For years, video game makers used blockbuster titles like Madden, Halo, and Assassin's Creed to make money ? after selling their consoles at a loss. But today, franchises like these are no longer enough to sustain both the profit and growth expectations of these legacy electronics businesses. The rise of social and cell phone gaming, coupled with increasing options vying for the customers' time, have introduced a wave of disruption into the gaming industry, siphoning off customers and reducing the amount of time gamers devote to their old-guard systems. The question: is there a way for console makers to survive?
They won't survive if they just keep focusing on producing more lifelike graphics. Starting with the Atari, each evolution of the console has pushed the graphics quality one step further ? from 2D to 3D with Playstation and N64, to more realistic human forms with Xbox and Playstation 2. But at this point, the investment in improving graphics quality has low returns. People simply don't value additional leaps in graphics the way they now value new ways to play games on-the-go or socialize with friends in these games. The time commitment for Words With Friends or Fruit Ninja is significantly less than the time commitment to, say, Call of Duty, as is the upfront cost. For next-to-nothing, a gamer can download a game to their cell phone, press the app anytime, and they are instantly playing. Such is the popularity of these games that although console sales have been down the last few years, total gaming spending is actually up.
This leaves console makers in a conundrum. The traditional performance metric ? graphics ? that defined console superiority is no longer significant to most customers. As for the die-hard gamers, they've lost loyalty to certain consoles ? no one is a "Nintendo-only" player anymore.
One response by incumbent video game companies has been to shift from the focus on graphics to a focus on interaction, with advances like the Microsoft Kinect and the Nintendo Wii. This is an attempt to make the consoles themselves profitable, to counteract the lost revenue from the declining number of blockbuster games.
But instead of finding new ways to compete with each other, console makers need to re-examine who they compete with to survive in the long term. Though they may be poorly positioned to vie for the gamers who are playing games on their cell phones during train rides, there are jobs for which consoles are uniquely positioned. These are jobs in customers' lives that require well-designed hardware in the household ? for instance, theory would suggest that console makers might further capitalize on an existing trend, optimizing their systems to run other services, such as streaming Netflix movies. In fact, Microsoft actually boasts that 40% of all Xbox usage is now non-game.
While increasing the usage of the console leads to increased revenue ? Xbox live for example has two revenue streams, subscriptions and ads ? the number of competitors is also increasing. No longer is the Xbox competing just against the Wii for a customer's purchase and time, but now also against cable boxes, Apple TV, and other integrated entertainment devices. By providing such services through the console, console makers may be cannibalizing some of their gaming profits (people will spend only so much time on the couch) but with the hope to make it up ? and more ? through the other outlets.
What if console makers continued to find new uses for their hardware? Using the same consoles, with basic wifi components and high functioning hardware, Xbox and Playstation could seek to disrupt many of the expensive legacy security companies. They could create smart interfaces with heating and air conditioning systems. They could serve as the On-Star for the home. The components already built into many console systems make them ripe for disrupting other hardware in the household.
While the gaming forecast for consoles is not cheery, the forecast for console makers may not be as bad as people think. To survive disruption, console makers need to find an "extendable core" and integrate around it, a concept explored in "Surviving Disruption" by Max Wessel and Clay Christensen. Though franchises like Call of Duty and Madden may survive, console makers must reassess what jobs they can do for customers. Moving towards interaction gaming is not necessarily an extendable core ? it is just another form of head-to-head competition.
Instead, companies should extend and even find new jobs customers need fulfilled to expand the reach of their industry, not just their company. While a service like Netflix is a substitute to gaming, it is also a way to survive in the ever-changing industry and extend the reach of the console. This option does have negative consequences; competition against other devices like cable boxes enters console makers into the fight to be the single, integrated system for the TV. But, the good news is that there is a clear opportunity to identify an extendable core and survive the wave of disruption hitting the gaming market. And gamers like me will have future iterations of Madden to look forward to.
Source: http://blogs.hbr.org/cs/2012/12/rebooting_the_gaming_industry.html
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