ΤNOTHING HERE like a captive audience. When Sony, a Japanese electronics giant, reported its latest quarterly results on October 28, the star of the show was the company’s video game division, which makes the PlayStation console line. If it was a normal year, revenue would probably have dropped, as Sony’s current model – the PlayStation 4 – is coming to the end of its life.
But in a year marked by lock-in and work-from-home, toy revenue increased by 11.5% year-over-year (and operating profit by 61%) as consumers who got home reached their auditors. Sony is not alone. Microsoft, its gaming competitor, released its own results the day before. The Xbox One console is similarly overpriced, but revenue has increased by 30%. The good times have been repeated throughout the industry (see Chart).
Most predictors expect covid-19 to boost the video game business. The pandemic has given another idea to other forms of indoor entertainment, from board games to video streaming to books. But the scale of the wave has taken industry viewers by surprise. Tom Wijman at Newzoo, a toy industry analytics company, says that when the pandemic started, his company had projected an increase of about $ 2 billion in industry revenue, beyond its current forecast. The latest figures, he says, suggest the actual number was close to $ 17 billion. Newzoo now estimates the industry’s revenue will reach $ 175 billion this year, an increase of 20%. Even for an industry that had grown by 9% per year, 2020 was a stormy year.
It is not over yet. Inside an ad, trailer and PR, Sony and Microsoft are preparing to replace their existing consoles with new, more powerful machines. On November 10, Microsoft will release the Xbox Series X. Sony will respond two days later with the PlayStation 5. With a locked Christmas style in many parts of the world, demand for both will be high. If industry rumors about pre-orders are true, some consumers may need to avoid them.
At the same time, both companies will be watching a lot of new competitors. Amazon, Facebook and Google all believe that this is the right time to try their luck at the gaming business. Over the past decade, streaming has revolutionized music, television, and movies. The tech giants believe that cloud computing, fast broadband and 5G Cellular networks mean it’s time to try the same thing with video games.
Start with the consoles themselves. Sony won the previous round of console wars, selling over 100m PlayStation 4s and more than 1bn games. Microsoft does not provide official figures, but most analysts estimate that sales of the Xbox One (confusing, the third Xbox remake) were only half. Most expect Sony to beat its rival this time as well. Piers Harding-Rolls at Ampere Analysis, a media analytics company, estimates that 5 million new PlayStations will be sold before Christmas, compared to Xbox 3.9 million.
One reason is brand loyalty. “There’s a lot of cult when it comes to consoles,” says Michael Pachter, an analyst at Wedbush Securities. “PlayStation owners will mostly buy another PlayStation and Xbox owners will get a new Xbox.” Another is Sony’s strategy, which focuses on existing players. Analysts believe the company is selling the machines at a loss – a common tactic for console manufacturers. Sony Marketing has focused on exclusive high-budget games aimed at dedicated players and not available elsewhere.
Sony executives hope analysts’ projections are correct, because the PlayStation 5 is vital to its future. The company’s gambling division is now the largest. Its recent success has absorbed the impact of the problems elsewhere, such as in its imaging department, which suffered from the problems of Huawei, a Chinese tech giant that is one of its big customers (see Schumpeter).
Microsoft, for its part, says it is not worried about how many new Xboxes it sells. It is just as focused on expanding the market as it is on trying to win over existing players. Over 3 billion people own smartphones and mobile games – smaller and more casual than console titles – are the most popular type of application. Phil Spencer, who heads Microsoft’s Xbox division, estimates that only about 200 million households worldwide are willing – or able – to launch an expensive piece of gaming hardware such as a console.
Microsoft is therefore trying to reduce the barriers to adoption. It will offer rental-purchase offers for the new Xbox. It greatly promotes Game Pass, a subscription service that provides access to an online library of hundreds of games for up to $ 15 per month (a quarter of the initial cost of a typical state-of-the-art console game).
At the heart of this strategy is a service called xCloud, which aims to eliminate the need to have a dedicated console by playing games in remote data centers and transmitting the results to a smartphone connected to the Internet. TVor any monitor that can be connected to the Internet and a game controller.
In rich countries, streaming could allow players to play anywhere, not just at home, making games like Spotify and Netflix for music and movies. In poorer countries, where smartphones are common and data packets are cheap, it could bring game consoles close to millions of new players. “There are 1.2 billion people in Africa and the average age is 20,” says Mr Spencer. “Many of them follow our games – they know the characters, the stories, even the release dates. They just don’t have the equipment to play them. “
Game streaming is not a new idea. Previous attempts have been hampered by technical problems (the flow of a game, which must react directly to a player’s actions, is much more difficult than the flow of a movie or song to a passive viewer). And Microsoft is not the only company that believes the time is ripe. Sony offers its own version, called “POSTSCRIPTNow “(although limited to older games), as well as Nvidia, a gaming-focused chipmaker, and many other companies. Other tech giants with little video game experience are also piling up. Google introduced the “Stadia” in 2019. Amazon announced the “Luna” service in September. On October 26, Facebook threw its hat in the ring with its own “Facebook Gaming” service.
The flow of games sounds appealing on paper, but few expect it to transform the industry overnight. “I would describe the market as fetal,” says Harding-Rolls. However, there is huge interest: Ampere monitors 60 companies whose offers are either in public testing or available for use. And if the flow takes off, it is likely to be just as annoying as in other media. “If you can make the flow work, you could grow the gambling market tenfold,” Pachter said. Video streaming wars have seen tech giants and media companies spend billions on content. Similar jockeys may be in progress in games. On September 21, Microsoft bought ZeniMax Media, which makes the best-selling game series “Fallout” and “Elder Scrolls”, for $ 7.5 billion.
It’s too early to pick winners and losers, but most analysts believe that Microsoft is in a good position. Azure cloud business is the second largest in the world, offering it a range that not many competitors have. Last year, Sony, which does not have its own cloud infrastructure, said it was exploring the option of using Azure to power its own gaming services. And unlike Google or Amazon, its only real rivals in the cloud, Microsoft has decades of experience in the gaming business.
But its competitors also have strengths. Amazon has 150 million subscribers to the Prime service, which already includes streaming video and music. Google could take advantage of YouTube, where video games are popular. Facebook intends to promote its service to people who already play simpler games based on the browser on its existing platform, which can boast of more than 2 billion users per month. And Sony’s success with the PlayStation has proven that size is not everything. There is everything to play. ■
Correction (November 6, 2020): An earlier version of this article incorrectly mentioned Tony Habschmidt on Newzoo instead of Tom Wijman. We apologize for the mistake.
This article appeared in the Business section of the print edition entitled “Games Just Start”