The Platform Dilemma

Even if you’re not part of the video game business it’s hard to miss the negative news captivating the pixel industry. Over the last three quarters, the games business has lost an estimated 18k jobs due to budget cuts, hundreds of project cancellations, and a realization the COVID surge was a bubble waiting to burst. In total, the largest game companies have lost a combined $31.53 billion in market capitalization since Q1 2022. Revenue growth tanked from a high of 21.2% at the end of 2021 to a meager 5.8% in 2022 - more than 3x lower then pre-pandemic growth. Newzoo estimates that 2023 revenues are only up 0.6% from 2022. Of course markets ebb and flow, but a key question remains, is this simply a burst bubble, or is it the canary in the coal mine demonstrating a necessary business model shift the industry needs to take?

It’s important to understand the dynamics at play and how they juxtapose with typical narratives during down periods. Multi-hundred billion dollar industries always have many dynamics at play which contribute to their success or failure. Understanding these dynamics is a crucial aspect in the quest to future success, or at the very least, to prevent further downturn. For the purpose of this article let’s take a look at the distribution pipeline; in-particular how important market projections and platform development choices can be.

A Little History

Many of my contemporaries joined the industry in the early aughts, just before the seventh generation of consoles started to hit the market (Wii, Xbox 360 & PS3). Console gaming was on the rise, distribution channels were increasing, new players were entering the fold, and generally speaking the market was on the rise. Even through the 2008 financial crisis the business managed to come out with a “recession proof” moniker. From 2005-2008 seventh generation consoles were on pace with the previous generation (GameCube, Xbox & PS2) accounting for ~78M units sold. By 2009 the the seventh generation was far out pacing the previous with ~110M units sold, over 50M attributed to the Nintendo Wii. The Wii opened the market up to a whole new player base which would have knock-on effects for the eighth generation and beyond, leading to over 117M PS4 units penetrating the market today. The modern baseline for console install base saturation/success is anything over 115 million units.

Generally speaking, 2005-2020 was a pretty good time for the industry. However, life is what happens when you’re making other plans, or so the adage goes, and one of many side effects resulting from the pandemic (and arguably not paying attention to the underlying market dynamics) is a bubble in the market we’re only just truly understanding.

Platforms & Distribution Pipelines

In 2021 the market was projecting PS5 sales to hit 63.5M units and the Xbox Series X|S to hit 44.3M by 2024. As of Q2 2024 PS5 and Xbox sales are down 24% and 60% respectively. That’s a delta in the projected install base of nearly 30 million players - or to put it another way, more than the entire install base of Xbox Series X|S to-date. Xbox One has an install base of almost 58M.

Gaming-based PC installs were growing steadily at around 3.5% from 2010-2190 when it spiked to nearly 13% in 2020. Over the last 3 years PC growth has declined sharply to about 1.5% YoY. The overall install base sits at around 1.8B, but that figure is hard to qualify, not just from an actual minimum spec but also a true active player perspective. As an example, revenue for PC vs console was $45B vs $30B in 2023 but the $15B delta doesn’t exactly square the circle when the PC install base is 5.5x that of all major modern consoles combined.

Development Trends

Now let’s juxtapose install base with development trends. In January of this year Steam shocked the industry when they announced over 14K games had been published on the platform. It’s worth noting that it’s in Steam’s best interest to boast about the number of games published on the platform and not all 14K titles should be considered in a serious market evaluation discussion (more on that in a future article). Once adjusted the actual number of games is far less. In 2023 it’s estimated that there were 225 titles release on the PS5, 180 on the PS4, 202 on the Nintendo Switch, 224 on the Xbox Series X|S, 164 on the Xbox One, and 412 on PC.

What get’s really interesting is when you compare install bases with platform publishing decisions. PlayStation 5 had 20% more games released on the platform compared to PlayStation 4 but has 54% fewer players. Xbox Series X|S saw 27% more titles published on the platform compared to Xbox One but has 53% fewer players. Moreover, when GDC released their survey stats recently we see that only 16% of developers are working on PS4 projects and 18% are working on Xbox One titles; which wasn’t far off from what they ranked as their personal preference to work on - PS5? @ 11% and Xbox One @ 13%. It’s always sexy publishing on the latest and greatest platforms but it’s not necessarily the best business decision.

PC publishing has a slightly different problem on the opposite end of the spectrum, over saturation. Publishing on saturated platforms makes discovery difficult and when you combine that with algorithms designed to feed players “what they want” it’s nearly impossible to rise above the fold without significant marketing cost - a feat made harder in an industry currently experiencing an ebb state.

Key Take-A-Ways

If we bring all of this back around to the consumer we can see part of the reason why the industry is in a down-turn. In a way, both PC and console are facing publishing saturation, just via different culprits. Publishers are saturating an underdeveloped install base on the console side and platform holders are flooding the market on the PC side due to a lack of reasonable curation. The strongest ecosystem, and the one that should be emulated, sits with Nintendo. The install base is ~138M, 15% greater than the PS4 and in the market for 4 fewer years. Price integrity remains strong for longer periods of time and you rarely see first party titles on sale.? The lifecycle of the device is healthy and they don’t try to bifurcate the base with competing options for developers. Most importantly, the value proposition to the end customer is clear and unwavering - fun games for all ages.

The question at hand, is that the cap in the market? All markets have a cealing, the game’s business just hasn’t seen what that looks like yet. The short answer is that we won’t know without a few more years of data. The current state of business is obviously experiencing a plateau. In the past, we got over plateaus with advancements in technology and game development that opened this form of entertainment to a wider audience. But, the market’s in a different situation currently. We’re running out of markets to expand to, birth rates are falling in all major regions, games aren’t getting more inclusive, there getting more narrow to specific sub-genres, and players aren’t adopting technology advancements like VR at any rate worth noting. Irrespective of market expansion and/or new technology, we need better solutions for the current situation otherwise we’ll se a serious contraction in the industry.

Wrapping It Up

When Microsoft announced their intension to buyout Activision/Blizzard the general refrain in the industry was a fear Call of Duty (and other titles) would be exclusive to Xbox; but that was never going to happen because Microsoft understands the massive success of Call of Duty is largely based on the ubiquity of it’s distribution. Our industry is so conditioned to hold up old business models steaming from the console wars that it can’t see the future of gaming software relies on ubiquity of distribution and platform agnostic sensibilities. Last month at GDC, Microsoft boss Phil Spenser noted that “The video game business is big but barely growing.” He went on to say “We’ve raised the price of games. We went through COVID. We found ways of getting more money per player. I think at some point you reach a peak on that, and, frankly, it can go to some places that are manipulative that I'm not a big fan of. The solution, is to find new customers, and you find new customers through new ways of delivering games to players who can't play those games today, whether that's device, whether that's access, whether that's price point of video games.” He’s right, and for developers that means building for all necessary platforms and implementing cross-play when possible so that each title has the maximum amount of exposure. There is no need to be tribalistic when it comes to platform planning. The games business is a business after all and businesses are in the business of doing two key things, growing and making money.

About the author: Chad McNeill has been a veteran of the video game, SaaS and entertainment industries for over two decades. In that time he’s had the opportunity to work with many leading international companies and known entertainment brands from all over the world. His passion for games, and dedication to expanding the landscape, has lead to a successful consulting career helping development studios understand markets and strategies that position titles for success. When he’s not working with clients, Chad is often donating time and resources to help support the positive attributes of gaming and guide the next generation toward healthy and positive experiences.