Where do consoles go from here?

The following article is part of a series of daily year-end content on GamesIndustry.biz analyzing the most notable news and trends we've observed over the last 12 months

With the exception of the last generation of consoles, which saw a roughly eight-year run on the market, the traditional console cycle has averaged around five to six years. This time around, however, perhaps influenced by the wave of high-end graphics cards necessitated by VR, both Microsoft and Sony are testing the market with so-called mid-cycle upgrades. The PS4 Pro and next year's Scorpio offer gamers the chance to play in 4K - a resolution that until recently was only possible in the realm of PC gaming. Perhaps more importantly, the inclusion of HDR gaming offers a new level of visual fidelity that brings a much wider color gamut to players.

Factoring in the recent release of the Xbox One S, and the PS4 Slim model as well, we've never seen this many new consoles launched to the market so near to the start of a new console cycle - both PS4 and Xbox One released only three years ago - which begs the question: is the traditional console cycle now dead?

2016 and 2017 with Scorpio will certainly prove to be an interesting test for the market. It's far too early to judge the reception to PS4 Pro, but Xbox One S has been selling moderately well, even allowing Xbox One to outsell PS4 for a few months.

NPD analyst Mat Piscatella, who joined the data firm with years of publishing experience at Activision and WBIE, commented, "I think I'd call it more 'evolved' than 'died'... Nintendo seems to have already been there for years, at least in the portable space. We have to wait and see what they will do with the Switch. But the iterative model certainly will be tested over the next 12-18 months."

"We're probably looking at the release of a new hardware architecture every 5-7 years, and allowing for annual iterations of key components throughout the lifecycle"

Joost van Dreunen

"Nintendo's past approach in the portable space has proven that the iterative model can be successful," he continued. "However, the PS4 Pro and Scorpio (we assume) will bring much more significant performance upgrades at higher upfront costs to the consumer.

"Adding iterative hardware into a cycle also creates the need for a much more demanding set of go to market strategies while making successful execution of those strategies more critical than ever before.  Balancing game development resources, the hardware R&D challenges surrounding an iterative launch, the detailed planning that will be necessary to properly align the supply chain from production to retail to ensure the proper mix and stock volumes in channel, ensuring the pricing and price promotion programs are right, all while communicating marketing messages that speak to the different customer sets effectively... this will certainly be an ongoing challenge."

While some have speculated that we'll now see new consoles literally every year, mimicking the lightspeed pace at which smartphones get upgraded, the market dynamics for consoles and the impact of new hardware on developers makes that a much more difficult proposition.

Consequently, Piscatella doesn't think we'll see more than one new console iteration per cycle. "I don't see a more rapid deployment as feasible due primarily to development challenges. Making video games is hard, and ensuring a game is optimized for two versions of a console is challenging enough. Getting to 3 or 4 versions of the game for the same console base seems to me as though it would bring diminishing returns," he explained.

SuperData's Joost van Dreunen believes that the typical console cycle will remain intact, but unlike Piscatella, he sees the platform holders iterating continuously.

The constant technical upgrades that we see in mobile have effectively changed consumer expectations and the broader market for interactive entertainment, he noted. "So as Sony and Microsoft are pursuing their respective long-term VR/AR agendas, they now also have to keep in touch with what's happening outside of their secret labs. This means we're probably looking at the release of a new hardware architecture every 5-7 years, and allowing for annual iterations of key components throughout the lifecycle," he said.

"This blend of internally developing proprietary hardware and adopting externally emerging trends that are popular with consumers is a powerful mix, and has allowed console gaming to thrive when many wrote it off. And given the current success of both platforms, and the imminent arrival of Nintendo's bid, I don't expect the console gaming market to soften any time soon."

While the longstanding five-plus year console cycle was a boon for developers to work with and optimize for a set specification, the iterative approach that we're likely to see in hardware moving forward brings advantages as well. As Piscatella explained, introducing console iterations can help to reduce cycle stagnation and boost consoles' cycle tail, while also "encouraging pubs/devs to invest in scalable development environments, to hopefully avoid the dramatic steps up in development costs seen previously with new hardware deployment."

