Game Console Platform Business Model

How has the console business model evolved from hardware plus commission per game to a more subscription-based offering in a free-to-play world?

It’s one of those situations where everything has changed and nothing has changed. The days when the platforms were losing a lot of money on their hardware, in order to secure an installed base are, I think, gone. They may come back but there was a time when you could make a case to lose quite a bit of money on each console, you’d subsidize it quite a lot, in order to get the lifetime value on software sales. I think that’s a very difficult model, just because the business is so big that it’s not making sense. As the market has broadened, you’ve got people buying consoles with very varying amounts of use, so you can’t rely on making the same amount of money, every time.

That’s changed. It’s still not the case that these companies are in business to make money from their hardware. There may be times, depending on currency and production costs, where they do. But by and large, they’re in the business of selling content and services. That’s changed. Of course, whether it’s free-to-play or a subscription model or a transaction or a download, the platforms make a platform margin on all of those sales, whether they’re digital or physical. It’s shifted from making money on each cartridge and each disc, to making money as a percentage of digital sales in the digital marketplaces. Certainly, that’s been important.

The other shift is that there are new income streams available, through PlayStation Plus and Xbox Live and now, Nintendo Switch Online. These have evolved over the last 10 plus years, to a point where they are a very important part of the ecosystem and the economy, for both Microsoft and Sony and now, increasingly, for Nintendo, as it’s got into the game with Switch, quite successfully. That helps an otherwise difficult and risky business model. But there are still other income streams, from the selling of games, which have continued. There’s still an opportunity for these players to operate in the subscription arena but they’re not alone. EA, Ubisoft and others, there are other people operating content subscriptions and memberships, in the gaming space.

Therefore, what advantage do the console players have in free-to-play, over the other publishers?

There are advantages and disadvantages. I’ll start with the disadvantages. The disadvantage is that it’s probably more difficult for the console players to really think of this subscription business in terms of cross-platform experiences. As we discussed, cross-platform experiences, subscription, streaming options, are all connected. A really, really good game subscription, if it’s going to meet customer needs, might need to be quite cross-platform. That might be less mentally easy to digest for a console platform business, than it is for an independent player. I think that’s one potential disadvantage, that you would need to heavily disrupt yourself, in order to really attack the subscription space, in a cross-platform way.

If you accept that cross-platform play is really important to a subscription experience, then there’s a disadvantage, unless they can get over the hump, on that issue.

In terms of advantage, streaming is difficult and you need a platform that’s efficient, to do that. If you want to play a game in the cloud, then you’re effectively putting PlayStations and Xboxes in the cloud. PCs and PC architecture doesn’t do that very well. It doesn’t do it very efficiently. Whilst there are players doing that – you’ve got GeForce and other people and Steam is entering into that space – there is an advantage to a singular, dedicated platform to do that. So I think there are advantages that can be played out and, of course, they have access to the customer base, to promote their service. I think those two will be an interesting combination. But certainly, I don’t see the case where you can only really be in the subscription and streaming business, as a console. I think there will be other players.