August 20, 2019

As Video Game Season Starts, How Will Retail Unit Sales Fare?

August 2 marked the unofficial beginning of the video game industry’s sales season, with the launch of Electronic Art’s flagship title, Madden NFL 20. This release occurs the same time each year and generally provides consistent, high-quality content. It is thus a reliable bellwether for how the gaming industry will fare in the upcoming holiday season. The same holds for Activision’s Call of Duty, which is set to launch October 25. More so than Madden, however, Call of Duty’s content and quality can vary from year to year, so results are more open to interpretation.

As we enter this year’s biggest retail season, it’s important to pause and consider what the future holds for game sales — not only this season, but for the next 3-5 years.

The Shift Away from Retail
A recent press release from Electronic Arts mentioned some interesting sales facts, including that, for the first time in history, more than half of Madden NFL 20’s consumer sales were digital. This is indeed an important mark for EA, and the industry in general, but the absence of actual sales numbers has led to speculation that total sales are in fact declining — assuming that, if sales were up, this fact would have been mentioned.

If traditional franchise sales are declining, it can’t be imputed to a decline in gaming interest (at an all-time high), but rather to shifts in consumption patterns, from one-off purchases to free-to-play and subscription models, such as Epic’s Fortnite and Riot’s League of Legends. This, along with the entrance of new cloud-based gaming platforms, will disrupt the retail gaming space, much as the introduction of the smartphone in 2008 changed the gaming landscape forever.

This doesn’t mean the age of hit games with traditional business models will end. Games like Borderlands 3 (Sept 13) and Star Wars Jedi: Fallen Order (Nov 13) will be blockbusters, but a long-term secular shift away from traditional retail is under way, and the effects will impact all youth media consumption. As Netflix mentioned in a recent letter to shareholders, “We compete with (and lose to) Fortnite more than HBO.”

Google
Another factor accelerating this trend toward video gaming as a service is the entrance of new tech giants, who bring with them new business models powered by new technologies. Google’s Stadia platform will launch in November. Though it is cloud-based and provides a platform for other gaming models, Google will continue its tradition of buying a game in order to play it. That being said, Stadia will support publisher subscriptions, as well as offer a premium-tier service with improved graphics and higher speed for $9.99/month.

Google appears to be focusing its disruption on deeply integrating its YouTube and Stadia services, thus creating more ways for spectators and players to interact with each other (and creating more competition for traditional television viewing).

Microsoft & Sony
Incumbent Microsoft Xbox expanded its own “Xbox Games Pass” beyond the console to include PC games. For the moment, however, an Xbox console is still required to stream Xbox games and a PC to play PC games, as is an unlimited subscription. Separately, Microsoft announced a new platform-agnostic cloud gaming service called “Xcloud,” with early public trials to start this November. However, the company now seems to be downplaying the service. Xbox head, Phil Spencer, recently said that cloud gaming “…is years away from being a mainstream way people play. And I mean years, like years and years.”

It’s also notable that Sony’s PlayStation announced a strategic partnership with Microsoft, which will have PlayStation’s cloud service (details still unannounced) run on Microsoft’s Azure. The two companies will compete in content while partnering in infrastructure.

Amazon
Amazon could end up being the biggest disruptor in the game space. As of today, the company has made no specific announcements regarding a consumer game platform offering (Twitch is a live-streaming platform, not a game platform). In fact, earlier this year the company announced layoffs from the cancellation of several internal game-development projects.Nevertheless, speculation runs high that Amazon could announce a service similar to Stadia, perhaps as early as this fall, with early rollout in 2020.

Amazon has much to gain from jumping in the space, and a fortune to lose if they don’t. A game subscription business would be an easy addition to the Amazon Prime service, and will strengthen Prime’s appeal to a new generation of Amazon customers. Such a service would be bolstered by synergy with Amazon’s Twitch game-streaming service, much as Google’s Stadia is doing with YouTube.

By failing to enter the space, however, Amazon risks losing a significant volume of the web traffic currently served by its Amazon Web Services (AWS) business unit. More than 90% of the world’s largest video game companies use AWS, and if those same companies shift to cloud-based offerings from Microsoft, Google, and others, AWS will lose their business. The new cloud-based services won’t be compatible with AWS.

It’s also worth noting that Electronic Arts founder, Bing Gordon, was a long-time Amazon board member and still consults for the company. Earlier this year, he was seen actively holding discussions at Amazon’s showroom during the Game Developer’s Conference in San Francisco, and is a well-connected asset for Amazon.

Final Thoughts
It’s too early to predict the winners and losers, as the shift away from retail is just underway. But just as the internet disrupted the retail model for music and video, so too will it disrupt retail games – with both new distribution methods and new business models. When this occurs, the reverberations will be felt through the entertainment value chain. Failure to evolve along with the gaming industry will guarantee that audience viewership and engagement will both be in jeopardy.

 

Mike Fischer is a veteran of the video and gaming industries, having held executive positions at Microsoft, Amazon, Epic Games, and Square Enix. He is also a member of the faculty at the University of Southern California.

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