Furthermore, by offering multiple configurations that still adhere to the same architecture (Xbox One, One S, Scorpio), there's an opportunity for "price/benefit ratios appealing to both enthusiast and mass market audiences. Marketing approaches no longer have to take a one-size-fits-all approach," Piscatella said.

The iterative release schedule would appear to make sense for the console manufacturers, enabling them to maximize returns and keep average pricing elevated, and so long as the ecosystem and gaming experiences are kept consistent across the numerous variations of the consoles, Sony and Microsoft don't really care which version of their hardware a player owns - so long as that player remains invested in Xbox Live or PlayStation Network, that's a win for Microsoft or Sony. The platform is less important than the digital ecosystem nowadays, especially with digital sales rising rapidly.

"The console market is at its heart a consumer electronics market," van Dreunen remarked. "But increasingly it is incorporating tactics from the fashion industry, where we see an accelerated adoption of trends that emerged outside of the ateliers and studios of salaried designers. Console manufacturers have been actively pursuing digital distribution and free-to-play, both of which first gained traction on PC and mobile. Full game downloads now represent about 27% of holiday sales, up from just 5% in 2012, adding just under $7 billion a year to the console market. Titles like FIFA, GTA Online, and Call of Duty, do really well in terms of digital sales, and have managed to improve margins and player base longevity. Further facilitating this trend will be as important as making the hardware better."

"Here's the real question. If consumers are purchasing multiple iterations of the same console over the course of a generation, does this potentially increase or decrease the amount of money that consumer will spend on software and associated content?"

Mat Piscatella

With the digital ecosystem taking precedence, it's no surprise that Sony has made PlayStation Now streaming titles work for Windows PCs, and with the remote play feature, customers can enjoy PS4 titles on a PC or Mac as well. Microsoft, of course, which has a deep investment in the PC space with Windows 10 has extended the Xbox ecosystem across devices with Xbox Play Anywhere, enabling certain titles to be played with progress intact on a PC or Xbox console.

Whether you're playing on Windows 10 or Xbox One doesn't matter to Xbox boss Phil Spencer. In fact, he's not even concerned about whether you upgrade to Scorpio next year.

"For us in the console [industry], the business is not selling the console," Spencer told me back at E3. "The business is more of an attached business to the console install base. So if you're an Xbox One customer and you bought that console 3 years ago, I think you're a great customer. You're still using the device. That's why we focus on monthly active users. That's actually the health of our ecosystem because it's really you want this large install base of people that are active in your network buying games, playing games... So our model's not really built around selling you a new console every one or two years. The model is almost the exact opposite. If I can keep you with the console you have, keep you engaged in buying and playing games, that's a good business."

If frequent hardware iteration is indeed the new reality for the console market, publishers couldn't be happier. "I actually see it...as an incredibly positive evolution of the business strategy for players and for our industry and definitely for EA. The idea that we would potentially not have an end of cycle and a beginning of cycle I think is a positive place for our industry to be and for all of the commercial partners as well as players," EA global publishing chief Laura Miele said during the company's EA Play conference.

Take-Two CEO Strauss Zelnick agreed, "It would be a very good thing for us," not to have to worry about hardware and who owns which console. He likened it to TV. "When you make a television show you don't ask yourself 'what monitor is this going to play on?' It could play on a 1964 color television or it could play on a brand-new 4K television, but you're still going to make a good television show."

"We will get to the point where the hardware becomes a backdrop," he said. That may very well be true. At the point when high fidelity games are playable literally anywhere and on any device, will we even have consoles? Much like Netflix, the networks and content providers/curators will live on, but hardware may not matter.

And as happy as publishers appear to be about the new world of console iteration, NPD's Piscatella did point to a possible cause for concern. "Here's the real question. If consumers are purchasing multiple iterations of the same console over the course of a generation, does this potentially increase or decrease the amount of money that consumer will spend on software and associated content?" he asked.

"And I think this is an open question... will they spend more because they've reinvested in the ecosystems? Or will they spend less because they've just output more money on to the iterative hardware? We'll see how the market answers that question over the next 12-18 months."