The Economist - USA (2020-11-07)

58 Business The EconomistNovember 7th 2020

1

T

here is nothingquite like a captive

audience. When Sony, a Japanese elec-

tronics giant, reported its latest set of quar-

terly results on October 28th, the star per-

former was the firm’s video-gaming

division, which makes the PlayStation line

of consoles. Had it been a normal year, rev-

enues would probably have been down, be-

cause Sony’s current model—the PlaySta-

tion 4—is coming to the end of its life.

But in a year marked by lockdowns and

working from home, gaming revenue in-

stead grew by 11.5% year-on-year (and oper-

ating profits by 61%) as housebound con-

sumers reached for their controllers. Sony

is not alone. Microsoft, its gaming arch-ri-

val, released its own results the day before.

Its Xbox One console is similarly superan-

nuated, yet revenues jumped by 30%. The

good times have been repeated across the

industry (see chart).

Most forecasters expected covid-19 to

boost the video-gaming business. The pan-

demic has given a filip to other forms of in-

door entertainment, from board games to

video-streaming to books. But the scale of

the surge has caught industry-watchers by

surprise. Tony Habschmidt, head of con-

sulting at Newzoo, a games-industry ana-

lytics firm, says that when the pandemic

began, his company predicted a boost of

around $2bn to industry revenues on top of

its existing forecasts. The latest figures, he

says, suggest the real figure has been

nearer $17bn. Newzoo now reckons indus-

try revenues will reach $175bn this year, a

rise of 20%. Even for an industry that had

been growing by 9% annually, 2020 has

been a barnstorming year.

It is not over yet. Amid a blitz of adverts,

trailers and pr, Sony and Microsoft are

gearing up to replace their existing con-

soles with new, more powerful machines.

On November 10th Microsoft will release

the Xbox Series X. Sony will respond two

days later with the PlayStation 5. With a

locked-down Christmas looming in many

parts of the world, demand for both will be

high. If industry rumours about pre-orders

are correct, some consumers may have to

go without.

At the same time, both firms will be

keeping their eyes on several big new com-

petitors. Amazon, Facebook and Google all

think the time is right to try their luck in

the gaming business. Over the past decade

streaming has revolutionised music, tele-

vision and films. The tech giants think

cloud computing, fast broadband and 5g

mobile networks mean the time is right to

try the same thing with video games.

Start with the consoles themselves.

Sony won the previous round of the con-

sole wars, selling over 100m PlayStation 4s

and more than 1bn games. Microsoft does

not provide official figures, but most an-

alysts reckon that sales of the Xbox One

(confusingly, the Xbox’s third iteration)

were only half as high. Most expect Sony to

outsell its rival this time, too. Piers Har-

ding-Rolls at Ampere Analysis, a media-

analysis firm, thinks 5m new PlayStations

will be sold in the run-up to Christmas,

compared with 3.9m Xboxes.

One reason is brand loyalty. “There’s

very much a cult following when it comes

to consoles,” says Michael Pachter, an ana-

lyst at Wedbush Securities. “PlayStation

owners will mostly buy another PlaySta-

tion, and Xbox owners will get a new Xbox.”

Another is Sony’s strategy, which focuses

on existing gamers. Analysts think the firm

is selling the machines at a loss—a com-

mon tactic for console-makers. Sony’s

marketing has emphasised exclusive, big-

budget games that are aimed at committed

gamers and are not available elsewhere.

Sony’s executives will be hoping the an-

alysts’ projections are right, because the

PlayStation 5 is vital to its future. The firm’s

gaming division is now its largest. Its re-

cent success has cushioned the impact of

problems elsewhere, such as in its imaging

division, which has suffered from the trou-

bles of Huawei, a Chinese tech giant that is

one of its big customers (see Schumpeter).

Microsoft, for its part, professes itself

unworried about precisely how many new

Xboxes it sells. It is just as focused on ex-

panding the market as on trying to win over

existing gamers. More than 3bn people

own smartphones, and mobile games—

smaller and more casual than console ti-

tles—are the most popular sort of app. Phil

Spencer, who runs Microsoft’s Xbox divi-

sion, estimates that only around 200m

households worldwide are willing—or

able—to splash out on an expensive piece

of gaming hardware like a console.

Microsoft is therefore trying to lower

the barriers to adoption. It will offer hire-

purchase deals for its new Xbox. It is heavi-

ly promoting “Game Pass”, a subscription

service that offers access to an online li-

brary of hundreds of games for up to $15 per

month (a quarter of the upfront cost of a

typical high-end console game).

Cloud strife

The centrepiece of this strategy is a service

called xCloud, which aims to remove the

need to own a dedicated console at all, by

running games in distant data-centres and

streaming the results to smartphones, in-

ternet-connected tvs, or any screen that

can be hooked up to the internet and a

game controller.

In rich countries, streaming could let

gamers play anywhere, not just at home—

doing for games what Spotify and Netflix

have done for music and films. In poorer

countries, where smartphones are com-

mon and data plans are cheap, it could

bring console gaming within the reach of

millions of new players. “There are 1.2bn

people in Africa and the average age is 20,”

says Mr Spencer. “Many of them follow our

games—they know the characters, the sto-

ries, even the release dates. They just lack

devices on which to play them”.

Game-streaming is not a new idea. Pre-

vious attempts have been plagued by tech-

nical problems (streaming a game, which

must react instantly to a player’s actions, is

far harder than streaming a film or song to

a passive viewer). And Microsoft is not the

only firm that thinks the time is now ripe.

Sony offers its own version, called “psNow”

(though it is limited to older games), as

does Nvidia, a gaming-focused chipmaker,

and several other firms. Other tech giants

with little experience of video-gaming are

also piling in. Google launched “Stadia” in

2019. Amazon announced its “Luna” ser-
      vice in September. On October 26th Face-
      book threw its hat into the ring with its
      own “Facebook Gaming” service.

A battle royale between the new PlayStation and Xbox consoles is kicking off. But

gaming’s prospects—and millions of new users—depend on streaming

Video games

The games are only just beginning

Level up

Sources:Companyreports;Newzoo *Forecast

Video-game company revenues

Q3 2020 or latest, % increase on a year earlier

NetEase

Sony (PlayStation)

Electronic Arts

Tencent

Microsoft (Xbox)

Activision Blizzard

Nintendo

1251007550250

2020*

2019

1751501251007550250

Worldwide video-game market, $bn

Mobile C PConsole