TNothing here Just like the captive crowd. When the Japanese electronics giant Sony announced its latest set of quarterly results on October 28, the star performer was the company’s video game division, which made the PlayStation lineup. Had it been a normal year, revenues would likely have declined, as Sony’s current model – PlayStation 4 – is nearing the end of its life.
But in a year marked by the shutdown and work from home, gaming revenue grew instead 11.5% year-over-year (and operating profit 61%) as internal consumers reached their consoles. Sony is not alone. Microsoft, its main gaming rival, released its own results the day before. Likewise, its Xbox One console has been retired, but revenue has jumped by 30%. Good times have been replicated across the industry (see chart).
Most forecasters expected COVID-19 to boost the video game business. The pandemic has given a picture to other forms of indoor entertainment, from board games to video streaming to books. But the scale of the boom surprised industry watchers. Tom Wegman of Newzoo, the game industry analytics company, says that when the pandemic began, his company expected an increase of nearly $ 2 billion in industry revenue in addition to its current forecast. He says the latest figures indicate that the real figure was closer to $ 17 billion. Newzoo now believes that industry revenue will reach $ 175 billion this year, an increase of 20%. Even for an industry that was growing 9% a year, 2020 was a great year.
It is not over yet. Amidst a flurry of ads, trailers and Public relationsSony and Microsoft are preparing to replace existing consoles with new, more powerful hardware. On November 10th, Microsoft will launch the Xbox Series X. Sony will respond two days later with PlayStation 5. With Christmas nearing in many parts of the world, both will be in high demand. If industry rumors about pre-orders are true, some consumers may be forced to do without them.
At the same time, both companies will watch their many big new competitors. Amazon, Facebook, and Google all think the time is right to try their luck in the gaming arena. Over the past decade, broadcasting has revolutionized music, television and movies. Technology giants believe that cloud computing, fast broadband and 5G Mobile networks mean it’s time to try the same with video games.
Start with the consoles themselves. Sony won the previous round of console wars, selling over 100 million PlayStation 4 and over 1 billion games. Microsoft doesn’t provide official numbers, but most analysts believe that Xbox One sales (confusingly, Xbox 3rd Edition) were only half of those sales. Most expect Sony to outperform its rival this time as well. Piers Harding-Rolls at Ampere Analysis, a media analysis company, believes that 5 million new PlayStation devices will be sold in the run-up to Christmas, compared to 3.9 million Xbox.
One of the reasons is brand loyalty. “There are a lot of followers when it comes to controllers,” says Michael Batcher, an analyst at Wedbush Securities. “PlayStation owners will mostly buy another PlayStation, and Xbox owners will get a new Xbox.” Another is Sony’s strategy, which focuses on existing players. Analysts believe the company is selling the machines at a loss – a common tactic for console makers. Sony’s marketing has emphasized exclusive big-budget games aimed at committed gamers not available anywhere else.
Sony executives hope analysts’ predictions are correct, because PlayStation 5 is vital to its future. The company’s gaming division is now the largest. Its recent success has mitigated the impact of problems elsewhere, such as its imaging division, which has been plagued by troubles with Huawei, the Chinese tech giant that is one of its major clients (see Schumpeter).
For its part, Microsoft declares itself not worried about exactly how many new Xbox devices it sells. It focuses on expanding the market just as it focuses on trying to win over existing players. More than 3 billion people own smartphones, and mobile games – smaller and more comfortable than console titles – are the most popular type of application. Phil Spencer, who runs Microsoft’s Xbox division, estimates that only about 200 million households worldwide are willing – or able – to purchase an expensive piece of gaming hardware like the console.
So Microsoft is trying to reduce the barriers to adoption. You’ll be offering rental deals for the new Xbox. They heavily promote “Game Pass,” a subscription service that gives access to an online library of hundreds of games for $ 15 a month (a quarter of the initial cost of any typical high-end console game).
The mainstay of this strategy is a service called xCloud, which aims to remove the need to have a dedicated console at all, by playing games in remote data centers and streaming results to smartphones connected to the Internet. Televisions, or any screen that can be connected to the Internet and game controller.
In rich countries, live broadcasting can let players play anywhere, not just at home – which it has done for games what Spotify and Netflix have done for music and movies. In poor countries, where smartphones are common and data plans are cheap, it can make console games within the reach of millions of new players. “There are 1.2 billion people in Africa and the average age is 20 years,” Spencer says. “A lot of them follow our games – they know the characters, the stories and even the release dates. They lack the devices they can play with.”
Game streaming is not a new idea. Previous attempts had technical problems (broadcasting a game, which must react immediately to the player’s actions, is much more difficult than broadcasting a movie or song to a passive viewer). And Microsoft isn’t the only company that thinks the time has come. Sony offers its own version, which is called “NoteNow (although it’s limited to older games), as do Nvidia, a gaming-focused chipset maker, and many others. Other tech giants with little experience with video games are also accumulating. Google launched “Stadia” in 2019. Amazon announced the “Luna” service in September. On October 26, Facebook threw its hat into the ring through its “Facebook Gaming” service.
Game streaming looks attractive on paper, but few expect it to change the industry overnight. “I’d like to describe the market as being in an embryonic stage,” says Harding Rolls. There’s still huge interest: Ampere is tracking 60 companies that either put their offerings on public testing or are available for use. And if the broadcast takes off, it will likely prove just as devastating as it has been in other media. “If you can make broadcast work, you can grow the games market tenfold,” says Mr. Bachter. The video wars have seen tech giants and media companies spend billions on content. There may be similar contests in the games. On September 21st, Microsoft bought ZeniMax Media, which makes the best-selling “Fallout” and “Elder Scrolls” game series, for $ 7.5 billion.
It’s too early to pick winners and losers, but most analysts believe Microsoft is well positioned. The Azure cloud company is the second largest in the world, giving it access that many competitors lack. Last year, Sony, which lacks its own cloud infrastructure, said it was exploring the option to use Azure to run its gaming services. And unlike Google or Amazon, the only real competitors in the cloud, Microsoft has decades of gaming experience.
But its competitors have strong points, too. Amazon has 150 million subscribers to its Prime service, which already includes streaming video and music. Google can take advantage of YouTube, where gaming videos are popular. Facebook plans to offer its service to people who are already playing simpler browser-based games on its current platform, which has more than 2 billion monthly users. And Sony’s success with PlayStation has proven that size is not everything. There is everything to play for. ■
Correction (November 6, 2020): An earlier version of this article mistakenly quoted Newzoo’s Tony Hapschmidt, rather than Tom Wijman. We apologize for the mistake.
This article appeared in the business section of the print version under the headline “Games Only Beginning”