Xbox and Playstation are potentially doomed

Initial warning: let’s read the title again. It has the word POTENTIALLY in it. Why? Because economics isn’t an exact science (or if you’re an exact scientist, not even a science at all) and there are always some factors that throw off your conclusion. Despite this flaw, statements about the economy can be made by using the concept of probability. Major influencing factors can be distinguished and used to come to highly probable conclusions. For example, recent research has shown that market analysts have an average probability chance of around 50% (mister Micheal “Mistake” Pachter doesn’t even reach 25%). Behaviorlogists reach up to 80-85% and so forth. What the probability for this analysis will be, I cannot tell (I assume high, off course :p). Coming to high probability is then also a matter of collecting enough data and throwing this inside some well-defined and refined fundamental analytic technology/method.

Why are Xbox and Playstation potentially doomed? Depends on how you’re reading the question. You could be wondering why I don’t say Microsoft and Sony are doomed for example. The reason for that is simple, without they’re gaming divisions, both companies would be (more) profitable the last 3-4 years. But let me first explain the set-up for this series of articles.

These series of articles will be about the high chance that there won’t be a successor for the Xbox360 or PS3 and the major factors involved. Why do this? Because the actual professional market analysts have been collectivly refusing to do proper analysis for the last years. Because of the large number of major factors involved, explaining everything in one blog-post would be very arduous. So I plan to split it up according to factors. For my own and potential reader’s convenience, these factors will described in a chronological/historical manner. I will first be reaching into the past, the near-past, the present and finally the near-future. Fire up your DeLoreans and hitch rides with a strange fellow called the Doctor, we’re going way back. The late 70’s early 80’s actually… to show you the dangers of a console manufacturer being a division inside a far larger company.

With the development of the Atari VCS (or the Atari 2600) Nolan Bushnell stood at a crossroads for his company Atari. Because developing, producing and distributing this product would be large financial burden, Bushnell sought out new financial sources. He had several options:  from contacting his last investor, a large loan, making the company go public or selling it to a much larger company. Finally the last option was chosen and out of a number of options, Warner Communications was chosen. Warner bought Atari for 28 million dollars and invested an extra 100 million dollars in October 1976. At this point, Atari became a part of Warner which appointed advisors to aid Noland Bushnell in running his company, namely one called Ray Kassar. Quite quickly this relationship would turn sour. Bushnell’s engineer mentality clashed with Ray Kassar’s business mentality. Bushnell was removed from Atari  in November 1978. Kassar became the new president of Atari. This quickly created a rift between the two big divisions inside Atari: the Arcade-division and the VCS-division.  The in 1977 launched VCS was in its first 18 months a financial black hole, Atari was only profitable trough her arcade division. In 1979 the VCS would be picking up steam and exploded in 1980 with the console-version of Space Invaders. This converting of arcade games to the VCS would become one the main pillars of the success behind the VCS. The problem was, the arcade division was initial responsible for the making of these games, the VCS-division however got more praise for making the conversions.

With the explosion of the VCS and the golden arcade years of 1980-1981 happening, the videogame industry looked very healthy and ready for exploitation. And exploited it would be. Market analysts would overestimate growth. On those projections, people took out loans to buy arcades, arcaderooms, companies with no experience in electronics hired a couple of engineers to quickly make a game or two to cash-in. Mattel made the Intellivision, Coleco (a leather and plastic swimming pool company) made the Colecovision. In short, videogaming became massively injected with people with no insight in videogames, expecting huge growth and profits. One of those people was also Ray Kassar who hugely over-estimated demand. The crappy VCS-conversion of Pac-man for example. Kassar was convinced Atari would clean out greatly with that game just on name, having made 12 million copies of the game for the US while only 10 million VCS’s were sold in the US. Yes you’re reading this right, a professional businessman did something this stupid. When suddenly profit growth wasn’t as high as predicted, the financial market panicked. Stocks tumbled down, loans didn’t get repaid, arcade manufacturers didn’t get their money, you get where this snow-ball is heading. The arcade-industry imploded in the US, the worldwide arcade-market would now know its slow decline.

Despite this doom and gloom, some companies were doing still quite good. In 1983 (the perceived year of the crash) 7 million consoles were sold and 75 million games were sold (15 million more then in “golden year” 1982) and only 27% of those were at discount prices. The problem lied with the many parent companies. Because of falling stock values, Atari and others were threatening to drag down their parent companiy’s stock with it down. This is when Atari, Colecovision, Intellivision and others were ejected by their bigger wholes. Demand for videogames still existed as the discounted consoles were selling at a good pace…only…there was barely anybody left to make videogames. Who was left moved to homecomputers. Why was there only a US-implosion? Make no mistake yanks, the Great Videogame Crash…was just the US-market imploding. The rest of the world didn’t real feel anything of it. The biggest reason for this was the extensive lincense-system in place. The Japanese market was in fact, very Japanese. American game companies licensed their games and systems to Japanese companies who then made and distributed it in Japan and vice versa.  This created an economic insular effect for each nation where economic problems wouldn’t spill over to another country. Japanese companies didn’t really care for Atari being sliced up and bought of, they had their licenses and they were happy. In reverse, in 1983, Atari was negotiating with Nintendo over the license to produce and distribute the NES in the US. Because the deal didn’t went through, Nintendo then decided to not sell this license and just create a US-branch to handle these things, a first for the videogame-industry.

