{audio:0:00:13} Can you bring us back to the start of the console world and share a bit of the history around the console?

{audio:0:00:19} One of the important questions to ask, when you have a new business category is, what problem is it solving? What business problem is it solving? What problems is it solving for us, as consumers? It’s worth remembering that, back at that time – we’re talking more than 30 years ago – computers were fairly clunky and their distribution was not as widespread as it is now. They were all in different formats; they had different architectures and different configurations. If you were a game developer, it was a bit of a nightmare. You would not be able to develop the same game for everybody, so you’d have different versions of the game, for different graphics cards. If you were a consumer, it was even worse, because you didn’t really know what you were talking about when you were buying a game. You didn’t know how well it would work on your machine.

{audio:0:01:11} Consoles really solved that problem of accessibility, of simplicity. Why that was so important was that, in the early days, video gaming was in category of toys. The target market was a lot younger than it is now. If you’re thinking about your market, of Sega and Nintendo, it really was quite young people. There were economic issues around having access to computers but, also, technical issues around simplicity and robustness. That’s where the console really fitted in. It solved this problem of accessibility and simplicity and took the technical labor out of it.

{audio:0:01:54} In some ways, Steam, in the last few years has solved many of those problems of PC. It takes away those issues and works out, for the consumer, what’s going to work on their PC or their Mac. It’s addressed parts of that problem. But there are still affordability and access issues, beyond that, which the console solves. That’s why it existed in the first place, I think, as a reason to attract developers and consumers.

{audio:0:02:27} Once in there, the great thing for developers was that they had two types of certainty. One was they knew, to an extent, what the size of their target market was. In those days, that was defined by the installed base, the number of bits of hardware sold. Now we define it by monthly active use. In those days, you could say, we sold this many. The other very important factor for the developer was that they knew what each consumer had in their hand. They could optimize for that machine, which allowed you, effectively, to go further, with any given piece of hardware kit. You didn’t have to think, well, this guy might not have a graphics card like this. Life was better for developers, in that respect.

{audio:0:03:18} What it also did was that it added something into the value chain; it added a participant, which was the console platform. The console platform didn’t come for free. If we look at the business model that the console platform players were working on, they were not making money from selling consoles. Nothing much has changed there; in the 25 years that I’ve been in the business, that’s been fairly consistent, though it’s changed in the level of intensity of that factor. What they were doing was that they were making money from the developer and the customer. They were taking a chunk out of the developer’s revenue, which is the model that has continued, since then.

{audio:0:04:04} They eliminated a lot of friction in the route to market for games and created a customer base but, obviously, that came at a cost. That was the environment of the console industry, at least at the time when Sony got into the business.

{audio:0:04:23} How would you compare how Sony competed with Sega and Nintendo?

{audio:0:04:28} When Sony entered the business, there were a lot of puzzled looks as to what on earth was going on. How could an electronics conglomerate compete with a multi-faceted entertainment business, where there were two very, very strong brands? This is a really good disruption story, in a way. You can look at the classic, what value was the new entrant adding, to be able to break into what was a relatively controlled, established marketplace?

{audio:0:05:05} There were two types of value which really allowed Sony to compete. The first was around the way that Nintendo and Sega structured their supply chain and the medium they were using for distribution. If you think back to the distant past, games were largely distributed on cartridges. Those cartridges were expensive; they contained a solid-state memory. Every time you were buying a game you were, effectively, buying what is now a memory card or equivalent. So they were expensive. They were really slow, in terms of the process. If you were going to launch a game, you needed to place an order, get a slot off the manufacturer of that, because it didn’t scale that well and wait two to three months for it to come through. If the game was a hit, you’d have to wait another three months, by which time, the demand may have evaporated. Highly risky; if you over-ordered, you had a huge amount of stock and you couldn’t really do just-in-time delivery, for this kind of machine.

{audio:0:06:13} The other limitation created by the format that they had was that they weren’t very big. We’re now used to memory cards with massive 32gb, 128gb; they didn’t exist in those days. These cartridges were tiny. Sony came along with the idea of publishing on CD. CDs were not huge, but they were many, many times bigger than the other models. They were cheaper, they were quicker to produce. They could be churned out, very quickly, in factories, in Europe, Japan and the US. So it changed the economics.

{audio:0:06:55} There’s an interesting story around why Sony got into CDs for games, because the game CD format is different from a normal audio CD, or indeed, a CD-ROM. That’s because some of the demands and characteristics of gameplay are different. In fact, Nintendo had spotted its weakness, early on, and had asked Sony to develop this format. Sony and Phillips, at the time, were the primary patent holders and technology leaders, for optical discs. Nintendo came to Sony; the relationship was very strong and they asked Sony to develop a CD format that would work for games. The founder of PlayStation, Ken Kutaragi, did exactly that. He worked very hard and, with some creative effort, created a new optical disc that would work well for games, with very fast read times, etc.

