Going the distance: The console cycle

Recently it has become fashionable to suggest that the current console generation is as good as over. Nintendo, with an unassailable lead, has effectively won, while Sony has limped into last place. Where are we actually in this console cycle? Has Nintendo really ‘won’ and Sony ‘lost’?

The current state of play is that Nintendo’s global Wii installed base is just under 97 million, 360 is at over 68 million and PS3 is approaching 67 million units. It certainly looks like a devastating lead.

To surpass Nintendo, both Sony and Microsoft would need to generate 30 million unit sales over and above what Nintendo achieves during the rest of their respective consoles’ lifetimes. That is, without question, a formidable challenge, but history suggests it is an achievable one, for Sony at least.

This snapshot of the runners doesn’t come in the last lap; in fact not even in the last half of the race. Around 55 million of Sony’s 150 million-plus PS2 unit sales to date have come in years seven-to-13. In fact, PS2 continues to sell, with some four million units sold in 2011. The original PlayStation also achieved a 10-year-plus lifespan, and this all points to a long term, ‘hold your nerve’-style strategy by Sony to maximise the longevity of its consoles, extending support of its platforms long after it launches successor hardware.

This strategy has put them at odds with Nintendo and Microsoft for whom the arrival of a new format has historically heralded the end of their support for the existing console.

THE HARE AND THE TORTOISE?

If Sony’s strategy is to run a marathon with PS3, then Nintendo’s has been more like a sprint. Wii burst out of the blocks, powering to unprecedented performances in years one and two, selling well over double Microsoft and Sony’s unit sales.

However, year two proved to be Wii’s peak year and although its decline was gradual in year three, it has fallen off a cliff since then, with 2012 sales expected to be around six million, half that of 2011.

With limited room for manoeuvre on Wii’s price and with Wii U’s launch, we do not expect Nintendo to be able or willing to coax much sales life out of the Wii after 2014, by which point sales may well have fallen to immaterial levels.

In contrast, Sony and Microsoft’s strategies have seen their sales grow more slowly and consistently. Launching with more sophisticated, or future-proof, hardware and higher price points, yielding more sales and stimulating price drops, has allowed them to prolong the their consoles’ shelf lives.

However, Microsoft and Sony diverge in other areas. Despite countless geographic initiatives, Microsoft’s sales remain highly concentrated around a small number of countries. Neither it nor Nintendo can match Sony’s extensive international distribution reach, which has proven critical at driving sales during the second half of its consoles’ lives.

While there is no doubting Sony’s long-term thinking for PS3, Microsoft dropped the original Xbox soon after 360’s launch, and its commitment to 360 after its successor launches is unclear.

ON THE DECLINE

PS3 and 360 unit sales peaked in 2011, years five and six respectively, and we do not believe they will be bettered. However, the telling detail is that all three consoles’ current rates of decline are very different.

Sony’s more gradual decline now puts it clearly ahead of Microsoft in monthly global sales – and on track to exceed 11.5 million units in 2012 – and two-to-three times that of the Wii.

We believe that this sales momentum combined with a greater games and non-games content flow from PSN will endow PS3 with a longevity of 12-to-14 years – some four-to-six years longer than the Wii will probably last. Although it won’t get close to PS2’s total sales level.

However, if it approximates PS2’s sales pattern we believe it could see a further fourty million-plus unit sales, a figure that could well put it ahead of Wii.

As with PS1 and PS2, it won’t be hardcore gamers in the major Western territories that drive this late adoption, but more diverse demographics and purchasers from less affluent socio-economic groups in the West and in territories such as Russia, the Middle East and South America, for whom the timing of each games console cycle is always delayed a chunk of time.

So is the current cycle finished? Not by a long shot. There is still huge opportunity left in the market. We reckon that there are at least 70 million unit sales still to come for current generation consoles.

It is also way too early to declare winners and losers. After all, you don’t declare a race over at the halfway point or when one of the frontrunners starts to fall behind.