Not Just a Game: New Consoles Shift the Video Games Industry s Focus

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December 2013  1

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December 2013

Not Just a Game: New Consoles Shift the Video Games Industry’s Focus By James Crompton

With the release of new consoles from Microsoft and Sony, the Video Games industry reaches beyond traditional borders Industry operators are showcasing gaming’s interactive aspects to win consumers’ dollars

Video games have become more popular and more accessible than ever before, and this holiday season, consumers of all demographics face a difficult choice: To purchase Sony’s PlayStation 4 or Microsoft’s Xbox One. Whether a consumer is an avid gamer or a casual user who occasionally indulges in the virtual experiences video games provide, this is a big decision. With timely releases, Microsoft’s and Sony’s new offerings are poised to become two of the most popular holiday purchases this year. While the Video Games industry evolved from humble beginnings, in 2013, gaming consoles are providing

more than just an escape from reality. Not only do consoles provide web browsing capabilities, the ability to watch a movie via Amazon or Netflix and rent or purchase items directly on the console, but they have also increasingly become social devices. The social aspect of gaming has grown alongside that of mobile devices and social media platforms, and it is now a prominent feature of gaming consoles. Console rollouts In 2013, the Video Games industry is expected to generate a total of $38.2 billion in revenue. It has been nearly a

Products and services segmentation (2013)

8.8%

Accessories

17.2%

Online games and software

41.4%

Physical games and software

Total $38.2bn

32.6% Consoles

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New Consoles Shift the Video Games Industry’s Focus

decade since any major player released a new console, which is a contributing factor in the industry’s revenue decline of 1.9% over the five years to 2013. The new PlayStation 4 and Xbox One are expected to help drive industry revenue back up in the five years to 2018. In the first 24 hours of their availability for purchase, both the PlayStation 4 and Xbox One sold more than 1.0 million units, making both releases the most successful ever for their respective manufacturers. IBISWorld forecasts the Video Games industry’s revenue to grow at an average annual rate of 4.0% over the next five years. Typically, gaming consoles have very low margins due to significant hardware and technology costs. For example, TechInsights, an intellectual property consulting company, estimates that the component parts of a PlayStation 4, which retails at $399.0, are $332.0. These costs, however, do not include the distribution and marketing for the device. While a console’s profit margin may be low initially, once a console is well established in the market, companies need to spend less on marketing the device. Sony released the PlayStation 3 in November 2007, and over time, the device became cheaper to manufacturing as the price of component parts declined

and less marketing expenditure was required. As such, video game console manufacturers look to maximize the time that consoles are relevant to eventually turn pricey rollouts into profitable ventures. Driving revenue with much more than games Per capita disposable income is a driving force behind the Video Games industry’s revenue. In the five years to 2013, per capita disposable income decreased at an annualized rate of 0.2%. While this factor dragged down video game revenue during this period, another factor that influenced the revenue decline was that fewer consoles were being sold as consumers anxiously waited for new consoles to hit the market. Consoles are expensive to purchase, but gamers nonetheless allocate income to purchasing the latest technology. As such, by the end of the year, Sony expects to sell 5.0 million PlayStation 4 consoles. The amount of time consumers spend on leisure activities also influences the Video Games industry. While the amount of leisure time is expected to remain relatively steady in the five years to 2018, new gaming consoles are likely to prompt consumers to spend Per capita disposable income

Time spent on leisure and sports

4 2

5.2

% change

Hours per day

5.3

5.1

5.0

Year 04

0 −2

06

08

10

12

14

16

18

−4

Year

06

08

10

12

14

16

18

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New Consoles Shift the Video Games Industry’s Focus

additional hours immersing themselves in these new virtual experiences. Furthermore, IBISWorld expects that consumers will spend more time streaming movies and video content to their consoles. PricewaterhouseCoopers conducted a survey on the amount of time consumers spend on streaming videos on their consoles, and the survey found that more than 70.0% of respondents that use consoles as their primary video game platform spend between one and seven hours, and some even more, on non-gaming related activities. This factor impacts the Television Broadcasting industry because more consumers are opting to pay lower monthly fees for streaming services, such as Netflix, rather than television cable packages. Moving forward, IBISWorld forecasts that this trend will continue as consumers are increasingly able to choose the content they consume. As such, the trend of marginal revenue growth for the Television Broadcasting industry is projected to carry over into the next five years at an annualized rate of 1.7%. Digital delivery Video game console developers are increasingly using digital platforms to distribute their content. Sony’s PlayStation Network and Microsoft’s Xbox Live enable consumers to digitally purchase game content from the comfort of their homes. To streamline this process, Sony and Microsoft collect billing information from consumers and store this information on consumers’ unique accounts. In allowing consumers to buy new games and content directly on their consoles, console manufacturers must ensure that their security and database software is robust. In April 2011, Sony’s PlayStation Network experienced a cyber-attack in which about 77.0 million accounts were