{audio:0:07:53} What happened then was that Nintendo got cold feet. Miyamoto and some of the development teams were worried about a couple of things. Firstly, they were worried that they weren’t used to it; the consumers might break the CD. Children wouldn’t be able to deal with it; they’d have lots of customer problems. From a user experience point of view, they were worried that a CD wouldn’t be quite as immediate as hard memory. So they pulled out. Having developed and got this technology and, at the time, Sony was quite cash rich, they decided to deploy it. They way that they deployed it was to build what become PlayStation 1.

{audio:0:08:37} The advantages of a CD over memory were also there for the consumer. Because there was all this extra memory you could do, what we then used to call, 3D gaming. When we talk about 3D gaming, we’re not talking about 3D visuals. We’re talking about a 3D world, where the player can roam in more than two dimensions. Obviously, that took memory and graphics. That was the first big shift. With the extra memory, the consumer could have a bigger world, a better world. That created consumer benefit and business benefit. That allowed a change and disruption in the market.

{audio:0:09:17} Can we talk about the technical dimensions of an actual console? What does a console actually do?

{audio:0:09:24} As a starting point, most people fall into the assumption that what a console does is grubs. That it takes the data on the game and renders it and it’s just processing. To some extent, that is the primary and necessary task, of a console. In recent years, that task is fairly generic. The task of actually playing back and rendering the game is not very different in its approach, between a PC, an Xbox and a PlayStation. The differences come outside of that environment, in small decisions around what user interface there’s going to be, what the I/O ports are. An I/O is an input/output; so how do you control your input/output?

{audio:0:10:12} If you think about Microsoft’s early activity with Connect and the huge success that Nintendo had with Wii, those were not really about the processor. What they were about were decisions on the input and output mechanism and what the relationship would be between the player and the game. I think there were two key elements to a console and now there are layers and layers extra. One is its ability to rapidly and effectively play back a game. That comes with a whole set of baggage, in itself, in that the console establishes a format to which the game developer must subscribe and write to. That’s the platform that the game developer must conform to, in order for it to work well. If it does that, then the console can do that reliably, quickly and effectively. After that, the decisions on the console are around how quickly and effectively it can do that, which affects the cost base of the console. Then also, how the consumer is going to access it.

{audio:0:11:21} I’ve talked a little bit about the input/output devices, whether you’re using a dance mat or a gun controller, or you’re using a VR headset. All of those things are not generic. A lot of these things have to tie into the console and work smoothly, without latency. If you’re going to try to get what we used to call the plug and play experience, to that console, that affects the whole value chain, including all of the things that connect to the console, physically or otherwise. It could be a headset; it could be a voice microphone. The point I’m making is, when we think about a console, it’s not just a piece of processing equipment. We’ll probably talk a bit about how you move consoles into the cloud. When you move a console into the cloud, you can’t move all of it into a cloud, because it’s not all about processing.

{audio:0:12:20} Do you think the console has an advantage over streaming, for the likes of AR, VR?

{audio:0:12:26} Absolutely. To some extent, I think consoles have to, and will, evolve. The consoles we see today will change and take advantage of streaming technologies and cloud technologies. In many cases, they already do. But I think the important thing is that, what a console does cannot easily be completely moved to the cloud. If you think about a dance mat or a VR headset, they often rely on things which are very physical and need to be closely located. In the case of VR, the problems that you see with latency are very much more acute, because when you turn your head, you’re immediately having to render a new world, so there are challenges.

{audio:0:13:12} They may be overcome in time but I think, for the foreseeable future, there are going to be limitations on what you can do with a purely cloud-based solution, for gaming. The console has never been just about processing.

{audio:0:13:31} How, exactly, do you see the console changing? You mentioned that it’s going to have to move, to some extent, to the cloud. How do you envisage that console in five or seven years’ time?

{audio:0:13:42} I think the first thing is that the console is an interface, with the consumer, for delivering a user experience. If you start with what happens at the beginning of that user experience, a lot of that is already not defined by the console. It’s defined by a combination of system software and activity that happens in the cloud. In the case of PlayStation 4 and the current Xbox generations, the consoles are already hybrid devices. Certainly, in relation to user experience, when you think about messaging, communication, viewership, where people are seeing other people’s gameplay, those are already connected experiences. They are also fed through networks. That’s going to continue and I think you will get to a point, also, where gameplay, game assistance, help, is partly done in the cloud and partly on the machine. Actually, that happens already and will happen in the coming generations, more and more.

