This is actually quite a powerful statement, and one worth exploring in more depth. In this article I would like to dissect how a shorter lifecycle would affect consumers, AMD, and device makers.
This Generation of Consoles
I have pointed out prior that this generation of consoles is selling extremely well, and is forecasted to increase sales going into the back half of the year. During the BoA Merrill Lynch conference, Mr. Kumar also stated it is expected that 2015 will likely be a better year for consoles than 2014; consoles alone could easily provide an avenue for YoY revenue growth throughout 2014 and 2015. Software sales hardware, and this week's E3 conference is revealing plenty of upcoming goodies for the next generation consoles.
The release of Mario Kart 8 managed to spike Wii U sales in the UK by over 600% (source: Gamespot) during the release weekend. In the interest of avoiding sensationalism, explosive growth doesn't necessarily translate to a huge volume when you're working with small numbers. However, based on CNN's report, Mario Kart 8 (just the game, not the Wii U console) sold 1.2 million copies across Europe, Japan, and America on the launch weekend, and this is not the holiday season. Mario Kart 8 finally brings Nintendo into the modern era by allowing for easy online racing and match making - a feature that has been largely missing Nintendo's consoles.
Nintendo's issues, in my personal opinion, is one of marketing. Rather than seeing advertisements that influenced me to purchase a Wii U, I had to go out of my way to research the product to see if it was worth the upgrade from the Wii. Turns out Wii U is backwards compatible with both software and controllers from the Wii, and the Mario Kart 8 Wii U bundle also included a free download of one of four major Nintendo titles. After trading in the Wii console and a few games that were now collecting dust, the upgrade, along with 2 new games, cost me about $150 out the door at GameStop (NYSE:GME). None of this was well advertised.
To bring this back to AMD, both the Xbox One and PS4 have been selling fairly well. Price cuts and early access to exclusive content could help the Xbox One somewhat close the gap. Similarly for Nintendo, games like Mario Kart 8 and the upcoming Super Smash Bros. could boost Wii U sales.
The Next Generation of Consoles From The Perspective of the Consumer
For the most part, the above has been about the strength of current generation consoles, and not so much an increase in release cadence of newer hardware. I went into the lengthy explanation above regarding my reasons for purchasing a Wii U to give the non-technical audience some insight into the typical thought process that could go into buying a new console; more specifically, I am referencing the discussion about backwards compatibility.
Backwards compatibility is a significant boon for consoles. The launch title selection for the new generation of consoles was fairly thin. Backwards compatibility ensures a healthy selection of titles at launch. It also makes the investment in newer hardware not quite as cumbersome, as it allows consumers to consolidate devices without giving up functionality. The number one reason I decided to upgrade to a Wii U was because my son could keep his favorite Wii games.
Another factor for the consumer is TCO (total cost of ownership). A decent gaming PC would probably start in the neighborhood of $800 if it is starting from scratch. Using the PS4's launch price of $399 as a starting point, a console cadence of new hardware every 5 years would mean the upgrade cost would average out to about $80 per year. Conversely on the PC, there is an entire spectrum of upgrade options. Looking at components and priced: A decent GPU is around $150, a CPU is also around $150, motherboard is around $100, and RAM is around $60. I have listed these components because they are the most likely upgrade candidates. Also note that prices can vary wildly based on performance level, but these provide a rough basis for decent, but not over-the-top, hardware choices.
The total of these components coincidentally totals around $400 as well, so from a hardware perspective there isn't much of a difference between substantially upgrading or purchasing a new console every few years.
The one area where the PC is unmatched is a cheap selection of software titles. Promotions such as humble bundles allow consumers to buy heaps of older titles at bargain basement prices. The closest thing in the console space are indie titles or GameStop promotions on used games.
The Next Generation of Consoles from Device Makers and AMD's Perspective
Because the Xbox One and PS4 moved to the standard x86 architecture and AMD's GCN graphics architecture, it should be much easier to preserve backwards compatibility between console generations, making the upgrade easier on consumers. And because AMD is the current supplier, it is likely this could help the company land future contracts.
