E3 2013: Fighting the Console Wars One More Time

Prologue
E3 is technically a trade show closed to the general public, but E3 apparently grants industry status to anyone who has ever worked at a Gamestop or Target (Target sells videogames, right?). As such, the show is more like Comicon than CES. Some attendees dress as their favorite video game characters, there are enormous props (World of Tanks had an actual tank parked in front of the convention center), and there are longer lines for free t-shirts than to try new game systems.

Oddly, E3 also does not evenly represent the world of electronic gaming. Exhibitors didn’t highlight the highest revenue platforms and genres or the biggest areas of growth. Instead, they skewed their exhibits towards a very specific audience: 25 year-old U.S. male console gamers. Fighting and role-playing genres were everywhere, while strategy, sports, dance, and puzzle games were not – even though more people play the latter category overall. E3 focuses more on living room consoles than PCs, even though PC gaming brings in more revenue, especially outside the U.S. PopCap was heavily promoting a new iteration of Plants vs. Zombies, but other than that, casual PC and web games were not well represented. A greater emphasis on consoles is to be expected in a year when a new generation of them is launching, but this pattern has held for several years, and the enormous growth in mobile gaming was almost entirely ignored. Last year, several major mobile game vendors from Asia had booths; this year they stayed home.

Finally, there was barely any mention of other forms of electronic entertainment at E3 beyond video games, despite the name of the conference (Electronic Entertainment Expo) and the fact that Microsoft reported consumers spend more time watching streaming media on their Xbox than they do playing games.

Sony and Microsoft both preempted E3 with previews of their next-generation game consoles. Sony held a large press conference in New York back in February, and Microsoft hosted a much smaller event on its Redmond campus in May. Just ahead of E3, Microsoft clarified its incredibly complicated policies on connectivity and used games, which allow consumers to play their games on friends’ Xbox One systems from the cloud, but restrict how games can be transferred. That left a lot less to talk about at E3 beyond pricing and extensive game demos.

The Main Event (Microsoft v. Sony: Fight!)

Sony’s decision to price the PS4 at $399 drew cheers, but mainly in comparison to Microsoft’s $499 Xbox One. Drawing even more positive feedback, Sony lampooned Microsoft’s move to DRM and connectivity mandate. Microsoft’s policies are definitely not consumer friendly – or easily understood – but are likely to be more significant to E3 attendees than average gamers. The E3 crowd was disdainful of the entertainment and motion gaming capabilities that Microsoft highlighted at its preview, and both Sony and Microsoft focused on traditional console gaming genres in their press conferences. Today’s motion games tend to focus on dance, fitness, and sports. However, the technology included in the Xbox One’s Kinect is truly astonishing, and the fact that every Xbox One will come with Kinect could lead to must-have game titles in the future.

The new Kinect is dramatically more sophisticated than the original. It works in low light and is not affected by concentrated light sources (like halogen lamps). It works in smaller rooms, enables a larger number of gamers, detects an incredible amount of detail – including gamers’ heart rates based on skin coloration! – and its microphones are more sensitive for voice commands. Sony does have a new PlayStation Camera (replacing the PlayStation Eye) for the PlayStation 4, but it is a $59 add-on, and Sony discounted its importance at E3. There were apparently Camera-equipped PS4 systems somewhere at the show, but I couldn’t find them. When I asked Sony about this, they were fairly dismissive about the importance of motion gaming. One rep noted, “you can buy the [PlayStation] Camera, and the new controller can be used with that if you want that type of game.” This could prove to be a big mistake over time as the Xbox One price comes down and developers design software that incorporate voice and gestures alongside the controller – even in traditional game genres. Sony is also behind Microsoft in cloud services; Microsoft has more Xbox Live subscribers than Sony has PlayStation Network accounts, and Microsoft is scaling up its servers further in anticipation of moving more gaming information to the cloud.

Console game sales are down ahead of the new hardware from Microsoft and Sony, but it isn’t clear that consumers are clamoring for new boxes that cost $400 – $500 before factoring in software costs and mandatory subscription fees for online play. I played a lot of games at E3, and the graphics on the next-generation consoles are better, but on many titles, that didn’t appreciably affect gameplay. There will be a lot devices fighting over limited consumer budgets this fall. Tablet and smartphone sales are exploding, and gaming titles for iOS and Android are either free-to-play or cost at most a few dollars a game. Some of these games are coming directly to the television. Ouya’s $99 Android game system was funded in record time at Kickstarter, and Apple is rumored to be opening its $99 Apple TV box to developers in the future as well.

Producing a winning living room game console is still a huge prize, but Sony and Microsoft seem focused exclusively on the living room, when gaming is clearly following computing into mobility. Sony execs were understandably proud of their performance at E3. However, Sony did not provide any more details on how the PlayStation will deliver on the larger vision of consumer-centric, location and device -independent gaming that it described back in New York. Microsoft is not doing much better in this regard. While a Halo game was finally announced for the Windows Phone, it will be an arcade-style top-down shooter, making it Halo in name only. The heavily promoted cross-platform game Spark impressed us by allowing consumers to design their own games on an Xbox One controller, an Xbox 360 controller, or a Windows 8 touchscreen, but it also lacks a Windows Phone version.

