December 21, 2016

Now You See It, Now You Don’t

As the holidays approach, parents are scurrying about shopping for gifts for their offspring. In this spirit, I was intrigued by new data showing that the legacy videogame market is truly struggling. Console hardware sales are down 45% year-on-year. Console software (i.e., games) is down 18% from last year. PC software, down 28%. But I thought kids love videogames, forever and always? What’s going on here, and what might it mean for the future of TV?

Two big things…

1. Dematerialization
Videogame consoles have a lot of parts. In addition to the console itself, a display (i.e., a TV screen) is required, as well as physical game controllers or, in rare cases, a Kinect camera system. Games are offered online, but are still available on physical media for grandparents that want to put something tangible in Johnny’s stocking. All this still exists, obviously, in the current generation of gaming consoles, but that’s not where the kids are.

I have three boys (ages 12, 9, and 9) that make regular cameo appearances in these posts to show me the error of my Gen-X ways (kind of like a Greek chorus). By my estimate, my children have an average level of interest in playing videogames, by which I mean that they don’t think they get to play nearly enough and their parents are convinced they play altogether too much. As I said, quite normal. What is interesting, though, is that we do not own a videogame console, and have no intention of acquiring one. My kids play games on literally whatever screen is available. That includes a certain parent’s iPhone (ahem), the Windows laptop that I am currently using to write this post, an old iPad, a stray Android tablet that we got for free as an AT&T promotion, and the older one’s school-issued Microsoft Surface, which is supposed to be used for schoolwork (double ahem). My point is simple – they really don’t care. As far as today’s kids are concerned, a screen is a screen is a screen. Many are actually superior to a traditional videogame console (in their eyes) because you can play them in the back seat of the car while being chauffeured to and fro. An always-on Internet connection is preferable, but they’re just fine playing offline games if that’s what’s available. The interface doesn’t seem to matter: some devices are touch-screen enabled, but not all. I am ashamed to admit it, but even my precious app stores are seemingly a matter of indifference. On devices that don’t have one, there are countless browser-based games available (including offline, cached games for when Mom and Dad block the Internet).

The bottom line: kids no longer need (or even want) a videogame console in order to play games. This is obviously bad news for the console game industry, but gaming is hardly the only industry facing dematerialization. MVPDs (thank you, Sling TV and DirecTV Now) are starting to ditch the STB for many of the same reasons. DVRs and disc players are similarly endangered. Cheap connected devices (Roku, Amazon Fire TV, Apple TV, and Google Chromecast) have done better, mainly because they provide the smallest, simplest, cheapest form factor for the next phase of TV. Consider them the half-way house on the way to full dematerialization. Roku itself is evidence of this theory as they are trying to move on from cheap hardware to simply licensing the Roku software as a platform to Smart TV makers.

The consequence of all this, of course, is that viewers are no longer tied to the living room couch. Dematerialization means less social viewing (everybody gets their own screen, aka personalization) and the decline of the linear model (aka on-demand, with viewing at whatever time and in whatever duration the user selects). This leads to our second point.

2. Demonetization
Media used to be expensive. Newspapers, magazines, books, music CDs, movies on VHS or DVD, and videogame titles were not just material objects – they all cost real money to buy or rent. When I think about how much money my parents had to spend per month in the 1980s just to be moderately informed and entertained, it’s kind of shocking.

Even as a child I spent significant money on content. In elementary school, I saved my allowance to buy music on cassettes for $12.95 a pop, and mowed lawns so I could buy computer games for my Atari 800 on floppy disks or cartridges at $29.99 per title.

Console videogame titles remain an anachronistic placeholder from this time period. Prices have changed little since the platform’s introduction 40 years ago, with current titles ranging from $59.99 for new releases (Call of Duty: Infinite Warfare, Red Dead Redemption 2) to $19.99 for catalog titles (The Last of Us).

Relative to other consumer media today, these prices constitute highway robbery, and it’s no surprise that consumers are balking. Worse still, I genuinely don’t see where the next generation of customers will come from to continue to support this model. With the help of some smart accountants and powerful spreadsheets, I tallied up the total amount of money spent to support my kids’ videogame habit in 2016. This includes money spent by parents and grandparents, as well as the kids themselves. The grand total is ZERO. Free-to-play is a parent’s best friend, and is driving a massive demonetization of the videogame industry. Kids are playing more games than ever, but paying little or nothing to do so.

Are videogames the only media susceptible to demonetization? Hardly. Think about the above list at the top of this section for a moment, and put it into a 2016 context. Newspapers and magazines are effectively free online for anyone with an Internet connection. Books are cheaper than ever, with lots of titles available for free to Amazon Prime customers and those savvy enough to download e-book from the public library. Music is either cheap or free, depending on one’s willingness to tolerate some ads and let someone else manage the playlist. SVOD services provide ever-growing VOD catalogs for low, low prices. Content demonetization is real. Setting aside the basic cost of a broadband Internet connection, I spent more money on entertainment media in 1983 (at age 12) than I spent this past year.

Conclusion
Dematerialization and demonetization are having major impacts on the console videogame industry. The TV industry is next.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.

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