The Economics of Gaming Consoles (SNE, MSFT)

The video game console wars are closely followed by gamers worldwide. Though the financial aspect is often lost in the noise surrounding it, profitability is the most important metric that a company looks for in the end.

The war for top-selling video consoles has expanded from merely selling consoles to offering online access and subscription-based services.
The battle for supremacy in video consoles continues to be fought by Sony’s PlayStation, Microsoft’s Xbox brands, and the Nintendo Switch.
The Nintendo Switch has outsold the competition in the last two years, with approximately 28 million units each sold in 2020 and 2021.
Meanwhile, the Xbox S sold nine million units in 2021, while Sony’s PlayStation 4 sold two million, and Playstation 5 sold 13.5 million units.

Video-Game Console Generations

The previous generation of consoles (known as the seventh generation) had three leading contenders: The PlayStation from Sony Corp. (SNE), the Xbox from Microsoft Inc. (MSFT), and the Nintendo Wii and Switch.

The seventh generation of consoles played out their life cycle and have been in the market long enough to analyze their strategies and business models. Sony’s competence has lied in its hardware capabilities, given its long history of expertise in the storage industry. In contrast, Microsoft’s competence has lied in software, given its dominance in computer operating software. The Nintendo Wii was designed more for recreational gaming than hardcore gaming, but in past years, it has outsold the other consoles.

The eighth generation of consoles began in 2012 and included Sony’s PS4, Microsoft’s XBox1, and the Nintendo WiiU. Since then, many iterations and changes have occurred within the eighth generation, including the discontinuation of the Wii. The current 9th generation of consoles faces fierce competition from smartphones and tablets running Android and iOS. Also, PC graphics are expected to surpass console graphics.

The Economics of Video-Game Console Sales

The war for top-selling video consoles and market share has continued to heat up as the battle has expanded from merely selling consoles to offering subscription-based services providing gamers access to new and previously released games.

As a result, the economics behind the revenue generated by console producers has evolved. Companies might sell the consoles at a loss initially to lure customers, gaining market share from competitors. The strategy looks to make up for any lost revenue by selling games and online subscriptions.

Subscription Business

Microsoft’s Xbox offers Game Pass, which is a monthly subscription providing all-inclusive access to Xbox games and new games. In the past, customers had to pay an upfront fee for an Xbox console, but with Game Pass Ultimate, they can get 24 months of access to Xbox, and an Xbox Series X or an Xbox Series S console, starting at $24.99 per month.

Customers get access to more than a hundred Xbox games—including previous generation games that played on Xbox, Xbox 360, Xbox One, and Xbox Series X. Game Pass subscriptions are also available for use on PCs and mobile devices.

Microsoft is looking to allow users to play games from nearly any smart TV or monitor. Also, Game Pass is expected to be offered to customers using other web browsers such as Chrome, Edge, and Safari. In other words, the TV will essentially become an Xbox console.

Sony’s Spartacus is reportedly a new subscription service planned for launch in 2022 and is designed to rival Microsoft’s Xbox Game Pass, according to Bloomberg. Although Sony has yet to announce officially, the product is expected to offer access to retro PlayStation games and combine the existing multiplayer subscription service—called PlayStation Plus and PlayStation Now, which is their cloud-gaming streaming service.

The service will reportedly allow users to play many PlayStation 4 and PlayStation 5 games. In contrast, the current PlayStation Plus service limits the monthly downloads to two games per month. There’s no word yet on the cost of Spartacus, but both PlayStation Plus and PlayStation Now currently cost $59.99 annually for each service.

Nintendo Switch Online subscription provides access to more than 100 games from Nintendo and Super Nintendo, including the classics Super Mario Brothers and Donkey Kong Country. The company also offers an expansion pack with more enhanced services, including cloud saving and online multiplayer. The Nintendo Switch Online costs $3.99 per month or $19.99 a year, but it also offers a family pack, which can have up to eight account holders for $34.99 for twelve months.

Who’s Involved?

The major players involved in the industry are the developers, publishers, console manufacturers, and distributors. The developers do the nuts and bolts work of designing and coding the games, while the publishers are responsible for the manufacturing and marketing.

Sony and Microsoft also act as publishers for some of their games. The cost of developing a game can be significant. In looking at the economics of video-game publishers, some of the largest costs include marketing, development, and distribution costs, as well as licensing fees. Development costs consist of the cost of hiring designers, programmers, and other staff required for developing the game.

The Bottom Line

Only time will tell how newer technology and changing consumer habits will affect the console-gaming industry. However, Nintendo Switch Online, Microsoft’s Game Pass, and PlayStation appear to be the top three players in the market in the coming years. Although Game Pass offers more games through its subscription service than PlayStation, as of early 2022, the new Spartacus service might help Sony provide a competitive alternative to Game Pass. Meanwhile, Nintendo’s affordable subscription service and family-friendly games will likely continue to delight gamers looking for new and classic titles.

This article was originally published by Investopedia.com. Read the original article here.