Yesterday Sony Computer Entertainment, the division that runs PlayStation, announced that they are acquiring Gaikai , the game streaming company, for $380 million. Gaikai has created a platform that enables games to be run in the cloud and streamed to a consumer's TV with no game console hardware required and no download or installation of the game application itself. The technology enables game players to get games without driving to a store, but more importantly it enable a wide range of new pricing and business models for both the game industry and consumers. For example, games can be experienced in a "try before you buy" model where gamers can play the game for say 10 minutes and then purchase if they like it. Or games can be packaged in subscription models in bundles or by the month. Or games can even be charged by the minute. There really is complete flexibility in how users could pay for and consume game play in this new delivery medium. Thus, assuming all other things equal (it does require a high bandwidth internet connection), making it a superior marketing and distribution platform relative to retail.
So begins the end of the console gaming business as we knew it. The console gaming business historically has been characterized by two givens. First, the consumer pays for your game up front in a single purchase, usually these days in the $50 to $60 range. And second, you buy that game at a retail store like Wal-Mart, Best Buy, Toy-R-Us, or Amazon in recent years. Even with the addition of online retailing the important fact is that there is a significant time lag between the moment you think you might want the game, and when you can actually play it. So there is no immediacy in the purchasing experience or impulse buying.
What the Sony and Gaikia combination enables is a removal of those two givens. Gamers will now be able to decide to buy, rent, or try a game and immediately start playing it. And as mentioned above, the technology also enables a wide range of pricing and business models of which a large purchase price up front is the least exciting. So the overall experience for both the consumers and the game industry is changing dramatically.
The underlying driver in the games industry on why the big console businesses (Sony, Microsoft and Nintendo) are being pushed into innovation is the explosion of social, mobile, and free to play (F2P) gaming. Facebook gaming has exploded and gamers now spend more minutes playing games on mobile devices like smartphones than consoles. 5 years ago, both Facebook gaming and smartphone gaming did not exist. Most if not all of this new format of gaming is free to play, meaning the users do not need to purchase the game to start playing. So between all the great new mobile devices, the emergence of Facebook, and a business model that enable users to start playing for free, selling games at $50 at a store is not something consumers are very excited about.
Microsoft with its successful Xbox business is also not sitting by idly. The Xbox has evolved well beyond a game console over the last two years with the addition of Netflix video streaming, music streaming, and even connection to Facebook to check on your friends or share photos. Recently the Xbox team announced users are spending more time on Xbox doing these new non gaming activities than actually playing games. Additionally this year Microsoft is adding a complete web browser to the Xbox so you can effectively surf the web from your TV in the living room. Microsoft is clearly looking at the Xbox as much more than a gaming console.
As usual Nintendo is a wild card. Historically not a believer in the "connected" world, they are just starting to have a real and meaningful plan for the Nintendo consoles to move into the future, or more accurately the present. Ironically, Nintendo still makes great and wonderful content. They are the Pixar of the game world and the gold standard in game creativity and delight appealing to the whole family. There is little doubt that if their games were for example on the iPhone they would dominate that market. But trying to predict with Nintendo leaders in Kyoto will do makes reading tea leaves look straight forward.
So this really does mark the beginning of an end of an era. We will continue to see the acceleration of the end of the old model of buying $50 or $60 dollar boxes with game disks in them via a retail store. And in its place we will see the new model of connected, on demand, immediate, pay as you go business models (whether F2P or otherwise) rise dramatically as gamers speak with their pocket books and their minutes of play. As was the case with the music industry and the video rental businesses before, those that live in the past will do so at their own peril.