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Tales From The Future (tftf). I picked my nickname because many advisors and investors claim they can predict the future of the (stock) markets and somehow pick the winners. I don't. I usually do not engage in short-term trading and myopic analysis (quarter by quarter, without looking at the big... More
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  • Who Will Win This Game Console Generation? Sony, Microsoft Or Nintendo 4 comments
    Nov 13, 2013 9:16 AM | about stocks: SNE, MSFT, NTDOY, GME

    I will focus on Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) in this article because the console from Nintendo is already available (more on this towards the end):

    1. Distribution / Product Launch and Game Software

    While both consoles have quite a dismal range of games ready at launch (not unusual compared with console launches, most current HD games also have longer development cycles compared to 10 or 20 years ago) and are not back-wards compatible to the last generation, there are more digital (download only) and other smaller "indie games" making up for it.

    MSFT dropped the ball early in game licensing (having to reverse its policy shortly after announcing its new XBox console in summer 2013) and distribution setbacks (only 13 countries globally at launch for the Xbox One; in addition dismal future sales in Japan are again a given for MSFT, this takes away one key market for video games for XBox One).

    "Exclusives" (games only available on one platform, sometimes only as a timed exclusive) are becoming less and less important with each console generation (except for Nintendo): Game development of AAA titles has become so expensive that it doesn't make sense to develop just for one platform - the few remaining titles are from third parties.

    Where one console manufacturer had a hole in its game portfolio it filled it with own studio content over the years (e.g. MSFT once didn't have a racing game matching the quality of Sony's "Gran Turismo" series so it built its own over the years: "Forza Motorsport").

    There is no indication of a clear "system seller" yet on both consoles. "Titanfall" looks like the only interesting (sales-wise) exclusive coming for MSFT in the near term and might give that console a slight edge in H1 2014, but this game will hardly decide the long console race alone.

    Both consoles might also add/blend-in cloud content over time (e.g. server-generated background graphics streamed to the console and mixed with locally rendered content). Sony even announced a streaming service ("Gaikai") for 2014+ which would allow to play older PS games and games from other systems. However, none of this is available at launch.

    2. Technical and Pricing Comparison

    XBox One's Kinect device is a forced bundle, the console costs $100 more than Sony's machine. The $100 price difference (advantage Sony) is an important psychological differentiator; what reinforces the price delta is that the new Xbox is also less powerful than the PS4 according to most tech reviews, mostly in terms of raw GPU power (again important in the core gaming segment, especially since console cycles now last up to 5-8 years, this could hurt MSFT badly towards the end of the cycle).

    3. Other Content and Services

    Additional services outside of game content are over-emphasized often: Nobody except for core gamers will shell out 400-500 USD just for a "better (NYSE:TV) living room experience". Why is that so?

    NFLX, Hulu, YouTube, live sports or similar cloud services and on-demand content are also available for cheap boxes (such as the Apple TV, Roku...) or just a modern TV; most cloud services are now included in the TV set itself. There is no need for a PS4 or an XBox unless consumers are interested in sophisticated games and maybe the Blu-Ray Player capability for movies.

    We should therefore not expect consumers to rush out to buy expensive consoles if they are not into gaming - or more specifically "core gaming" since so many "casual" gaming alternatives on tablets and smartphones popped up in recent years that were not available on general purpose devices in the past.

    4. The Importance of Game Consoles for SNE and MSFT

    As for Sony not making enough money on PS4 and the general outlook for Sony's console compared to Microsoft :

    - Both the XBox and the PS4 now use mostly PC standard parts, this is very much unlike the PS3 and to a lesser extent the XBox360. There are no deep losses or specific investments (as for the Cell chip in the PS3). Sony just needs to sell one first-party game (attach rate) or a third-party title and a 12-month PSN (Playstation Network) membership to break even on the hardware.

    (Assuming neither manufacturer has a recall due to quality defects (something MSFT plagued with the early XBox 360 versions) the initial losses on hardware will be much smaller in this generation.)

    - Speaking of PSN, online multi-player gaming now costs about the same as on XBox (it was free on PS3). This provides a steady stream of income for Sony: about 50-70 USD per subscriber per year, depending on the region. At the moment, there are a little over 100 million free PSN members.