{audio:0:15:00} There are parts of gameplay which are best done locally and parts which can be done elsewhere. Those are problems that we will begin to see emerge. It’s also worth bearing in mind that, when we think about streaming, most people that stream games at the moment, do so on a console. It’s another way of accessing a game, but most of the people that want to access a game of that type, will have some kind of console, whether it’s an Xbox or a PlayStation, or something else.

{audio:0:15:32} How do you think that will change as we get more cross-play? Do you think that console is quite sticky with the consumer?

{audio:0:15:37} Streaming lends itself really well to two trends, which are quite dominant at the moment. It lends itself really well to cross-play, because it’s very easy for a customer to jump from their mobile, to their PC, to their console and not feel tied to one device. It also lends itself well to subscription. The reason for that is that subscription models, typically, offer a large variety of games and the value proposition is about trying as many games as you want, until you find something that fits and meets your needs – we don’t have trailers, but we have the ability to play – and then diving in. Of course, that’s not really easy to do if your process of trial is downloading 50gb or 100gb games every time. It’s not really a Netflix type experience.

{audio:0:16:34} Streaming lends itself really well to those two use cases. Particularly for mobile, it addresses challenges of the device. Mobile gaming is a really big part of the industry now and, despite its limitations, it’s very popular. Its limitations are that the processing power of phones is still weak, compared to the higher-end consoles but, more importantly, the battery life of a mobile phone, if you’re playing a game, is really very poor. That isn’t improving because, as screens get better and processors get better, they just drain more of the battery and games is probably the worst thing that you can do. Many, many times more power is used playing a game than it is watching a video.

{audio:0:17:22} Streaming addresses both of those, quite nicely. Once the problems of bad network performance are overcome, I think we will see the ability to have almost any game, on a mobile, subject to the I/O port issues, which are also being addressed. Streaming will help there and, I think the thing to bear in mind is that it is not necessarily a binary choice. Just because you stream a game, to your mobile, which you can currently do, through remote play technologies, which the platforms have deployed, that doesn’t mean, on another platform you might not download. What we’ll see, I think, is a hybrid of these two use cases, depending on the type of customer you are and how bothered you are. It’s worth remembering that one of the biggest trends in gaming, at the moment, is competitive gaming. For those consumers, they are worried about whether their controller is working fast enough and their life is in many, many milliseconds of differentiation. They’re going to want to play locally, for a lot of their experiences, anyway.

{audio:0:18:34} I think it’s going to depend on the consumer and the type of games you’re playing. To play cross-play doesn’t always mean you have to cross-play as a stream. I think it’s going to be a very plural world, for the next decade.

{audio:0:18:45} Even though you mentioned these advantages that streaming has and, obviously, the changes that we’re seeing on the UX and business model, you still think that console is crucial to the ecosystem and that it’s pretty sticky, with the consumer?

{audio:0:18:59} I think it has an important place for the consumer. If you think about where the console market has drifted, overall it has been quite flat and, as a trend, it’s not exponentially growing, but the gaming industry has grown hugely. Console hasn’t shrunk; the stories of the demise of console have been going for the last decade and they’ve proved false. I think it will stay. But if you look at where it’s shifted, it’s actually shifted into mobile. That’s been the main threat or challenge to the gaming environment. In terms of console-type games, I think we will see some of it move to streaming. My real question is, if you look at the customer base for those kind of games, are they going to rely on a pure streaming service? I think it’s going to take a long time, for that to shift. For the next decade, and perhaps longer, the type of gamers that want to play console-type games are sufficiently fussy about their gameplay experience and ecosystem and sufficiently economically committed to their hobby, that there will be a good role for the console.

{audio:0:20:10} So you think that the advantage that Microsoft potentially has with Azure is, therefore, limited, in a way?

{audio:0:20:19} As I mentioned, I think streaming is an important part of the user experience, for all gamers, whether you have a console or not. Azure is an infrastructure that Microsoft can leverage to build xCloud and that’s what it’s done. As it has done that, internally, it has some benefits, I guess, to being able to deploy xCloud and offer streaming games. Whether that really is so important, I would question. In the end, these factors are decided around cost bases and the fact that you own your own cost base doesn’t make the cost go away. Azure is in the business of selling its product, in the open market and I’m sure it will; so’s Amazon. I think what Azure and AWS do are productized and commoditized. The layer of top on that, what you need to do for gaming, isn’t; it’s very specific.

