E3 2009: Who Won? A Tale of Two Disruptions

Jacob Mazel

In part four, Vgchartz looks at how the big three strategic announcements look short term and in the context of the long run.

Check out the case for Microsoft, Sony, and Nintendo before reading Part IV below.

Who "Won" E3 Part IV:  Conclusions

The big three each had great press showings. Nintendo, Sony and Microsoft continue to introduce big new initiatives and compelling new games to satisfy their fan bases. Before delving into how the announcements compared to one another though, we have to look at the development scene.

Developer Challenges

Deciding where to publish your game has become a more challenging proposition than ever before. Most people see Wii, Xbox 360, PS3, PS2, DS, PSP, PC, Zeebo, iPhone and other cell-phones as the major platforms. The reality is, developers see Wii, PS3, 360, Wii Ware, Xbox Live, PSN, Virtual Console, Xbox Live Arcade, PSP Go vs. PSP 1000 to PSP 3000, DSi vs. DS Phat and Lite, Steam, retail PC gaming, Zeebo, iPhone, other cell phones, Macs, and advertising based free to play games as the major platforms. In addition there are MMOs, expansion packs, and downloadable levels and content, not to mention game demos which can be purchased. On Live, ipod touch, Zune and a few other models may complicate this mess even further. Each system then has a different ways of controlling game play. There is not a company in the world that currently supports all of these platforms and control types with a profitable business model. At some point, the number of platforms has to shrink, or the focus on the higher end platforms will prevent large companies from making good games for the lower end more profitable platforms.

With so many choices of where to put digital content, it will take many years for a single digital distribution network to overtake the ‘retail’ based platforms. If we call ‘10% of total software shipped’ in a year the barrier for major exclusive projects in the video game system space, there are currently four relevant platforms in the March 2010 fiscal year – Wii, Xbox 360, PS3 and DS. The breakdown for the year ending March 2010 currently looks like:

Wii – 220m (forecast does not include Wii Sports)

DS – 180m

X360 – 145m* (estimated)

PS3 – 140m

PS2 – 55m

PSP – 45m  

Digital content, compared to the estimated software shipments for the fiscal year listed above, including downloadable levels and features is enormous but far more competitive and spread out between platforms. There are at least a dozen different types of digital content which can be bought for only a specific platform type over the internet. The reason this is relevant is because there are currently two disruptions going on in the videogame industry. Disruption one is completely caused by Nintendo. It is the interface revolution which was initiated as a huge wave by the stylus on the Nintendo DS, expanded onto consoles through music games like Guitar Hero and DDR, spread to the Wii with motion controls via Wii Sports, and soon it will be an essential ingredient of the Xbox 360 and PS3. The second disruption though is digital distribution. Publishers can now make content without physical manufacturing costs (disc production), without stores getting a cut of game revenue, and with less piracy. However, the digital distribution disruption is impacting the gaming industry more evenly, as content can be bought over the internet for cell phones, smart phones, portable game systems, PCs, and home game systems. Digital distribution can be used to expand pc games and some console games purchased in stores, and it can be used to buy games exclusively over the internet for PCs as well.

At the moment, the interaction of these two disruptions is causing unforeseen side effects. A good example is Game Stop. If you are Game Stop, you have to love that the user interface disruption is bringing in tens or hundred of millions of new gamers into the videogame industry. Without that influx of new people, who are largely unaware of the features of their new gaming devices the technophile portion of the gaming audience would probably remain the dominant driver of the video game market, and a company such as Game Stop could have been out of business in five to ten years on rapidly declining revenues as the software market transitioned to online-only. With the new influx of people, such a transition will be much slower as perhaps half of a nation as rich as America still lacks the internet technology to utilize digital distribution on their gaming system but may enjoy a game of Mario Kart Wii.

Disruption Leadership

The companies in control of these disruptions to the business model for gaming control the future of video games. At the moment, the ranking among the major players for influence in the two disruptions goes something like this by sector.