compromised. One of the largest data breaches in history, this attack exposed a great downside to digital content delivery: The vulnerability of consumer data. On one hand, digital delivery minimizes manufacturing and distribution costs for game publishers, and on the other, it consolidates the billing information of millions of consumers. Nevertheless, this trade-off between low-cost distribution and additional security measures is expected to be worthwhile for game developers moving forward. IBISWorld anticipates that the Security Software Publishing industry will increasingly work with game companies to develop robust firewall and security systems to prevent consumer data from being compromised. This factor will contribute to the Security Software Publishing industry’s expected annualized revenue growth of 2.5% in the five years to 2018. In response to the increasing trend of digital distribution, game retailers, such as GameStop, have increasingly relied on secondary sales of used games and game console accessories to drive revenue. When a video game is first sold, the majority of the proceeds go to the game developer and the console manufacturer. However, when a consumer trades in a used game and the retailer resells that game, the retailer keeps the proceeds. Microsoft, in an attempt to capture some of this lost revenue, initially planned to restrict the resale and even lending of Xbox One games. Digital rights management (DRM) is essential in video game publishing, as it prevents the illicit copying and distribution of game software. However, when Microsoft announced this plan, alongside a requirement that all game consoles “check-in” online on a daily basis, consumers were outraged. Microsoft eventually reversed these plans in response to consumer backlash.

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New Consoles Shift the Video Games Industry’s Focus

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Bringing people together Another shift in the Video Games industry has been the increasing emphasis on the social aspects of gaming. The proliferation of mobile devices, including smartphones and tablets, has encouraged social media developers to shift their focus to games. However, rather than requiring an expensive console, social media gaming costs gamers no more than a few dollars per game. Games such as Words with Friends and Scramble allow users to directly interact with their friends or acquaintances on their cell phone or tablet. Furthermore, consoles are taking note of the social benefits of gaming. The PlayStation 4 controller includes a “share” button that allows gamers to upload videos of their virtual endeavors to Facebook or to Twitch, a video game streaming website that has hundreds of thousands of monthly visitors. By connecting gamers together, the new wave of video games is becoming increasingly immersive for users. While computer games are still relatively solitary activities, console games enable multiple players to compete on the same console, and the new and improved console hardware makes watching video games comparable to films or TV shows. Immersing consumers in game systems is expected to remain a primary focus in the industry moving forward. Xbox One’s Kinect allows users to speak commands to the system, and a camera attached to the system allows users’ motions to be translated to digital environments, creating an increasingly virtual and interactive experience for gamers. PlayStation 4 uses similar technology, and IBISWorld forecasts that new

capabilities like these will continue to be developed. Additional investment in analytic software and hardware is expected to follow gaming trends, as consoles must compete against the new wave of social media games on mobile devices. By creating a fully immersive experience for gamers, console developers are expected to entice younger gamers to begin playing on consoles. According to the Entertainment Software Association, the average game player is 30 years old and has been gaming for 13 years. Consumers that have grown up with video games are well aware of the various choices available, but younger generations are expected focus more on portable gaming via social networking services. In the five years to 2018, console developers are expected to bolster their efforts to emphasize the experience of console games over mobile social games. While social network game development has exploded into the gaming world, with revenue growing at an astounding rate of 183.1% annually on average to $6.0 billion in the five years to 2013, this growth is expected to taper off in the coming years. IBISWorld projects that this industry will grow at an annualized rate of 16.9% over the five years to 2018. Video game developers have opportunities to tap into social networks, but ultimately, IBISWorld expects that traditional gaming platforms will continue to compete effectively in the five years to 2018. As DRM and security improves, digital content distribution, whether in the form of streaming entertainment content or updating games, is expected to play a vital role in the Video Games industry moving forward.

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