Analyze This: Will Hardcore Gamers Be Pushed Aside In This Console Generation?

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Microsoft recently announced that it would broaden the customer base of the Xbox 360 by trying to appeal to the family demographic. Sony has also indicated that it would market the PS3 to a wider audience beyond hardcore gamers, by publishing more casual games and introducing Wii-like peripherals.

Obviously, Nintendo's success with its DS and Wii appear to be looming heavily over its competitors. So we asked Michael Pachter of Wedbush Morgan Securities, Ed Barton of Screen Digest, and Billy Pidgeon of IDC:

Is it now becoming crucial for Microsoft to appeal to a wider demographic, in order to ensure the long-term survival of the Xbox 360?

Does Sony need to take a similar approach with the PS3?

Can either the 360 or PS3 stick to selling to the hardcore gamer first, and then pull in a wider audience once it has reached a critical mass in sales? This happened for the PS2, but can this strategy still work today?

[Michael Pachter, Wedbush Morgan Securities]

On Microsoft: I think some portion of family growth will come from aging of original Xbox owners, who will have families of their own and will likely play games with their children. I also think that newer features on the Elite, like the 80GB hard drive, will encourage more family activities, like downloading TV shows and movies.

In essence, I don't see [Microsoft] trying to cannibalize the Wii audience, so much as to trying to offer an alternative with the Xbox 360 as the home media center. I don't think that there is any real threat to the long-term survival of the Xbox 360.

On Sony: Sony will ultimately do quite well with the PS3, as it is likely that Blu-ray will win the high-definition movie format war. Sony has shown so far with its firmware upgrades that it desires to make the box accessible and useful in many contexts. I expect Sony will further expand its Playstation Network and Playstation Store over the next several years to compete favorably with Microsoft's Xbox Live.

On sticking with the hardcore crowd first: The only way for an expensive [game console] box to succeed is to appeal to hardcore gamers first. The "wider" demographic by definition is the demographic that doesn't consider ownership of a console essential. Thus, they would not consider it important to be early adopters. The hardcore demographic considers new consoles a "must have," and are willing to pay a premium to own one.

Most observers misunderstand what's going on with the Wii at present: that once a household purchases a Wii, it will never purchase another console. I completely disagree with this analysis.

In my view, the Wii is bringing in a wider demographic than has ever been exposed to games before, and a meaningful number of them will now consider purchasing a more "hardcore" system. Once the PS3 and the Xbox 360 price points decline to a competitive level -- the magic number is probably around $199, this wider demographic will be more likely to consider purchasing [one] as the second console in the home. I think the tried-and-true strategy of focusing on the hardcore gamer audience first, and expanding to the wider demographic later in the cycle, will again work for Sony and for Microsoft.

[Ed Barton, Screen Digest]

On Microsoft: Microsoft needs to do something to drive sales. Given 2007 Q1 year-on-year sales data, there are some worrying trends for the platform at this stage of the hardware life cycle. Xbox 360 continues to generate both sales and growth in the US market, but has struggled in Japan, while a drop in sales in the PAL region -- during a period almost completely free of competition from PS3 -- is a concern.

Can Microsoft generate growth by appealing to groups outside the core gamer demographic? We believe this is currently doubtful, given the nature of the overwhelming majority of its software library and the relative weakness of the Microsoft/Xbox 360 brand to the family demographic, certainly compared with Nintendo and, to a lesser extent, Sony PlayStation.

The games which have performed strongly on the platform have tended towards the hardcore -- Gears of War --while Viva Pinata has not performed as well. Viva Pinata is indicative of Microsoft's dilemma: Despite very favorable reviews and offering an innovative and family-oriented gaming experience, the game did not sell particularly well, suggesting that even if the content is there, the family demographic isn't buying.

Microsoft's Xbox 360 exclusive Gears of War

Presumably [Microsoft's] decision to appeal to the family demographic will coincide with an increase in content designed to appeal to this group. This could apply not just to games but also films and TV content. Microsoft has the potential to ignite growth in this group, but it depends on a significant change in focus in the content available for Xbox 360, which would require investment and, given the nature of the current user base, risk.

