where would this leave Nintendo? There is nothing stopping Nintendo from joining this new model. However there is an opportunity for them, if Microsoft and Sony adopt this way forward. Indeed Microsoft and Sony might have no choice but to adopt this type of model, as otherwise their expensive solutions will not sell in numbers adequate to reach a critical mass in an acceptable time frame to generate the revenue required to justify the business rationale of developing new consoles. Nintendo, as we know, is going to produce some (hopefully) well integrated and very able technology, but which is not cutting edge. The price to consumers will be anywhere between $200-$300 by all accounts, and within a year would be the lower end of this. Nintendo can make their console the console for those who just cannot afford ongoing subsidies (many people cannot and will not ever be able to afford to be ‘on contract’ however much ‘value’ the contract offers) and the ‘second’ console for those who are tied into a contract. Call it the Amazon Kindle of gaming if you will. The Kindle is the only real tablet to be a success as it’s cheap, tied into a content platform and so has become the tablet for those who are not able to jump onto the Apple bandwagon, or an iPad user’s second tablet for the home.

Microsoft it seems might be planning for this, and so might keep the Xbox 360 available in the shops at a hugely discounted price to try to stop this becoming a successful strategy. However it will be a struggle for them to do this effectively as however good the 360 will be in comparison to the Wii U, the average consumer will consider the Wii U as ‘new’, and the repackaged 360 as old. In addition continuing to sell the 360 could take away purchasers from any new console they release. So it will be a balancing act for them, and new to their business model. Microsoft pulled the original Xbox the moment the 360 came onto the market, and unlike Sony (who still today sell the PS2) have never had a two console marketing plan.

if there was one machine that would have benefited from a low up front cost, but monthly fee which included network bandwidth and PSN Plus content it was the Vita...

Would you be willing to pay a monthly contract to get the latest hardware if it also included either all the content or certainly a large amount (of credible content)? As we move to simultaneous downloadable titles (even Nintendo is going to do this) and possibly streaming games (perhaps starting with less graphically challenging titles – today’s XBLA titles for example) is this shift inevitable?

In two years time will you buying your new console from Sky as part of your new contract?

I think it’s time to start this discussion within the industry, but also with the consumers.

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Written by Steven G

Steven Gurevitz is the CEO of 2002 Studios Media LTD and a founder of gaming accessory company Asiiya. 2002 Studios started off as a music production company, but produces a range of content from videos to videogames. The company specialises in localizing content for global brands. He also owns the Urban Sound Label, a small niche e-label. He is a freelance music tech writer, having co-written the Music Technology Workbook and is a regular contributor and co-owner CriticalGamer.co.uk. He enjoys FPS, Third person 'free world', narrative driven and portable gaming. He is a freelance music tech writer, having co-written the Music Technology Workbook and is a regular contributor to CriticalGamer.co.uk.

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