The collapse of the console video game market is coming.
Yes, I realize that sales are in the billion dollar range these days. But the future doesn’t look so good, all because of the trend towards increasing the market share of downloadable games.
Note that I’m not mentioning PC games in all this. That’s a different kettle of fish, and although that industry also has challenges, hardware manufacturers are much better positioned to survive a switch to online only services and games, mostly due to their versatility. But that’s grist for another blog entry.
Right now retailers carry the video game console systems, games and accessories. A sale of just a console can be a money-losing deal for a retailer, so they look for add-on purchases to improve the margin of the sale. Games are one of those margin builders, but if games go to completely downloadable format the way that various industry analysts state, the retailers are left holding the bag for the console costs. This just in: No corporation will carry any system that they cannot make money on. Period. So the industry will be faced with three options:
- Brick & mortar retailers stop carrying the consoles completely. No more Xbox, PS3, etc in the stores means a sharp reduction in availability, which translates to a huge hit to the market. Think this can’t happen? Think again. If Wal-Mart, Best Buy, etc. can’t make money on the deal, the deal is dead. No company grows its bottom line by taking a loss on every sale. This is the worst-case scenario, and I’m confident that all parties will avoid this like Tiger Woods avoided monogamy.
- Retailers keep video game systems on the shelf, but lacking present and future game sales, must raise the price to get the margin they need to make money from the sale. Increased prices will result in a decrease in sales, which means less market for game developers. Also, there would be less available discretionary capital to spend on games. Again, a huge hit to the market, and definitely a longer unemployment line for game developers.
- Video game console manufacturers go the route of the cellular phone companies, and rebate the retailers for each sale of a system. Already there is very little margin in the consoles for the manufacturers, so they look for legacy sales. For instance, if a Wii is packaged with a Wii Points card, or perhaps some form of yearly subscription, the manufacturers could offset the loss of hardware revenue with sales of online games and services over a set time period (1 year?). With a surcharge per game for game developers to get their products on the network, this might be the most viable option for profitability. However, that surcharge means that games will have to be a little more profitable to keep game companies afloat. This will result in more crapware that costs nothing to buy online and even less to code, endless sequels to tap into a known revenue source (Final Fantasy XXV is coming sooner or later), and MUCH less push-the-envelope original games, as the R&D budget will be meager at best. So the market survives, kinda. (And some of this scenario is already in progress.)
We’re already at a point where video game hardware manufacturers are reluctant to develop the next generation systems until the very last drop of profit can be gleaned from the current generation systems. If it takes longer to make money from a new system, you can be assured that next gen systems will be vapourware until that money is made.
As online game sellers take market share away from traditional Brick&Mortar businesses, so too will downloadable games take away from their boxed format cousins. Though exactly how future events unfold is still murky and mutable, the ultimate result will be dark times for the game industry.
Disagree? Leave your comments below!