User-Controls

Portables:

Nintendo (DS/DSi)

Apple (Ipod touch/Iphone)

Cell phone companies (cell phones, other smart phones)

Sony (PSP, PSP-Go)

PDA companies

Consoles:

Nintendo Wii – Uses Wii Remote, Balance board, Classic Controller, GC Controller

Sony PS3 – Uses Six Axis, Dual Shock 3, PS2 Controllers, PS Eye, motion tech eventually

Microsoft X360 – Uses 360 controller, camera, natal eventually

All Devices:

DS

Smart Phones/PDAs

Wii

PC

Cellphones

PSP

PS3

360

Nintendo and Apple remain the leaders in interface use among the major players. Since Nintendo focuses exclusively on gaming, it has the most influence on how that disruption will carry out. The announcements of motion control tech for the Xbox 360 and PS3 are to try to come in second place for user interface control on the console side, as Nintendo and Apple already have the two spots locked up for portable devices and will continue to draw in more new people to gaming because of it.

Control on the digital distribution side is more complicated to determine because it is a more even handed disruption. Currently, it probably looks roughly like this by sector.

Digital Distribution

Portables:

Apple (Ipod touch, Iphone)

Other cell phone companies

Sony (PSP Go, PSP)

Nintendo (DSi, DS)

PDA companies

Microsoft (Zune)

Consoles:

Microsoft (X360 content like games, levels, movies, tv shows, subscription based)

Sony (PS3 content like games, levels, movies, music, Home)

Zeebo (All games are digitally distributed for developing markets)

Nintendo (Some Wii owners download games, levels)

PC:

Post-store based purchases (MMO items, expansions, levels, etc)

Steam (game purchases over the internet)

Steam Rivals (game purchases over the internet)

On Live (assuming it releases and works)

Free games paid for by advertising

Companies such as Microsoft, Sony, Apple, Valve, Nintendo and Cellphone companies all want digital distribution to succeed so that they can replace retailers and control the content delivery for their platforms without as much competition. But at the moment, there are too many digital distribution services to support for developers to massively benefit from avoiding the retail market. Until there is something like Steam which is available not only PCs, but Cellphones, videogame consoles, videogame portables, PDAs to function as a unified content delivery system, the impact of digital distribution is going to be slow to impact the overall economics of the videogame industry. It frankly isn’t that hard to imagine Sony or Microsoft jockeying to partner with Steam to provide the content delivery system, so that all games are delivered on a distribution system proven to work for the next console. The companies could even combine their efforts, partnering to make the same box, but maintain exclusive content by forcing users to pay a fee to unlock the capacity to download “exclusive” content which would go to one console manufacturer, and the maker of the exclusive game.

Guessing the Long Term Winner

Based on what we know about the two disruptions which are ongoing, classifying the winners and losers comes down to how the big three are handling the disruptions in the near term and long term.

On the portable front, Nintendo continues to lead the interface revolution. Sony’s PSP Go has lowered the sales threshold for PSP developers to be profitable by embracing digital distribution though. The DS and Iphone could both conceivably end up with over 1 billion legal game purchases, while PSP can conceivably get to 350 million game purchases. Many Iphone games cost $3 or less to make, so even though retail and Nintendo’s licensing fees eat into the DS revenue pie, there is still simply more money to be made for developers supporting the DS than any other single portable platform in the world. Still, when DS finally does slow down to tepid sales Nintendo will probably fully join the digital distribution bandwagon with DS2.

In contrast, developer support for digital distribution on the portables is currently in favor of Apple, then Sony, then Nintendo and other cell phone companies. There just isn’t a whole that can currently be downloaded on DSiware, and the limitations of the DSi hardware probably will insure that its store will not be as successful as the others. So even though retail game support for DS will remain strong, digital distribution game support for PSP and Iphone should stabilize and rise respectively. Nonetheless, since DS is so cheap to develop for compared to even the iPhone and has such a massive base it will continue to see enormous developer support on the retail software side given that 500 or more titles will end up selling over 250,000 units on DS. For PSP, this figure is likely closer to 200 titles, and with development costs similar to Wii and PS2, not all titles to sell 250,000 at retail on PSP may be profitable.