Note this would significantly alter the typical waxes and wanes of the console cycle however. Console sales on the prior generations peaked in the third year of sales, and the lifespan has been 7+ years. My guess is that we would see peaks in volume somewhat muted, but the tradeoff would be longevity from the design wins. Rather than seeing a one shot, 3 to 4 year boost in revenues followed by a sharp taper, we could see higher levels of revenues continue for a longer period. This is however only a guess on my part, but I bring it up so the reader understands there will be some nuances in console volumes given a shorter upgrade cycle.
AMD has focused on making the IP used in these consoles highly portable, as well as scalable, so from the customer's perspective, designing silicon is analogous to picking out a desired level of performance.
If we are talking about a console release that is ~4 years in the future, that should give foundries a chance to work out the kinks in 20nm processes. A smaller transistor size usually entails some power savings, although it's expected this power savings at 20nm will be less pronounced compared to prior generations. Nonetheless, the shrink from 28nm to 20nm should yield a fairly substantial die size reduction. This die size reduction and power savings could allow device makers to make thinner, cheaper, yet more powerful devices.
One aspect I haven't seen touched on yet is the potential for forward compatibility. If you look at PC gaming, games can run on a wide swathe of hardware. Depending on the performance of a gaming rig, all one must do is reduce settings and/or resolutions to render a game playable. The difference between even 900p and 1080p is about 40% more pixels for 1080p. Developers that create PC ports are already accustomed to creating user-definable graphics settings. A console title could be developed that is console aware, and could render in a different setting depending on the generation of console it is played on. This would extend the longevity of a given hardware design, allow developers to reach the largest potential audience, and further extend the value proposition of consoles.
This generation of consoles served as a departure from the norm, where rather than developing proprietary hardware that led to expensive consoles and losses from the device makers, it was opted to choose more standardized PC hardware as the base. Console makers are now able to launch the consoles at lower price points, as well as essentially come close to breaking even on each sale, rather than taking substantial losses.
Finally, and although this is highly speculative, I believe an article I penned on the potential impact of a new console designed by Nintendo for the Chinese market aptly demonstrates an important final point, and that is the ability to quickly and cheaply address potential target markets.
Note that there is no information that specifically points to AMD being the supplier for this console other than potentially a few ambiguous statements about the potential upcoming semi-custom design wins. But bear in mind that a potential deal between Nintendo and AMD on a new console at this point is nothing more than speculation, and I am in no way attempting to start a rumor.
As mentioned, this generation opting for standardized hardware brought down development costs, and therefore MSRPs of the new consoles. Two other important aspect is that it also minimizes design times and gives developers a more familiar development environment to work with. One example I mentioned in my Nintendo article is that Android gaming is huge in China, so a specialized SoC based on an ARM instruction set could be manufactured cheaply, and designed to open up Android gaming on a potential Nintendo console.
A faster release cadence of consoles, provided compatibility is maintained, would be a great thing for consumers. I believe hardware cost advantages of PCs over the long run are often overstated, as the consumer would likely spend a few hundred every 4 years or so if they desire to maintain an up-to-date gaming rig. Also, if starting a build from scratch, a consumer would be hard pressed to piece together a gaming PC equivalent to a next generation console for $400 that would game as well.
From AMD's perspective, this could extend the revenue generation from consoles, provided the company is able to land the new contracts. In the essence of maintaining backward compatibility, along with AMD's now proven track record, I believe the company would have a decent shot of landing such contracts.
The speculative example I outlined for Nintendo is a different facet of this new cadence, and this is releasing hardware targeted at more specific consumers.
Both faster cadences and targeted hardware are made possible by use of standardized PC hardware. This will have implications worth watching for consumers, component suppliers, device makers, as well as developers.
Disclosure: I am long AMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own both shares and options in AMD, and actively trade my position. I may add or liquidate shares or options at anytime.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.