Consoles are resilient for now, but cloud gaming will create new dynamics and competition

Senior Analyst Matthew Bailey shares insights from Ovum’s latest Game Console Device Forecast - analyzing key trends shaping the future of the home game console market, and assessing the opportunities on offer for telcos, hardware manufacturers, OTT platform owners, game developers, and publishers as the next generation of video gaming emerges and evolves.

Game consoles, and their manufacturers, are on the precipice of significant change

The emergence of new connected devices such as media streamers and smart TVs, the (re)emergence of device-agnostic cloud gaming platforms and technology such as Google's Stadia, and the growth of mobile gaming are threatening their relevance to gamers, software developers, and publishers as well as the broader media and entertainment market.

The game console market is currently at a crossroads: Sony's and Microsoft's eighth-generation consoles are coming to the end of their lifecycle, with replacements expected in 2020. Meanwhile, Nintendo is seeing success with its Switch console, which straddles the line between home and handheld consoles, meaning that it competes with both home consoles and smartphones.

Competition between the three incumbents is also set against the looming threat (or opportunity) of cloud gaming, which will eventually eliminate the need for dedicated consoles and usher in new competition from global tech giants such as Google and Amazon, in addition to other smaller vendors. However, Ovum believes that this will not be the case over the next five years, when console sales and installed bases will remain strong despite declining penetration in some mature markets.

Source: Ovum Game Console Device Forecast Report: 2019-24

Cloud gaming will be the next battleground for manufacturers, tech giants and OTT players as console penetration falls

2013 marked the launch of the current eighth generation of video game consoles, with the release of Microsoft's Xbox One and Sony's PlayStation 4. The latter emerged as the clear leader in terms of sales, nearing the 100 million mark this year. The Nintendo Switch, released in March 2017, further boosted consumer interest in console gaming. According to Ovum's latest game console forecast, there were 260 million consoles in people's homes globally at end-2018. Growth, however, is set to slow down substantially – reaching only 300 million in 2024. The longer-term prospect is less than promising: Ovum predicts that global console hardware unit sales will effectively halve between 2018 and 2030.

Source: Ovum Game Console Device Forecast Report: 2019–24

Faced with a gloomy long-term outlook for consoles, Microsoft, Sony, and – to a lesser extent – Nintendo are making bold moves in cloud gaming. They aim not only to mitigate the looming threat and maintain their market dominance in the traditional gaming segment, but to reach a much wider audience. Sony has offered game streaming as part of its PlayStation Now service since 2014; Microsoft's own xCloud service is expected to launch this October; and Nintendo has dipped its toes in cloud gaming by offering Resident Evil 7: Cloud Version on Switch in Japan in late 2018. However, cloud gaming launches by OTT giants with strong cloud computing infrastructure, such as Google and Amazon, will create new competition.

What should console makers and game developers do next?

Console manufacturers must prepare for a cloud-first, post-console market. This will be easier for Microsoft, with its significant cloud technology and infrastructure. While Sony already runs its own cloud gaming service, it will, along with Nintendo, struggle much more against OTT giants in this area. Manufacturers' biggest strengths are their gaming brands: partnering with other prominent cloud-technology vendors (including Microsoft, as Sony has already done), network operators, and even other smart TV, smartphone, and tablet manufacturers would provide the scale, technology, and brand equity to compete.

Games, meanwhile, should be designed with cloud gaming in mind. Games that rely on "twitch" reflexes, such as competitive online multiplayer first-person shooters, will be more impacted by latency brought in by game streaming, making slower-paced, single-player experiences a better option at this stage. Meanwhile, game progression systems and save states must be designed to withstand server disconnections to avoid frustrating game experiences.

Publishers and developers should also embrace new partnership opportunities. Rethinking how games are sold is going to be essential – cloud gaming’s business model remains a big point of contention/pain point. Cloud gaming also means that tech giants and prominent telcos will become viable partners over the coming years, in addition to the three main console platforms. However, publishers need to account for the economics of the all-you-can-eat nature of any new subscription platforms that emerge.

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