On Sony: It is difficult to see how the PS3 will appeal to the mass market until a significant price drop. If Sony can evolve this offering into a more generalized, media hub, perhaps more people will be able to justify the cost. Additionally, PS3 is currently one of the cheapest Blu-ray players available, potentially expanding its appeal outside of gamers.

We expect PS3 uptake to be slow. However, we also feel that the adoption curve will endure for a longer period than previously witnessed in the console industry. Sony believes the expected lifespan of the PS3 will be eight to ten years. The issue one must consider is whether it is better to have a short period of relatively low hardware investment followed by four years of growth, or a short period of losses sustained on hardware sales early in the cycle followed by eight to ten years of growth. It is arguable that Sony's strategy will garner significant, long-term publisher support.

It is interesting that SCEE is releasing a PS3 version of Singstar so early in the hardware life cycle We will be very interested in the performance of this title, which has proven hugely appealing to non-core gamer demographics in Europe. It is difficult to see how it will drive hardware sales in the short term. However, given the potential of downloadable expansion packs [and] songs, it makes sense to release it early in the hardware cycle to enable it to maximize profitability across the entirety of the hardware cycle. Perhaps uptake will be slow, but it is easy to see why Sony wants this product on the shelf for as long as possible.

On sticking with the hardcore crowd first: Consoles based on advanced technology will be relatively expensive on release, until sufficient volumes have been manufactured for economies of scale to kick in and drive component prices down. Price dictates targeting the hardcore early in the hardware cycle.

Having said that, Nintendo stepped aside from this model with the Wii being released at price points which puts it within reach of a much wider proportion of the market. Currently, this is looking to be a successful strategy, and we will be interested to see if Nintendo can sustain its current sales performance, across all major territories.

[Billy Pidgeon, IDC]

On Microsoft: With the first Xbox, Microsoft experienced the upside and downside of appealing to a core gamer market. The core bought into Halo and built up the installed base, which peaked with Halo 2. Microsoft didn't expect a long tail for the first Xbox.

While a good number continued to play Halo 2 online, core gamers' interest wandered toward the next cycle and to the PC. Microsoft designed Xbox 360 for a wider appeal, and the games for the Xbox Live Arcade are more casual in genre. Halo 3 is coming for the core gamers, but the Xbox 360 and its software library should seek mainstream and non-gamers, including families, to build and sustain a long end-cycle.

On Sony: Sony has some problems with the PS3, not least of which is that the PS2 remains a strong hardware and software seller. The PS2's continued dominance combined with the PS3's high price and limited library doesn't give enthusiast gamers sufficient incentive to upgrade. Sony needs to build anticipation for upcoming first and third party games, and the company must differentiate the online experience from Xbox Live. Sony should also build the PS3's appeal to the mainstream sooner rather than later.

On sticking with the hardcore crowd first: The success that Nintendo is enjoying with the Wii and the DS is both a catalyst and an indicator. Nintendo correctly observed that the hardcore gamer market was not growing quickly enough to sustain a growing installed base for new consoles.

The Wii is disrupting the console market by appealing to the mass market at launch rather than in mid-to-late cycle. Nintendo's image as a relatively wholesome publisher makes the Wii ideal for families. Many lapsed gamers have fond memories of Nintendo and are old enough to have young children.

Another factor widening the console market beyond the core demographic is the continued success of the PS2. Guitar Hero is perhaps the best example of a game that non-gamers can enjoy, but will still be popular with the enthusiast and core gamer. The Wii, the DS and the PS2 are changing the dynamics of the industry, with the mass market becoming a primary driver rather than an end-cycle afterthought.

Activision's popular rhythm action game Guitar Hero II

The core audience is still important and always will be. But I'd be very surprised if the next consoles from Microsoft and Sony are as targeted at the core gamer as the Xbox 360 and PS3 were. Some worry that focusing on the mass market will result in fewer hardcore games. I don't believe that will be the case, but fewer mediocre games, hardcore or not, would be a good thing. Interactive entertainment should be accessible by the mainstream, not just by those with higher gaming skill.

For the industry to maintain a healthy growth rate with sufficient installed bases of consoles and handhelds, marketers can no longer ignore demographics outside the core. I think that's good news for the industry. Girls, boys, men and women of all ages play games. It's time for the industry to show them how to play video games together.

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