Epilogue

Microsoft clearly felt the heat from Sony – and gamers – on the Xbox One’s DRM and connectivity policies. A week after the show, Microsoft reversed nearly all of them: the console will not require connectivity to play standalone games, games will not need to “check in” every 24 hours to remain playable, and it will be possible to share or resell Xbox One discs without restrictions. While some damage was done, the updated policies were received well by the online gaming community. Microsoft was forced to change due to its downright consumer unfriendly DRM, incredibly confusing rules for sharing or reselling games, and the fact that Sony didn’t follow Microsoft into cloud gaming. (Sony gleefully turned the knife in Microsoft with YouTube ads ridiculing Microsoft instead.) However, Microsoft’s original plans offered consumer benefits, too. Microsoft failed to articulate them, but the connectivity and DRM enabled sharing games among family members, and playing games locally or remotely without requiring a disc in the drive. Faced with a consumer backlash, Microsoft had to make changes. Microsoft could have made disc-based purchases work DRM-free, and downloaded purchases work with DRM restrictions but with all the cloud benefits. However, this would have been a more difficult message to deliver. Instead, Microsoft simply went back to the old way of doing things, and consumers will lose out.

Netflix as a Streaming Service is the Bandwidth King

News broke yesterday that Netflix was raising the price of its streaming plus DVD-in-the-mail plans. It was interesting to see all the backlash from some media and from consumers on Twitter. As much as this may be shocking in the short term what it really signals is the bigger picture story that Netflix is really a streaming video service not a DVD-by-mail service.

In fact I think this piece in the Wall St Journal got it right: Reed Hastings Doesn’t Want You To Pay More For Netflix. He Wants You To Stop Using DVDs.

If you noticed, the cost of their streaming only service did not go up at all. Only the packages that included an option for DVD-by-mail went up in cost. The age of Internet video is undoubtedly upon us. This reality is cemented in stone if we do a quick case study of Netflix.

I’ve recently analyzed a Q2 2011 report on Netflix from Sandvine Networks. Here are the key points from that report as I see it.

  1. Netflix now accounts for 29.70% of all downstream traffic during peak period (evening traffic)
  2. Netflix has 23.6 Million Total Subscibers
  3. The average Netflix consumer consumes more than 40gb of data per billing period
  4. Playstation 3, XBOX 360, PC, and Wii (in that order) account for 85% of Netflix traffic
  5. Average consumer using Netflix on an XBOX 360 consumes over 80gb of data per billing period

To quote a statement from their report:

“It is difficult to understate how truly staggering the growth has been. Lest the reader think that this phenomenon
is limited to peak period, even when measured over 24 hours, and when measuring all traffic (upstream and
downstream), Netflix is #1.”

Netflix is now the undisputed bandwidth king of the Internet in North America. What’s more is that they have caught Comcast in total US subscribers both with just over 22 million.

What I find most interesting about the Netflix streaming service is how the non-techie community has embraced it. We are hearing more and more frequently in our interviews with mainstream consumers (non-early adopters) how they are turning to Netflix as a part of their prime time evening experience. The reality is for this to happen Netflix time is taking away from their service providers time. In fact we are beginning to hear frequently in these interviews how many are cutting the chord to cable and using Netflix streaming only.

These are telling signs about the value these types of services offer into the main part of the market. As more online streaming services from companies like Apple, Amazon and perhaps even Google continue to grow and become attractive, traditional MSO’s will have no choice but to adapt and adapt fast.

The Bandwidth Story
The real point I want to make is around bandwidth demand. The bandwidth Netflix is demanding from North American service providers is simply stunning. Keep in mind this is just one service. I expect many entrants into the streaming media sector from major players over the next 5 years. The impact on broadband will be overwhelmingly significant.

Not only are the bandwidth demand numbers I pointed out above only from one service; they are also only from one device and one concurrent stream. What happens when you have multiple people in homes consuming Netflix on a tablet, PC and TV all at the same time? The answer is the 29% of downstream traffic could double or triple.

The multi-connected-device reality that is coming is one i’m not sure the network and broadband providers are ready for.

Are Service Providers Prepared?
The Wall St Journal Heard on The Street section published a commentary on this subject titled: “The Time Bomb in Netflix’s Streaming Strategy.”

If we do see a continued explosion in streaming services how will the broadband service providers meet the demands of their consumers? Are the networks themselves capable and ready to handle this explosion of streaming media?

These are all questions we will have to wait to see how they are solved. I do however hope that whatever costs that get passed to consumers do not hinder the success of these services as the WSJ article suggests. What could very well happen is that the costs of traditional TV packages go down and data packages go up – just a thought.

It is in the best interest of the network and service providers to add more value to their broadband networks. Right now they believe their broadcast services are the most valuable but very shortly that value will transition into their broadband services. And that transition will happen on the back of services like Netflix.