T.HERE IS NOTHING just like a captive audience. When Sony, a Japanese electronics company, released its latest quarterly results on October 28th, the star performer was the company’s video game division that makes the PlayStation line of consoles. Had it been a normal year, revenues would likely have fallen as Sony’s current model – the PlayStation 4 – reaches the end of its life.
Instead, in a year marked by being locked and working from home, gaming revenue increased 11.5% year over year (and operating profit increased 61%) as home consumers reached for their controllers. Sony is not alone. Microsoft, its gaming arch-rival, released its own results the day before. The Xbox One console is similarly outdated, but sales are up 30%. The good times have been repeated across the industry (see graphic).
Most forecasters expected that covid-19 would boost the video game business. The pandemic has tipped off other forms of indoor entertainment, from board games to video streaming to books. But the magnitude of the surge took industry watchers by surprise. Tom Wijman of Newzoo, an analytics firm for the games industry, said that at the beginning of the pandemic, his company forecast industry sales to grow by around $ 2 billion in addition to existing projections. The latest numbers, he says, suggest the real figure was closer to $ 17 billion. Newzoo now expects industry revenue to hit $ 175 billion this year, up 20%. Even for an industry that grew 9% annually, 2020 was a stormy year.
It’s not over yet. In the midst of a flash of advertising, trailers and PR, Sony and Microsoft are preparing to replace their existing consoles with new, more powerful machines. Microsoft will release the Xbox Series X on November 10th. Sony will respond with the PlayStation 5 two days later. With Christmas locked in many parts of the world, demand for both will be high. If industry rumors about pre-orders are correct, some consumers may need to forego it.
At the same time, both companies will keep an eye on several large new competitors. Amazon, Facebook and Google believe it is time to try their luck in the gaming business. In the past decade, streaming has revolutionized music, television, and movies. The tech giants think of cloud computing, fast broadband and 5G Cellular networks mean it’s time to try the same with video games.
Start with the consoles themselves. Sony won the previous round of the console wars, selling over 100 million PlayStation 4s and more than 1 billion games. Microsoft doesn’t provide official numbers, but most analysts believe Xbox One sales (confusingly, the third iteration of the Xbox) were only half as high. Most expect Sony to outperform its rival this time around. Piers Harding-Rolls of Ampere Analysis, a media analytics company, estimates 5 million new PlayStations will be sold ahead of Christmas, compared to 3.9 million Xboxes.
One reason is brand loyalty. “When it comes to consoles, there is a huge following,” said Michael Pachter, an analyst at Wedbush Securities. “Most of the time, PlayStation owners buy another PlayStation and Xbox owners get a new Xbox.” Another is Sony’s strategy which focuses on existing players. Analysts believe the company will sell the machines at a loss – a common tactic for console manufacturers. Sony’s marketing has focused on exclusive, large-budget games aimed at dedicated gamers and not available elsewhere.
Sony executives hope the analysts’ predictions are correct as the PlayStation 5 is vital to their future. The company’s gaming division is now the largest. The recent success has cushioned the impact of problems elsewhere, such as in the imaging department, which has suffered from the problems of Huawei, a Chinese tech giant who is one of its big customers (see Schumpeter).
For its part, Microsoft has no concerns about how many new Xboxes it is selling. It focuses on expanding the market as well as trying to attract existing players. Smartphones are owned by more than 3 billion people, and mobile games – smaller and more casual than console titles – are the most popular type of app. Phil Spencer, who heads Microsoft’s Xbox division, estimates that only around 200 million households worldwide are willing or able to do without expensive gaming hardware like a console.
Microsoft is therefore trying to remove the obstacles to its introduction. It will be offering hire purchase offers for its new Xbox. It is heavily touted for Game Pass, a subscription service that gives access to an online library of hundreds of games for up to $ 15 a month (a quarter the upfront cost of a typical high-end console game).
At the heart of this strategy is a service called xCloud, which aims to eliminate the need for a dedicated console by running games in remote data centers and streaming the results on internet-connected smartphones TVs or a screen that can be connected to the internet and a game controller.
In rich countries, streaming could allow gamers to play anywhere, not just at home – for games that Spotify and Netflix did for music and movies. In poorer countries, where smartphones are common and data plans are cheap, console games could be accessible to millions of new players. “There are 1.2 billion people in Africa and the average age is 20 years,” says Spencer. “A lot of them follow our games – they know the characters, the stories, and even the release dates. They simply lack devices to play them on. “
Game streaming is not a new idea. Previous attempts have been plagued by technical issues (streaming a game that needs to respond instantly to a player’s actions is far more difficult than streaming a movie or song to a passive viewer). And Microsoft isn’t the only company that believes the time is right. Sony offers its own version called “PSNow ”(although it’s limited to older games), as well as Nvidia, a gaming-focused chip maker, and several other companies. Other tech giants with little experience in video games are also piling up. Google launched “Stadia” in 2019. Amazon announced its “Luna” service in September. On October 26th, Facebook threw its hat into the ring with its own “Facebook Gaming” service.
Game streaming sounds attractive on paper, but few expect it to change the industry overnight. “I would describe the market as embryonic,” says Harding-Rolls. Nevertheless, there is great interest: Ampere is tracking 60 companies whose offers are either publicly tested or are available. And when the streaming starts, it will likely prove to be just as disruptive as any other media. “If you can get streaming to work, you can increase the game market tenfold,” said Pachter. In the video streaming wars, tech giants and media companies spent billions on content. Similar jockeying can take place in games. On September 21, Microsoft acquired ZeniMax Media, which makes the best-selling game series “Fallout” and “Elder Scrolls” for $ 7.5 billion.
It’s too early to pinpoint winners and losers, but most analysts think Microsoft is well positioned. The Azure cloud business is the second largest in the world and offers a reach that many competitors lack. Last year, Sony, which lacks its own cloud infrastructure, looked into the possibility of using Azure to power its own gaming services. And in contrast to Google or Amazon, the only real cloud competitors, Microsoft has decades of experience in the games business.
But the competitors also have strengths. Amazon has 150 million subscribers to its Prime service, which has already streamed videos and music. Google could use YouTube, where game videos are popular. Facebook plans to offer its service to people who are already playing simpler, browser-based games on its existing platform, which has over 2 billion monthly users. And Sony’s success with the PlayStation has shown that size isn’t everything. There is everything to play. ■
Correction (November 6, 2020): An earlier version of this article incorrectly quoted Tony Habschmidt in Newzoo and not Tom Wijman. We apologize for the mistake.
This article appeared in the business section of the print edition under the heading “The games are just getting started”.