{audio:0:21:28} There are lots of economic challenges as to how you would go about delivering gaming, in a productized way. I don’t think either AWS or Azure have cracked that. Until they do, I think the infrastructure benefits are limited. Not nothing, but limited.

{audio:0:21:46} How did Xbox actually lose the console fight, versus Sony?

{audio:0:21:51} I think it’s too early to say they’ve lost. They lost market share in the last generation. If you look back at the history of consoles, quite often, market share shifts, not because of one side doing something brilliant, but because of the other side messing up. To some extent, I think that was the case with the last generation. After a troubled PlayStation 3, Sony put in a really solid, consumer-centric, well thought through proposition, for the customer. Xbox went off on a little bit of a tangent. If you recall, they had a good position – not everywhere in the world – but certainly in the US, the UK and Australia. They are still pretty weak in much of Europe and in Japan. Certainly, it wasn’t the case that Xbox was the dominant global player, but it was certainly did really well, compared to PS3.

{audio:0:22:46} If you look at what happened after, there were just mistakes in its consumer proposition. For example, the issues around rental and second-hand games. It wasn’t a mistake of technology, but there were periods in time where there seemed to be a distraction from a consumer-centric position. There was also a little bit of a confused position, around where Xbox had gone into its video propositions and tuners and those kind of things, which I think had confused the market. If you recall, they had this ability to plug into your TV and watch TV, using old broadcast technology, at one point. In those steps, there was a little bit of confusion. Whereas, PlayStation and Nintendo had remained hyper focused on their proposition.

{audio:0:23:39} They’re very small differences. When the market swings, it swings around those small differences. I wouldn’t say that Xbox has lost, it’s just that the market share has changed; it’s still there.

{audio:0:23:54} 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?

{audio:0:24:23} 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.

{audio:0:25:07} 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.

{audio:0:25:51} 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.

{audio:0:26:50} Therefore, what advantage do the console players have in free-to-play, over the other publishers?

{audio:0:26:55} 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.

{audio:0:27:56} 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.

{audio:0:28:06} 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.

{audio:0:29:01} Looking at PlayStation Now, I think there’s just under a million subscribers, when they have 90 million plus PS users. Why is the penetration so low?

{audio:0:29:30} PlayStation Now is newer. I’m not sure about those numbers. I think they are probably a lot better than that. But there have been a few things. Firstly, it takes time for the customer to adopt a new business model. I don’t think it’s a technology hurdle, because the customer actually has a choice of streaming and downloading, for the content that is on the service. I think that both Game Pass and PlayStation Now are growing fairly steadily. But it’s going to take another shift in content and the willingness and vigor with which content is put into that service, for them to grow. You’ll have seen that Game Pass grew very quickly, when Xbox decided to put day and date first-party titles in there. I think it’s really just a question of content proposition and the willingness of publishers and the platforms to shift away from their current model and the economics of that.

{audio:0:30:35} It’s kind of a Catch-22 because, until you have tens of millions of subscribers, it’s very difficult to make economic sense of spending $100 million on a game and then putting it in a service. I think those are the kind of things that need to evolve, over time. I think we will start to see these services grow, significantly, if only because it’s a very competitive space, so no one wants to lose. EA wants to be there, Ubisoft wants to be there, Xbox wants to be there and Sony will want to be there. I think they will just compete and the competition will create growth.

{audio:0:31:15} How do you look at that landscape? It’s fairly complex for the console players, for streaming and, obviously, the changes in distribution. How do you look at the planes of competition and who is set to take share or be best positioned?

{audio:0:31:30} You’re right; it’s a very complex space, at the moment. As well as the current players of Nintendo, Sony and Microsoft, you’ve got Google coming in, with Stadia, you’ve got Amazon announcing that it’s going to come in with its service. In fact, it’s already in the business of providing games to Twitch subscribers or Twitch Prime subscribers. All the while, you’ve got a very consolidated set of game developers and publishers. You’ve got very dominant and important players, in the form of EA and Activision Blizzard, who are also looking to develop their B2C offerings. What we’re seeing is, a lot of people trying to move, to displace the kind of position that the console companies and Steam have had, around being the B2C touchpoint.

{audio:0:32:27} That’s quite natural because games are now connected, in that there is a relationship between the developer and the consumer. That relationship is now longer and closer than it ever was. It’s quite natural that a developer and a consumer will start to have closer and closer interactions and that will affect how you think about the business and how you want to monetize that relationship. I think you’ve got this heady mix and, as a result, you will see that there is a great emphasis on content ownership. If you look back at the history of the game industry, to the extent of you question about who is going to win, I think that answer usually comes down to content and who is able to marshal together the strongest set of content.