On the home consoles, Microsoft and Sony continue to take incremental steps toward full digital distribution while Nintendo takes baby steps. Nintendo remains light years ahead of the Xbox 360 and PS3 on userface initiatives though, with entire genres on Wii (fitness) that are essentially not possible on the other platforms, or which have been rendered inferior (snowboarding, golf, tennis). Microsoft and Sony have announced their intentions to try to overtake the motion initiatives of the Wii though. Sometime after the start of 2010, both companies will have camera-motion based initiatives for their systems. The new motion tech initiatives will present problems for all three companies.

For Nintendo, some amount of content from third parties that would be third party exclusive will be developed with a multiplatform focus or exclusively for rival system(s). Development of certain genres, say competitive swing dancing for instance may make sense on the Natal interface; just at golf and bowling make more sense on Wii. One other thing to note is that there is no other gaming portable device on the market with two screens, and a touch screen interface. In other words, even limited success for rival motion tech initiatives could stop 10 million or more people from purchasing a Wii, and no such phenomenon has impacted the DS yet which is why it is a shoe in to pass 150 million at this point even though there are going to be over 70 million PSPs sold eventually as well.

For Microsoft, the complete abandonment of the controller is a big risk. It could be huge, or it could flop – hard. There is something to be said for holding a wheel to drive in Mario Kart Wii. Spinning your hands may not have the same impact, and releasing an accessory for ‘feel’ in every game would get awfully expensive quite quickly. If Natal releases in 2010 and doesn’t immediately take off, the Xbox 360 software market will likely end up peaking in the year ending March 2010 (June 2010 going by Microsoft’s fiscal year).

For Sony, the risk is getting caught in the middle. If Wii remains huge and natal flops, then implementing a camera to make PS3 motion games is an unnecessary financial burden on consumers, in the same vein that Blu Ray continues to keep the PS3 price significantly above the Xbox 360 price when most users don't seem to care much about the Blu Ray drive. On the other hand, if natal makes the Wii look primitive and limiting, the wand implemented in the motion tech feature Sony built is also an unnecessary financial burden. It is a bit difficult to imagine Sony’s middle approach beating both extremes, which means Sony is gunning for second place. Unlike Microsoft and Nintendo which will bundle their motion initiatives with cheaper machines, Sony looks like it will force customers to buy their device separately. That means the only real business advantage Sony has with its motion tech (as it has ceded price and approach to Nintendo and Microsoft) is launching ahead of Microsoft.

Until a gaming company dominates digital distribution, or learns how to successfully challenge Nintendo in improving user interfaces, Nintendo is set to remain in the drivers seat and despite some threats in long term posturing, the company remains better positioned than either Sony or Microsoft strategically. 

Short Term Winners

The second half of 2009 looks strong for the big three.

Among announced titles for the Wii, there are nearly 30 titles which should sell over 1m units between July and December. The super hits (2m+) should be New Super Mario Brothers Wii, Wii Sports Resort, EA Sports Active, Mario & Sonic 2010, Wii Fit Plus, Wii Fit, Mario Kart Wii, Your Shape, and Wii Play. Red Steel 2, Shaun White 2, Tiger Woods, Monster Hunter 3, Jillian Michaels 2, Guitar Hero 5, Beatles Rockband, DJ Hero and a few others could also make it.

Of the super hits, several titles also look like 5m+ caliber hits. Wii Sports Resort, Wii Fit Plus can do it for sure. That is at least two. New Super Mario Brothers Wii, Mario & Sonic 2010 could probably hit 5m worldwide in 2009 if they released at the right time. Mario Kart Wii, Wii Fit, and Wii Play may also be able to hit 5m in the second half of 2009.

