Games: Console Games – Hardware + Software = Ka-Ching!

By Gabe Zichermann, Guest Author

The first home game console was called the Magnavox Odyssey. Introduced in 1972, it had a number of design flaws that would eventually doom its future, including the need for plastic TV overlays, boring games, and some dubious marketing strategies. Ultimately however, it was the closed nature of the product that doomed it – too few exciting games from top developers, made the product a bore. In that same year, Atari debuted PONG – but it wasn’t until their 2600 was launched in 1977 that the basic formula for a successful videogame console was created: proprietary hardware + amazing software + controlled development & production = major success. And that model continues to power the $10+ Bn console games industry today through years of double digit growth.

Consoles like the Nintendo Wii, Sony PS3 and Microsoft Xbox are tightly managed, and generally try to speak to a particular industry segment. Their content developers benefit from gigantic marketing budgets and blockbuster titles that vault their respective platforms to the top of consumer consciousness. If you can get a developer deal with one of the platforms – and they are not necessarily easy to come by – you will find yourself among a select group of developers vying for the attention of the “locked in” consumer.

Although present in some 90s consoles like the Sega Dreamcast, networking of game consoles only really became important in this last generation, with the Wii, Xbox (360) and PS3 all featuring some networking and storage to enable multiplayer games and persistence. Although most people consider multiplayer and networked console play to be the most exciting topic in that vertical, the real earthquake is happening in a slightly less obvious way: through the “casualizing” of the console player, and the shift towards digital distribution.

When Microsoft launched Xbox Live, the online community side of the product, there were very few DVD-based titles available that took advantage of their new connectivity. So, in partnership with Oberon Media, Microsoft launched Xbox Live Arcade, a multiplayer casual-gaming system. Ridiculed at the time, and shrouded in a fair amount of traffic/statistical secrecy, XLA has since grown into one of the leading casual gaming destinations worldwide, although it’s not limited strictly to casual games anymore. Microsoft continues to play dodgeball with the exact statistics, but as recently as the spring of 2007, they announced 6 Million XLA players and over 135 million downloads of virtual items and points from the XLA marketplace.

Although these likely don’t translate into a ton of revenue today (estimates put the ancillary revenue on Xbox at about $50M annually), their success points the way towards the potential value of a managed online gameplay experience delivered through the console. Of course, Nintendo’s casual game success with the Wii is well documented and that outreach to boys, girls and parents was always part of their strategy to differentiate the platform. Their continued content weakness (once again) threatens the success of their product, but the overarching implication is clear: not just 18-34 year old men play with game consoles, and they are vying for supremacy at the center of home entertainment.

On the digital distribution side, Microsoft claimed 25 million downloads through the spring of 2007 on XLA. With a 2% conversion rate of download to sale, and a $15 average sales price, they have a tidy <$10M annual business selling games via download. With the advent of more holistic download applications from Valve and others, both numbers should improve and the shift towards direct distribution in the console gaming space will continue.

What the console manufacturers clearly want is to put the device at the center of the digital home and to create a platform with both community and distribution that they control. In this way, of course, the consoles also compete with Apple, Windows and the entire cable/TV business. Leading the battle is the fight over digital distribution and mass appeal, all wrapped in a user friendly and content-centric approach. The real question seems to be: will it be games at the heart of the set top box ecosystem or will it continue to be TV and movies?

If it turns out that the millennial generation really does prefer games – as most demographers seem to believe – then the future of the digital home seems guaranteed to be fun. Open? That’s another story altogether.

This segment is a part in the series : Games