Challenging the Current Console Business Model

Includes: MSFT, NTDOY, SNE
by: Bruce Everiss

Currently our model for video games consists of very powerful consoles playing games that are distributed as cardboard and plastic. This is acutally a very wasteful model, as most of the processing power spends most of the time doing nothing. And in the days of the interweb using physical distribution of a digital product is just plain silly.

The PC industry is already moving to another model. Microsoft Office is a very expensive ($499 for a one off copy of the professional edition), heavyweight package of software. Yet probably 99% of its features are not accessed by most users. Google (NASDAQ:GOOG) is now offering pretty much the same features in it’s Google Apps, the big difference is that they sit in a remote server and your PC is just a terminal. Oh yes, and they only cost $50 per year for the top Premier Edition.

This is a model we could go to in gaming, with the game once again sitting on a remote server and the console just being a terminal. In fact it is something we already do with MMO games and online casual gaming. This approach offers a lot of advantages over the current console business model:

  • The gamer can choose from hundreds, maybe even thousands, of games to play. Physical product at retail is self evidently limited in range and shelf life. A server has no such problems and can carry an almost infinite “stock” of games. Once a game was written it would have an almost infinite life.
  • No retail, taking their massive percentage. It is really silly for the game industry to effectively pay for the high street rents and staffing costs of conventional retailers. They are not needed if you go to either digital distribution or server based games. Which allows for lower cost gaming and/or bigger development budgets. Either way the customer wins.
  • Much cheaper consoles. Because the game runs on the server you don’t need much horsepower in the console. It is mainly there just for the interface. In fact, you could cheaply build the interface into the television and do away with the console completely.
  • Zero piracy. This is an exceptionally good point. If everyone who played games paid as they should then games would be cheaper. If the game is sitting on a remote server then it cannot be stolen. This is one reason why MMOs are such good business.
  • Latest version of the game always available to play. To fix bugs or add content you just need to update the game on the server and it is instantly updated for every player in the world. Retail games are inevitably buggy because of their sheer size and complexity. Server games could instantly fix bugs as they were found.
  • Web 2.0 benefits. If everyone playing a game is playing the same version on a server, it is much easier to incorporate user generate content (as MMOs now do) and social networking. Together these make gaming more immersive and more rewarding.
  • No need for publishers. It is true, they would be redundant. The game developer can deliver the game directly to the server owner. There is no need for a global sales and distribution network because there are no retailers to sell to! I can see two new sorts of companies setting up. Mini merchant banks to finance individual games and distribute the risk and reward, and marketing companies to raise public awareness of games on the server. Presumably existing publishers would morph into doing one or both of these jobs.

As you can see, it is an alluring model with a lot of benefits. Taking publishers and retailers out of the loop and having a very long product life all put more money into game development. And playing games is what this whole industry is about.

I am sure that Sony (NYSE:SNE), Microsoft (NASDAQ:MSFT) and Nintendo (OTCPK:NTDOY) are looking at this very seriously as a future option. Of the three Microsoft, with their five year lead on Live, are by far the best positioned to take advantage.