Going one step further, the Wii also may have two ‘transformative’ hits (10m+) in the second half of 2009, out of the potential 5m unit sellers as Wii Sports Resort and Wii Fit Plus should be able to sell at least half as many units as their predecessors which are amongst the best selling games of all time. New Super Mario Brothers Wii will be huge, but it will release too late in the year to hit 10m in 2009.

For DS the situation is similar. Roughly 15 games have the capacity to sell over 1m units on DS between July and December. There will be at least six super hits (2m+) – Dragon Quest IX, the Pokemon remake, Zelda: Spirit Tracks, Mario & Luigi 3, Mario Kart DS, and New Super Mario Brothers, although Guitar Hero: Modern Hits, Style Savvy, Petz, Mario & Sonic 2010 have at least a shot of hitting 2m as well.

Amongst the super hits, Pokemon, Dragon Quest IX, and Zelda: Spirit Tracks have the potential to hit 5m units by the end of 2009 if they release quickly enough.

For Xbox 360, roughly 20 titles have the capacity to sell over 1m units between July and December. There will be at least five super hits (2m+) – Modern Warfare 2, Halo 3 ODST, Bioshock 2, Assassin’s Creed 2, and Splinter Cell. Madden 2010, Fifa 2009, Forza 3 and Beatles: Rockband may also top 2m for 360.

Amongst the super hits, Assassin’s Creed 2, and Modern Warfare 2 are the Xbox 360 titles with the greatest likelihood of topping 5m units by the end of 2009.

On the PS3, roughly 15 titles have the capacity to sell over 1m units between July and December. There will be at least four super hits (2m+) – Modern Warfare 2, Assassin’s Creed 2, Fifa 2010, and Gran Turismo 5 (supposed to make 2009). Madden 2010 and Uncharted 2, and Final Fantasy XIII also have a slim chance of topping 2m for PS3 by the end of 2009.

Among the super hits, Modern Warfare 2 and Gran Turismo 5 are the PS3 titles with the greatest likelihood of topping 5m units by the end of 2009.

Lastly, the PSP looks like it has about four titles which can sell over 1m units between July and December. There will be at least on super hit (2m+) – Gran Turismo PSP.

With more of the huge (2m+) and massive (5m+) hits continuing to come for Wii and DS then rival systems it is difficult to argue that Nintendo is not the winner of the show from a strategic perspective. Wii Fit Plus, Wii Sports Resort and New Super Mario Brothers can probably total 60 million units of software or more by the time they stop selling, and all three release by the end of 2009.

For Sony and Microsoft many of the biggest titles keep getting pushed back. Final Fantasy XIII, Alan Wake, God of War 3 all release in 2010. Metal Gear Solid: Rising, Crackdown 2, The Last Guardian and other big titles were also pinned for 2010. The biggest exclusives by platform for 2009 are Gran Turismo 5, Gran Turismo PSP, Splinter Cell and New Super Mario Brothers Wii, The Legend of Zelda: Spirit Tracks. Depth is where the issue is though. Because while each company has at least one completely exclusive game which can top 5m units, Nintendo’s platforms have several titles which will top 5m units.

With Super Mario Galaxy 2, Pikmin 3, Metroid, Zelda, and a number of smaller projects in development for 2010 and beyond, there is no reason to believe that Nintendo’s luck is about to change, because it looks like the company can match the major Xbox 360 and PS3 projects for at least another 18 months with internal and farmed out projects for the Wii and DS.

Contact Vgchartz at jmazel@vgchartz.com

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Further Reading

48% of All U.S. PC Games in 2009 Were Digital Downloads

2009 IGF Finalist NightSky Coming To WiiWare

How Big is 2010? A Look at Why 2010 Revenue Will Be Less Than 2009

Xbox Live Arcade Grew by 41% in March When Compared to March 2009