{audio:0:33:16} I don’t have a crystal ball on this, but the platform players are in a fairly good position and the existing publishers are in a good position. If your question is about who is going to come out on top, I think it’s going to be about who can marshal that combination of alliances and maybe mergers, that are going to see the strongest possible content position.

{audio:0:33:39} Arguably, this was the big challenge for Stadia, for Google, where they just didn’t have the content to drive the engagement for the consumer?

{audio:0:33:47} Yes, that’s correct. Google can deal with that in many ways. They can buy their way out of it which, to some extent, has happened. They can acquire as they are a very cash-rich company. They can solve the problem; I think it’s just a question of when and whether they want to.

{audio:0:34:06} Can we dive into a bit of detail on how you see content subscriptions changing the console business and the economics of that?

{audio:0:34:17} I think content subscription is not unique to console. We mustn’t forget that there is another platform that’s really, really important and really big and that’s Steam. I imagine that they can also enter the space. Content subscriptions, for me, changed the industry in two ways. Firstly, it’s economic, in that they create a window of opportunity of revenue, which the game industry has been really slow to capitalize on. If you compare the revenue streams of gaming, historically, they’ve been very linear or singular. What’s nice about the last decade, or five years, in particular, is that the revenue streams have moved from being in a very, very small window box, in time, and a very small way of just one transactional sale, to being multiple streams. They’ve been more like the movie industry, where they’re making money from 10 different sources.

{audio:0:35:16} Now you have income from selling the game, from the sale of add-on content, the free-to-play game as a service model and you have subscription, all as possible ways to monetize. If you’re in the mobile, you also have ad-funded revenue. As an industry and a media, we’re becoming a bit more plural and quite similar to the revenue opportunities of movies. That means you can think about your game in a more complex way. All of these revenue opportunities, in the end, resolve down to design decisions and production decisions, as well. One of the interesting things we’ve seen, if we draw an analogy from the movie world, is the type of content that people commission, when they’re trying to meet the business needs of a subscription, is different from the type of content that they commission when they’re trying to do a theatrical release.

{audio:0:36:20} At least in the movie world, I think it has allowed a lot of more adventurous and more risky decisions, on content creation.

{audio:0:36:33} You can serve the long tail rather than just going for the big hits?

{audio:0:36:36} You can serve the long tail, but you also don’t need to think so much about what you’re marketing. If you think about a theatrical release, it’s a one-shot experience and you are pouring a huge amount into that one-shot experience. It needs to have this big hit, big stars. All of that creates this momentum of where the thing gets bigger and bigger. It’s part of the problem that games have. They get bigger and bigger and bigger because it costs so much to launch a game that you need to spend more in making sure it’s successful. The more you spend on making sure it’s a great game, the more you have to earn and so it just consolidates gaming.

{audio:0:37:18} The interesting thing in subscriptions models is that a lot of those economic pressures change. If you’re acquiring for a subscription, it’s much easier to have a range of content. You can take some risks, because you don’t need to have a $100 million marketing budget to create awareness. You’ve got your user base there, to whom you can give the game. We found that, to some extent, with PlayStation Plus where, if you had a great game, it didn’t need to have a huge budget, in order to be very successful. I think there are great positives there, for content creation. We’ll also see this with Apple Arcade; they’re commissioning a lot of content. Hopefully, we’ll start to see a broadening of content commissioning, to sort out the problem that major publishers have had, which has forced them to really reduce the number of titles they produce – which has been quite dramatic, for every major publisher – into often, a handful of these $100 million, $200 million blockbusters. I think the subscription model might drive change, in what I think has become, potentially, an unhealthy trend, in content creation.

{audio:0:38:32} If we go back to the fact that, typically, most of the margin or profit pool has been taken by the content owner; the owner of the intellectual property. Fast forward five to seven years, where there are a lot of free-to-play games, lots of different games serving the long tail, more releases, who’s going to capture that profit pool?

{audio:0:39:14} It’s worth bearing in mind that the profit structure of a platform is quite different from the profit structure of a content creator. Effectively, as a platform, if you’re Apple or you’re PlayStation or Xbox or Steam, you may profit on a game, irrespective of whether the game is profitable. This is when you are selling a third-party game. From day one, you’re making your 25% to 30% on the title. You’re making on everything. So if you’re selling a billion dollars of games, you know you’re going to make your $200 million, $300 million contribution. That’s not the case as a game developer. As a game developer, you have a totally different risk profile. Your business model, whether you have some kind of external funding or not, means you don’t make any profit until you have recouped and covered your entire development costs. Bearing in mind that development cost now, doesn’t stop on the day you launch the game; it carries on.

