The theme of this year’s E3 gaming expo is that publishers and developers finally know how to harness the power of the three big consoles — Nintendo’s Wii, Microsoft’s Xbox 360, and Sony’s PS3 — and the upcoming slate of games will be the most technically ambitious, polished video games ever. Of course, just as everyone’s getting comfortable with the consoles of the current generation, next generation consoles are right around the corner.
Colin Sebastian of Lazard Capital Markets says “both Sony and Microsoft have new platforms in development.” So it’s a done deal, right?
It’s a classic game theory problem called a prisoner’s dilemma: Everyone’s better off by keeping the current generation going as long as possible, but one company can try to stake out a strategic advantage by moving first. However, for the first time in gaming’s modern era (after the Atari crash), there appears to be no driving force for any of the “prisoners” to push forward to the next generation of video game consoles any time soon.
It is in the interest of all three console makers — Nintendo, Sony, and Microsoft — to keep this generation going as long as possible. Nintendo’s (NTDOY) printing money, Microsoft (MSFT) has worked out their manufacturing issues, and Sony’s (SNE) finally been able to reduce costs on the PlayStation 3 where they’re finally not taking a massive bath on every console sold.
Traditionally, the last-place finisher in a particular console generation aims to be the first out of the gate in the next one. However, there’s no major reason for Sony to try to move the goalposts on Microsoft and Nintendo. Unlike the jump from the PS one (compact discs) to the PlayStation 2 (DVDs) and the jump from the PS2 to the PlayStation 3 (Blu-ray), there is no new larger storage medium to jump to. Sony’s thinking was that the inclusion of Blu-ray in the PS3 would allow Sony to hold off Microsoft’s 360, just as the PS2’s DVD player helped depress demand for Sega’s Dreamcast, which sported a GD-ROM (essentially, a higher capacity compact disc) drive.
For the PlayStation 3, built-in Blu-ray and hard drives in all models still remain significant differentiators. Microsoft tried to counter the PS3’s Blu-ray with a software-powered external HD-DVD drive and the lack of a hard drive on all 360 models continues to result in developer grumbling. The PS3 has no problem pushing 1080p visuals at a smooth 60 frames a second — the standard for the best HDTVs. Manufacturing costs will only continue to fall, and Sony maintains its advantage in technical specs. A new console generation increases development and manufacturing costs, and developers would have to learn to code for a new platform — the issue that resulted in many third party Xbox 360 exclusives in the PS3’s formative years. Sony doesn’t want to end up in that situation again.
However, Microsoft looks to be in no hurry to introduce a new console that has Blu-ray, and why would they? The 360 has managed to outsell the PS3 worldwide without it, despite Microsoft’s failure to penetrate the Japanese market in any meaningful way. The fees from Xbox Live Gold subscriptions are a significant, and high margin, recurring revenue stream, and would be in jeopardy in the move to a new console generation.
Nintendo has taken a different path with the Wii: They’ve ceded technical superiority to the other guys and went for a user-experience superiority. They blazed a new path with the DS’s touch controls and chose to continue to cede technical superiority for a new user experience and a broad effort to go after the “blue ocean” by bringing non-gamers into the fold. But there’s no guarantee that these new Wii owners would upgrade to a new platform; Nintendo may have to re-sell these new gamers and if HD graphics didn’t matter the first time, why would they matter the second?
According to Lazard’s Sebastian, even though both Sony and Microsoft have spent some development dollars on next-generation consoles, “neither one is enthusiastic about launching a new platform.” Nintendo has already talked about “refreshing” the Wii, specifically speaking about high definition and online services, characterised by Sebastian as a kind of “Wii plus.” Sebastian says that the “natural lives of the consoles would be through 2012 or 2013.” That would be a seven-year console cycle, which would be the longest in history.
Now, one company may still try to sell out the other two prisoners and kick off a new console generation for their own benefit. Nintendo might decide it has to press its advantage now, as demand no longer outstrips supply for the Wii and they feel that they can continue to use their goodwill to make new inroads into casual and family gaming. Perhaps real gesture control — controllers with motion sensors, like the Wii’s — for Microsoft and Sony can’t come on the current 360 and PS3 platforms and would require new processing hardware. Someone may see the potential dollar signs and decide to commit to digital distribution and cut out the retailer channels to control the pipe to the box.
But game theory analysis of everyone’s incentives says this game ain’t over yet, not by a longshot.
Sachin Agarwal is the President and CEO of Dawdle.com, an online marketplace for gamers to buy and sell new and used video games, systems, and accessories with other gamers online. Sachin is covering E3 Expo 2009 for The Business Insider.
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