    - More importantly, using other PS4 online services doesn't require a premium subscription as Xbox does ( this is one more example why MSFT won't dominate the living room with its new console. Who wants to pay for a MSFT subscription just to be able to use premium online services such as NFLX and pay again?). A detailed comparison of services available for both platforms can be found here:


    To emphasize once again: most of these online services and content streams are also available on cheaper boxes or even directly included in modern TV sets.

    AV Content (streaming audio/music and video/TV series) is also region-locked and often doesn't work outside of North America at the moment; this is another reason MSFT delayed the launch in many countries, there weren't enough content and licensing deals finalized in late 2013. Sony seems to have a clearer focus on games at the moment.

    Finally, we should also not over-emphasize the importance of consoles in MSFT and Sony's total business:

    In MSFT's case the unit (including entertainment) is about 10-15% of total revenue, slightly higher in holiday quarters. It has become more difficult to compare MSFT's Xbox division historically because the company recently (July 2013) re-organized its business units:

    Devices and Studios Engineering Group. Julie Larson-Green will lead this group and will have all hardware development and supply chain from the smallest to the largest devices we build. Julie will also take responsibility for our studios experiences including all games, music, video and other entertainment.

    Excerpt from: "One Microsoft: Company realigns to enable innovation at greater speed, efficiency"


    In SNE's case even the entire consumer electronics business (while certainly important for revenue) isn't the main profit driver lately:

    Overall, Sony made most of its money in insurance and financial services in recent years. Many people may not know this (this unit is mainly active in Japan). Following are the numbers for Sony's different business units:

    (click to enlarge)


    Sony is basically a bank with a lots of consumer electronics attached (dragging the bank profits down since the 2000s) in terms of profits.

    Once Sony manages to finally stop the bleeding in TVs, cheap digital cameras and related consumer products, the other company operations (film studios, medical equipment (recent Olympus deal), financial services and entertainment with the PS4) will be doing fine. It has already restructured and cut back on non-operational expenses (real estate in Japan and the US) and re-structured some of its CE business lines where intra-company "kingdoms" (silos) often fought each other instead of the competition.

    To answer my title question who will win this game console generation, there are two answers:

    I already gave away the short answer in the title. I think the new console generation will be won in this order:

    Sony first, Microsoft second and the Wii U will come in a distant third.

    (While I didn't discuss Nintendo in detail in this article, here's my summary and outlook for the long-standing contender from Kyoto:

    The Wii U will mainly sell to the "classic" Nintendo community, the machine is heavily underpowered over the console cycle in the coming years *. While Nintendo's first-party content continues to be great and unique, it (again) lacks third-party support and it couldn't exploit its earlier launch date (late 2012) compared to Sony and Microsoft.

    Nintendo also doesn't have other businesses to fall on or cross-subsidize the Wii U - as MSFT and SNE can to a certain extent. While its dedicated mobile games devices (the 2DS and the 3DS) sell better than the Wii U, they are also under increasing pressure from iOS and Android devices).

    This short answer only ranked the three "classic" contenders in console gaming, but the world has changed since 2005-2007 when the last home console generation was launched:

    The long and more complicated answer therefore is:

    There could be four new contenders/ecosystems soon and the entire console living room revenue could stagnate because of casual game patterns emerging beyond "traditional" game consoles:

    - Amazon, Google, Apple and niche Android consoles could soon enter the console race in the living room. (Steam with Steambox could be another contender for core gamers.) While core gamers will dismiss these four entrants due to underpowered technical capabilities, they will sell at $99-149 or even below and be "good enough" for most casual gaming.

    - Mobile devices will also chip away at living room entertainment: Casual gaming on tablets and smartphones will be "good enough" for most customer segments. Soon, these devices will be technically on par with the last console cycle (PS3 and XBox360), again good enough for most casual game segments.

    More and more games will be distributed in digital formats at impulse buy price levels or freemium ($0.99 to $10 or free with "in-game / in app" purchases). This will put pricing pressure on classic games (except for few AAA titles with branding power and online lock-in such as GTA, Battlefield, Call of Duty or MMORPGs...) and physical distribution networks of games (e.g. Gamestop, GME).