{audio:0:40:21} You’re having to recoup your sunk cost and then fund your ongoing development, to keep the game as a service going. It can be a long time and a lot of consumers, before you get to break even. There are some useful things, tools and technologies, that mitigate that. But it means you are in a different position. As a result, I think it’s quite right and necessary that the bulk of revenue goes into this content creation, because you’re only making money when you are successful.

{audio:0:41:00} How do you look at the change in the game developer economics?

{audio:0:41:04} Fortunately, whilst game developers, going back in history, have always been on a sticky wicket, to some extent, there are a lot of benefits and changes, over the last years, which have been empowering for the game development community. One of them is the advances that have been made in the tools and middleware side of the business and the ability to, effectively, out of the box, license in the technology you need, in order to create a game, without having an army of coders doing stuff for you. That’s helped game economics and game development and liberated it, I think.

{audio:0:41:50} The other side is that your sources of funding and the ability to raise capital have dramatically changed. When I started in the industry, 27 years ago, there were very few sources of funding for a developer. You might be lucky and you might have a rich uncle; there wasn’t as much of an angel community. What you would actually do is, you would go to a publisher – and admittedly, there were a lot more publishers – and ask them to fund it. If they funded it, it would be a bit like the record industry. You’d take the money and then you’d wait a long time to get any more out of it. That was your only route. You were reliant on publisher decisions and publishers make decisions about their creative investments in a very different way from developers.

{audio:0:42:43} By and large, developers will create things because they think they are creating something wonderful and exciting. Publishers will invest in things because they think they’re going to have a low risk return on investment. That, in itself, was a constraint. What’s happened, since then, is that the sources of funding for a developer have got a lot greater. They have been able to go to platforms, for the last while. Nintendo really didn’t commission anything much. They had Rare and a few places they went to, but it was mostly their own stuff. Xbox and PlayStation commissioned a lot of content. After that, there was the ability to create and sell games for the subscription services, such as Plus and Xbox Live. I think, most importantly, in recent times, has been the advances in angel and venture capital investments and the fact that games, which was kind of an unattractive area in the early days, is now very attractive and a very well-understood area in those communities.

{audio:0:43:52} Going back to the publishers, where they invested in a developer and intellectual property, how are they looking at the changes? For example, do they want cross-play games and, going back to the console and the platform business, whether it’s Steam or the consoles, they earn a margin based on every game that goes through the platform. If we have more cross-play games, does that pressure the take rates on all the platforms?

{audio:0:44:24} I think there is pressure on the margins, both in PC and console. Digital marketplaces can be competitive and we’ve seen new entrants, like Epic, coming into the digital marketplace business, with both their middleware and their marketplace and being very aggressive on their margins. All that aggression and competition and the fact that you’ve got Google and Amazon coming in, creates pressure on the margin structure, certainly. To some extent, that pressure has been bubbling over for a long while, because as the publishers consolidated, over the past couple of decades, when you have consolidated suppliers into a platform, obviously, their bargaining position increases.

{audio:0:45:17} There’s lots of types of pressure. It will be interesting to see how that impacts the environment. In the end, what a developer and a publisher wants, is a strong active user base, because of the development economics we talked about and the need to achieve scale. That is more important, to some extent, than whether you are paying 15% or 20% or 30%. It’s painful and I think everyone would prefer to pay less. But the way in which a developer will look at the economics is around the opportunity. If you look at Apple, other than the fact that it’s getting a bit knocked around the head at the moment, by the European Commission, it maintains a reasonably level playing field of its margin, which is relatively high, at 30%. Most developers still choose to lead on an iOS platform, because of the installed base that it offers and the fact that they need that income stream.

{audio:0:46:23} But isn’t mobile quite different from PC and console, in that sense?

{audio:0:46:28} In terms of the basic economic realities of whether or not you should develop for a platform, I think it’s kind of the same. You would have a fairly brutal calculation on what your opportunity is, in terms of revenue and lifetime value. Obviously, the margin you need to pay, to get on that platform, comes into that equation. It’s a factor. But the ultimate determining factor is not just that margin; it’s the installed base that’s created. It’s kind of the same economics. If PlayStation or Xbox said, okay, we’re going to do it for free or it’s going to be 5%, but as a result, the installed base that you’re addressing and the user base is going to be half what it is now, that would probably be unattractive. It’s that balance that the industry needs to find, around this.

{audio:0:47:31} In mobile, you have iOS and Android; that’s defined. But the big question now, on console and PC, is where the users are really going to migrate and how the bargaining power changes for the platform owners?

