Jesse Schell: Xbox, PlayStation and the Innovator's Dilemma

At the start of this year, many would have chosen Microsoft as the early leader going into the next generation. Nintendo was struggling to gather momentum with the Wii U, Sony was struggling to keep its console business in the black, and yet Microsoft was enjoying dominance and profitability, month after month, in both retail and online. When predicting the balance of power in the next generation, Xbox would have seemed to be the smartest bet. But if you asked the same people the same question today, the answer might well be different.

So who will lead in the next generation? It's a question that Jesse Schell - the prominent game designer and author, and the founder of Schell Games - has spent a great deal of time contemplating, and it is the focus of his hour-long presentation at Barcelona's Gamelab conference: 'Technology + Psychology = Destiny'.

"When people make bad predictions about technology, it's not because they don't understand technology - it's because they don't understand psychology"

"The answer's not obvious," he says when we meet after his talk. "Last time round, there were people who picked PlayStation 3, and that was wrong - very wrong. But when people make bad predictions about what happens with technology, it's not because they don't understand technology - it's because they don't understand psychology.

"If you understand the technology and you understand the human mind, you can predict the future. You can tell what is going to happen."

According to Schell, this is at the root of Microsoft's mistakes with the Xbox One. It understood the needs of its partners, and its own needs as a business, but it badly misjudged the psychology of its customers. It is the classic innovator's dilemma: the market will change, and the customer will respond positively to that change, but the customer won't necessarily allow the current leader to be the one to make that change happen.

"Your customers want you to stay the same, even if it drives you into the ground," Schell says. "Somehow, Microsoft didn't seem to think that would be a reality, or even a problem.

"The reality is that they can't do what the customers want. Basically, Microsoft said, 'We're going to be Steam. You like Steam, don't you?' And we all said, 'No, we hate that. We hate you. You're an idiot to do that.'

"They came out and said, 'We're gonna do this new thing.' And the customers said, 'No, we don't want that, we hate that' - even though it's what they really want and what they will ultimately buy. So now Microsoft has had to say they won't do all that stuff, but someone will.

"our customers want you to stay the same, even if it drives you into the ground"

"That's how it always goes. This is the lesson of the innovator's dilemma. Why is it that big companies fail when the technology changes? It happens in every industry, so what's the pattern? What are they all doing wrong? Everyone says, 'Oh, it's because they're stupid. Big companies are stupid.' They can't be stupid. How did they get that big and stay that big if they're stupid? Microsoft isn't stupid.

"There's one mistake that they all make, and that mistake is listening to their customers."

But that's precisely what Microsoft has done. In the last few weeks, it has altered or removed almost every feature of the Xbox One that truly distinguished it from both its competitors and the current generation of hardware. Microsoft wanted to demonstrate boldness in the face of a rapidly changing market, but it did too much, too soon and with too heavy a hand. The problem for Microsoft, Schell explains, is that while the subsequent outcry came from a relatively small section of the gaming audience, it is nevertheless impossible to ignore. Microsoft may prove to be correct about what a console needs to be in the digital world, but that's irrelevant when it comes to the psychology of the consumer.

"The problem is that the hardcore folks always want the same thing: 'We want exactly what you gave us before, but it has to be completely different.'

"When you want to do something really different - the solution to the innovator's dilemma - you can't take your big brand and say it's going to be completely different. You need to set up something up on the side, and big companies are hesitant to do that. It's how Valve could do it [with Steam], because they had nothing before.

"The thing that's going to make the biggest difference in the next four years is that someone's going to come out with a great gaming tablet"

"I suspect that we're going to end up in that world. Are we going to end up there on these consoles? I don't know. It could be that some dark horse shows up. It could be that Apple shows up. It could be that somebody finds a better way."

And if Schell is sure of one thing, it's that the console companies are in need of a better way. The PlayStation 3 and the the Xbox 360 launched before iOS, before the explosion of casual games on social networks and smartphones, before the emergence of free-to-play as a force in Europe and North America, and at the shallow end of Steam's trajectory as the dominant power in PC gaming. These new consoles are Microsoft and Sony's first real opportunity to respond to those changes, and yet E3 and the events that followed left Schell feeling less than confident in their direction.

"E3 convinced me that they are going to be struggling," he says. "I haven't seen anything that made me think, 'Yeah, you're gonna get that market share back.' I'm convinced that all [of the consoles] are going to have a gradually eroding market share over the coming years. Because tablets are going to be eating their lunch more and more, and other platforms are going to start to take off and catch fire.

"The thing that's going to make the biggest difference in the next four years, say, is that someone's going to come out with a great gaming tablet - a really grade-A tablet for games. Exactly what that means I don't know; I suspect it has a separate hand controller, and I'm sure that it connects up to your TV no problem. I don't know who's going to make that, but it doesn't smell like Microsoft, Sony or..... well, maybe, who knows what Nintendo has up its sleeve, right?"