    I discussed these two points in an earlier article on SA in more detail:


    All is not lost for consoles: Core gamers (dominant 13-18 and 19-34 age segments, mostly male) will certainly continue to be attracted to traditional console games - but that segment will not grow the market a lot over the coming years.

    5. Summary

    The long answer therefore is: Sony, Microsoft and Nintendo could all loose revenue or at least stagnate in existing markets compared to earlier console cycles (with the exception of few new markets in SE Asia such as China) because of new entrants and "general-purpose" mobile devices used for gaming.

    My total unit numbers for this console cycle (assuming it will last as long as the prior cycle) therefore are:

    PS4: 120-150 million

    XBox One: 80-100 million

    Wii U: 25-50 million **

    In terms of profits, "attach numbers" (software and service/content revenues per unit, especially first-party game content) will be important, so Nintendo's bottom line numbers may not be as bad compared to weak unit sales - on the other hand, Nintendo doesn't generate subscription revenue from online gaming and generates less AV media revenue than both SNE or MSFT.

    PS: I'm long SNE since late 2012.


    * While the first Wii (and some of the earlier Nintendo consoles) were also underpowered in terms of technical specs compared to rivals, the Wii U can't make it up so far because of a lack of compelling Nintendo software and a stagnating supply of third-party titles. This already crippled the GameCube. The Wii U could have a similar fate in terms of (relative to the other consoles) marketshare as the GameCube.

    Nintendo's high quality first-party franchises (Mario, Pokemon, Zelda, Donkey Kong...) are both a blessing and a curse for the company: Even when a Nintendo console sells in great quantities (such as the original Wii) few third-party titles sell in large numbers compared to sales on other consoles. Nintendo also was late to the party with online and multi-player gaming trends.

    ** Widest relative estimate range since Nintendo may desperately cut prices later in the cycle to move more units.

    Disclosure: I am long SNE.

    Additional disclosure: Long SNE since late 2012

    Stocks: SNE, MSFT, NTDOY, GME
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Comments (4)
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  • Tales From The Future
    , contributor
    Comments (7743) | Send Message
    Author’s reply » One addition:


    There is a (pretty far-out for the moment) rumors that the next MSFT CEO might look at breaking up the company, co-founder Paul Allen supported this:


    "Microsoft’s next chief executive should consider spinning off consumer businesses including search advertising and the Xbox games console, according to the private investment vehicle of Microsoft co-founder Paul Allen."




    This could of course have huge implications for the XBox console and its business unit.


    Again, just a rumor for the time being.
    13 Nov 2013, 12:21 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (7743) | Send Message
    Author’s reply » Today's rumor (contract not yet finalized 100%) fits into AAPL potentially making a big move in the living room space soon:


    Apple reportedly purchases PrimeSense, the Israeli 3D body sensor firm behind Microsoft Kinect for $345M




    This could provide an Apple TV on steroids.


    The rumors about programmable boxes from AMZN and GOOG also keep making the rounds.
    17 Nov 2013, 09:27 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (7743) | Send Message
    Author’s reply » Updates:


    1. Some (early 2014) news on the game console situation in China, namely lifting the sales ban in force since 2000:


    "Hold Your Horses, Don't Get Excited about Consoles in China...Yet"




    2. Sony renamed its Gaikai streaming service as Playstation Now with an introduction date due later in 2014:


    "With PlayStation Now, you will be able to stream popular hits and classic games from the PS3 library, first on PS4 and PS3 systems, followed by PS Vita."




    As I had already pointed out in my article, this is not good news for $GME and other physical distributor long-term.
    8 Jan 2014, 08:31 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (7743) | Send Message
    Author’s reply » The numbers for Wii U so far are horrible:




    My estimate for at least 25 million units over its lifetime provided in the article may have even been optimistic.


    It remains to be seen if Nintendo is willing to cut the price of the console in the coming years to move more units - the expensive primary Wii U controller featuring a touch-screen might make it harder to cut costs...another problem is the lack of compelling software (even first-party titles were quite scarce in 2013-2013).
    20 Jan 2014, 12:20 PM Reply Like
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