{audio:0:47:49} Yes, and it is interesting. In terms of cross-platform play, we’re seeing a convergence of console and PC communities. Whereas, in the past, they were very different, both as people and franchises, they’re beginning to get closer. The console world was not very free-to-play friendly, five years ago. However, we’ve seen, in recent years, quite a lot of free-to-play content come onto the console and those have often been PC-origin franchises. Those worlds are beginning to get closer. I think we’ll start to see some interesting dynamics, where consumers are making choices across PC and console. But it’s worth bearing in mind, going back to our original discussion about the history of why consoles exist, the problem statements of accessibility and affordability, which consoles addressed, to some extent, is still there.

{audio:0:48:58} In order to have a PC that does the same job as an Xbox or a PlayStation, you need to spend a lot of money. I think there is still a role to play for the consumer base that wants that. At the same time, if you look at the competitive gaming and esports environment, where you have very, very dedicated gamers, who are not cost conscious – they want the very best and the very latest and they want to continuously upgrade their experience – they are still living in the PC world and they haven’t really shifted. You’ve got this fragmentation, to some extent, but the overlap pool is a lot bigger.

{audio:0:49:41} As you worked on PlayStation Plus and PlayStation Now, how did you look at the evolution of lifetime value, for games?

{audio:0:49:54} Most of the time, I think I looked at lifetime value as a question about a consumer. It’s not really the lifetime value of the game; it’s the lifetime value of a relationship. There are several ways to look at it. You can look at the lifetime value of that relationship, in a particular service, or as a company. Both of those are valid. It gets very complicated when you are looking at it across the portfolio of services, for obvious reasons, but if you take it just for a particular service, such as a PlayStation Plus, then the lifetime value is really a function of tenure. Obviously, you can think about it in terms of your pricing.

{audio:0:50:35} Is it about $80 a year, for Plus?

{audio:0:50:39} It’s less than that. It’s in the $60 for the Plus services. It’s about $10 a month for Game Pass and PlayStation Now. Lifetime value is a function of tenure; how long they stay with you and their retention and loyalty and their feeling of value. In some cases, there’s obviously more complexity in the economics, because when you are playing a game, as a member of one of these services, that’s not the end of your economic relationship. You might upsell; you might buy the game that you’ve been streaming, you might buy add-ons. The interaction between these free-to-play or game as a service content and subscription is really very interesting, because the lifetime value then, is not just what you’re getting as a subscription, but it’s what that subscriber is buying.

{audio:0:51:29} How did that evolve? £10 per month, on average; what was the lifetime, roughly, of gamers? How did the average revenue, per user, actually split between the subscription and the in-game add-ons?

{audio:0:51:44} I think it’s very early days. If you look at most of the play and use cases of subscription gaming, on Game Pass, primarily, people are going in and they are playing those games and it’s the catalogue gaming experience. What’s happening now is that there is the start of this process of playing a game, streaming it, liking it, downloading it. After you’ve downloaded it, you can then get add-ons to it. I think it’s very early days, on the economics of that. It’s certainly growing but the bulk of revenue from a subscriber, at the moment, comes from their subscription. What’s interesting is, most subscribers to a service are also very, very healthy transactors. At the moment, what’s happening is that it’s not that they are subscribing and buying lots and lots of add-ons; that trend is evolving. But those subscribers are still buying day one games and they’re still spending a lot of money buying games, outside of the subscription.

{audio:0:52:56} This is where I think we’re kind of following the movie model, where you have theatrical releases and people buying content, day one, and then using their subscription for their catalogue.

{audio:0:53:08} How did you think about driving add-ons and in-game services and live services, for the subscribers?

{audio:0:53:16} To some extent that’s a function of the game. The games do a very good job of that and each game has a different mechanic for driving that. In the case of EA, they use FUT points; in Call of Duty, there are lot of map packs. Each of the game experiences have a different model of where they see their game as a service revenue evolving.

{audio:0:53:41} Is Sony’s incentive to drive those in-game transactions too obviously.

{audio:0:53:45} Absolutely, yes. Platforms will make their margin, irrespective of whether it’s a game sale or an upsell of a map pack or a piece of add-on content. Certainly, there is an incentive to do that. I think there is a certain amount of awareness that can be created, at a platform level. But the primary task of the mechanic of a game as a service model is that the game generates that demand. Then the job of the platform is to create a frictionless way for the consumer to acquire that.

{audio:0:54:27} How does the developer look at which platform is best for game as a service?