So let’s recap: The Great Videogame Industry Crash wasn’t caused because of a flood of mediocre games (the traditional view), this was actually an effect of a deeper lying cause: bad strategic business practices, lack of insight and wrong and overblown market analysis. This then created the flood of mediocre games coupled with high profit-projections. When those projections aren’t met, the financial market panicked and bailed out. Companies that were actually healthy got sliced up, sold or simply ejected by their parent companies. Videogame companies being or becoming a part of bigger wholes can also been seen as a bad strategic business practice.  Certainly for an infant industry like videogames then.

So how does this help us now? Off course I’m not going to state that because the Xbox and Playstation are from divisions inside a far bigger whole that they will not receive a successor. I will state that, when these two divisions are running into problems, the parent companies will get edgy and will be considering to eject them. Actually…let’s have some nifty graphs and number colums!

       Sony           Nintendo         Microsoft                 Total

Y/E 1998     $902,811,090   $1,023,333,867                                            $1,926,144,957

Y/E 1999   $1,102,563,557   $1,301,350,000                                            $2,403,913,557

Y/E 2000     $722,738,949   $1,368,207,547                                            $2,090,946,497

Y/E 2001    -$449,776,290     $677,576,000                              $227,799,710

Y/E 2002     $629,101,056     $895,872,180   -$1,135,000,000      $389,973,237

Y/E 2003     $935,569,253     $834,333,333   -$1,191,000,000      $578,902,586

Y/E 2004     $627,195,212     $993,161,303   -$1,337,000,000      $283,356,515

Y/E 2005     $419,888,799   $1,056,056,202     -$539,000,000      $936,945,001

Y/E 2006      $69,129,058     $774,478,055   -$1,339,000,000     -$495,392,887

Y/E 2007  -$1,970,923,859   $1,914,666,388   -$1,969,000,000   -$2,025,257,471

Y/E 2008  -$1,079,994,103   $4,322,637,887      $426,000,000    $3,668,643,783

Y/E 2009    -$664,313,787   $5,691,428,301      $169,000,000    $5,196,114,515

Y/E 10Q1    -$413,541,667     $420,843,750      $312,000,000      $319,302,083

Y/E 10Q2    -$653,333,333     $710,655,556      $375,000,000      $432,011,111

Y/E 10Q3     $210,629,750   $2,087,904,452               N/A               N/A

Total            $387,078,407  $24,072,504,822   -$6,157,000,000   $16,004,049,028

Is there a picture forming inside anyone’s head now? No? Let me help you. The PS3 managed to negate all the PS2-profits and is now chewing down on the PS1 profits. Yes, the profit of the best sold home-console until now is gone, never happened. The HD-consoles together are literally bleeding billions out of the industry. Even always profitable (and always more then Sony’s gaming-division) Nintendo wasn’t able to pick up the slack in 2006 and 2007.

So, let’s put on our economic CEO hats on…who would like to keep Sony’s gaming division? No one? Then who’s holding his hand up over there? Owh…it’s Michael Pachter…right no one sane then. I won’t ask the same question about MS’s Xbox-division, investors have already told me the answer and it is…dump it. (http://www.businessweek.com/magazine/content/10_24/b4182036703891.htm)

So you have divisions bleeding money and investors wanting the divisions shut down. On the other side you have analysts (and game journalists falling for it) that keep repeating that the most profitable console manufacturer around is doomed while the HD-twins are doing gangbusters. Then you also have Microsoft and Sony making similiar mistakes with Kinect and Move like all those  other non-videogame companies in the early 80's. Assuming that just making something that's hot now will make them huge money automatically. How looking at things from a long-term perspective can change things.

Now I  won’t say that history repeats itself, because it doesn’t. I will say that the same factors that influence history then keep influencing it now and in the future, only in different clothes. If neglected or badly used, these factors will bite you in the ass (which creates the seeming repetition in history). The traditional industry is in decline, as many nifty colorful charts have proven. Take for example Pachter’s own nifty numbers put into a chart which shows that a big portion of the PS2-crowd just vanished.

Look closely. The Xbox360 manages to sell a bit more games then the Xbox and the PS3 manages to sell a bit more games then the GC. Now some would say, but the PS2-sales are still going strong! Yes, but the PS2 also kept selling, meaning that a large portion of those sales are new PS2-owners. Also the ratio total user-base vs. game sales is in quick decline. A good portion of PS2-owners are still buying PS2-games. But a much larger portion…well…vanished. Also consider, the Wii consists mainly of complete new audiences, not the established audience from last generation, so the PS2 crowd also didn't migrate over there. A large portion of last generation gamers has just quit video gaming (millions). This is not the first time this happened. After the implosion in 1983, millions of gamers stopped gaming because of lack of new videogames. With the transition to 2D and 3D again millions quit (one of the Wii-audiences is exactly these former gamers). The reason for these gamers that quit is all the same: not enough interesting videogames.  The same is happening now.

The bad thing about this all? Nobody has a say about it if the Playstation or Xbox don’t get successors. Not us gamers, not the people in charge of said division, not the game journalists. And this does leave a bad after-taste.

The real bad thing about this all? Nobody dares taking it serious while the numbers are out there. Even in the forums were these numbers come from there always a lot of people fancy-talking it, clinging to hope that ejection of the Playstation or Xbox-division is not the realistic scenario, while it actually is. This leaves a even more awful after-taste.

Next time, looking at the near-past and how Microsoft and Sony saw it coming, but didn’t act on it.