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PS2: The Elephant in the Room

January 23, 2007

I got to listen to another excellent 1Up Yours Podcast this weekend. This series features some of the most insightful commentary on the games industry that you will find anywhere combined with sophomoric sexual double entendre.

What caught my attention this week was the discussion of the effect of the huge PS2 install base (probably around 10 times the number of all next gen consoles combined) and its effect on the console market going forward.

This got me thinking about the future of the console market and to make several predictions:

  1. The PS2 install base helps Sony now, but at the expense of the PS3 in later years;
  2. The Wii’s useful lifespan will be cut short by increases in consumer HDTV adoption;
  3. Consoles are likely to be differentiated more by their features and less by the titles available exclusively for them (much like PCs);
  4. They will become like PCs in that new generations of hardware will come more quickly than in the past; and
  5. The PC games market will become the equivalent of another console console, albeit one with strong ties to the Xbox– a good position for Microsoft.

Here’s why:

After this holiday season, we now also know that demand for consoles is not demand inelastic, the more expensive a console is, the fewer units it will sell. I think both Sony and Microsoft underestimated supply elasticity for next gen consoles. I am convinced this is one of the big reasons that the Wii has done so well: it is only $250.

It is also obvious that the Playstation brand is quite strong because of the strength of the titles available for the PS1 and PS2 in the past. Unfortunately, for Sony, consumers can get a "Playstation" by buying a Playstation 2 for $130, rather than a Playstation 3 for $500. The result was that PS2 was the best selling console this past holiday season. PS3 sales were limited by supply, but there is no doubt that the continued availability of PS2 at a fraction of the cost of a PS3 significantly dilutes PS3 sales. The "Playstation brand" will not save the PS3, rather it may retard sales of the PS3.

Less robust PS3 sales mean fewer exclusives for PS3 and feed into the trend of making games available on all platforms– in this case both Xbox 360 and PS3. As I have detailed previously, this means that consoles will compete more on features other than what games are available, e.g. motion controller, Live or built-in Blu Ray player.

The other reason Wii and PS2 did well is that for people without either a HDTV or a high speed internet cconnection, neither the PS3 nor the Xbox 360 is that compelling a purchase. The next gen is all about connectivity and high definition. Sony fans are right about one thing– the PS2 and the Wii are much more competitors that are the PS3 and Wii. The PS3 and Wii are in the same market segment– which is different that the segment populated by the 360 and PS3. That segment is still quite lucrative, but it will be less so as more people purchase HDTVs, have high speed internet connections and want to use them. These trends will make the Wii and PS2 much less attractive options in just a few years. This will force Nintendo to come out with a new Wii in less than five years time.

With features other than exclusives no longer driving console choice, I think we will start to see new products introduced faster than in years past. Hardware features will become more important and manufacturers will respond with hardware with improved feature sets.

This is likely to be harder on console manufacturers with their loss leading hardware than on consumers for several reasons: (i) manufacturers old market models may no work that well any more and new market models are likely to be speculative add ing significant risk to this product space; and (ii) backwards compatibiliy will be a large feature as it rescues what would otherwise be consumers’ stranded investments in games.

What does the market I have described look like? That’s right… the PC market… with plentiful and fast hardware iterations, titles running on all machines… etc.

The emphasis on "Games for Windows" as a platform will bring PCs closer to the console world. There are still diiferences of course: some games are better played on the console platform and some games are better played on the PC platform for reasons that have more to do with interfaces and players proximity to the screen than anything else. But, note that Xbox 360 controllers can now be used on a PC quite easily.

This trend, combined with Live Anywhere is likely to leave Microsoft in an excellent position five years from now.

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