{audio:0:54:33} That starts from the route to market, to acquire customers. The start of the game as a service – I guess you’re meaning the free-to-play type of games – in that model, what’s really important is, getting your active user base up. You want your MAU and your DAU to be very high, as soon as possible, so you’re creating your community effects, you’re getting a vibrant ecosystem. Then, you’re basically into in-app purchases. Whether you are on a PC or a console, all of them facilitate in-app purchases, within the game and so it’s fairly neutral.

{audio:0:55:15} Where I think the difference is, is how you go about acquiring your user base. PC is, obviously, a more open platform for that and there aren’t any restrictions on what and how you get to your route to market. On the other hand, it’s a more fragmented platform. Typically, PC developers are still very dependent on Steam to acquire that user base and it’s very easy to get lost, so that’s the downside, in the PC world. It’s still a problem on console but you’ve got a defined user base to target and market to. I don’t think one has a particularly great upper hand in this business.

{audio:0:55:57} But how do you see console owners approaching this? The platform owners have huge advantage in the installed base so, looking forward, do you see them partnering with certain publishers? How do you see the attractiveness of rolling out free-to-play games with certain partners?

{audio:0:56:18} I can’t talk very specifically on an individual company but, broadly, platforms will now accept content from publishers, if the content fits their content criteria. There are not huge gates. There are quality gates, which most publishers of good content will meet very easily. Then the question is, which titles will platforms co-market with? It’s no longer the case that platforms are really active gatekeepers, where they’re selecting what does and doesn’t come on the platform. There are QA rules and legal and decency rules that each of them have, for obvious reasons. But beyond that, the platforms are not open, but they are accessible. The real question is, which of the types and categories of title does the platform choose to actively promote? That depends on the opportunity.

{audio:0:57:23} Most of the time, that is a fairly commercial decision about whether the title is going to do a function which they need. You can map out these functions fairly easily. The first would be, does the title bring in new customers? A great example of why Fortnite was so successful on the consoles is that the console business, especially PlayStation, thought it would bring in a lot of customers; and it did. The second function might be around revenue. By partnering, is there going to be really significant revenue coming from that title? The third and, I think, often neglected function, might be that it’s completing the portfolio. Perhaps there has been a weakness perceived in the platform’s portfolio, in this area and this addresses it, so they want to make sure that it fills that gap.

{audio:0:58:18} I think the first two are really the things that are front of mind when considering, from a platform point of view, what content may or may not work. Those things all come into play. But in the end, it is often the marketplace and the economics that will determine a lot of that and guide that.

{audio:0:58:35} Final question and that’s Amazon. They’re entering the space and they obviously have Twitch, already. How do you look at the potential disruption or positioning of Amazon?

{audio:0:58:47} I think you mentioned the most important factor there which is that Amazon owns Twitch. Twitch is a very, very big part of the gaming ecosystem. It’s worth mentioning that Twitch sites alongside YouTube. YouTube is actually where a lot of game streaming is viewed and a lot of gameplay is viewed. The viewership business is split between YouTube and Twitch. Then Mixer, from Microsoft, comes in in a growing portion. But Twitch gives it a huge access and credibility to the gaming user base and, particularly, this growing category of viewership. Viewership is now almost as big as gameplay. People are spending as much time watching other people playing games as they are playing games.

{audio:0:59:42} What that means for Amazon, is that it has ready access to a very rich pool. One of the barriers to entry would be its credibility in the space and ability to access consumers and it has that and it also has a good knowledge of who is buying games, because it sells a lot of games and consoles through its ecommerce business. I think the combination of those two things, perhaps supplemented with their strengths on AWS, on their ability to deliver games to customers, means that if they can get their content proposition right, they have a great opportunity. Twitch already has a Prime premium membership, which you get with Prime, so they’re already kind of entering that space of subscription gaming. That’s been a good playbook for Amazon, as to how they build up a customer base. They did it with music, with Prime Music and then they’ve obviously done it with their delivery business. I can see the same thing happening here.

{audio:1:00:48} I think, initially, they are appealing in the PC space, but there’s no reason they shouldn’t expand that offering to a more broad-based subscription. I can see Amazon, if they’re willing to go into this space – and it’s not an easy space – having a good run at it.

{audio:1:01:07} It all comes back to the point we made around content. They have to have the content?

PlayStation: History of the Game Console

The original problem of accessibility solved by a game console

How Sony entered the console business and the relationship with Nintendo

The core technical functionality of a console and why it is potentially crucial for AR/VR

PlayStation: History of the Game Console

Former SVP, Corporate Strategy and Development at PlayStation, Sony

inpractise.com/articles/playstation-history-of-game-console

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Nainan Shah

Former SVP, Corporate Strategy and Development at PlayStation, Sony

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PlayStation: History of the Game Console(June 26, 2020)

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