DDM Games Investment Review – Feb 05, 2020

Next Gen Consoles in 2020

2019 was a very busy year in the video game industry. New services like Apple Arcade, Google Play Pass and Google Stadia launched. Public testing was conducted for upcoming services like Microsoft xCloud, Electronic Arts Project Atlas and Tencent Start. The storefront competition heated up as the Epic Games Store gained momentum in its first year with 108 million customers and $680 million in revenue.i On the hardware front, Nintendo lightly upgraded its Switch console, released a dedicated handheld, the Nintendo Switch Lite, and launched the Switch in China selling 50,000 units on day one and is on track to meet Niko Partners’ forecast of 100,000 units sold by the end of the year.ii

2020 promises to be another exciting year with the launch of new generation consoles from Microsoft and Sony in the 2020 holiday season. New generation consoles will replace their predecessors originally released in 2013 and refreshed in 2017 by the Xbox One X and the PlayStation 4 Pro. Newzoo estimates 2019 console market revenues at $45.3 billion or 30 percent of the $148.8 billion video game industry. In the current generation, the PlayStation 4 leads with 102.8 million units sold worldwide, which makes it the second best-selling non-handheld-dedicated console, outsold by Sony’s own PlayStation 2 at 155 million units.iii Microsoft’s Xbox One is estimated to have sold 46.9 million units through Q2 2019.iv The Nintendo Switch, launched March 2017, and along with the Switch Lite, has sold 41.67 million units.v

As we head into a busy 2020, we have quickly summarized the specs of the upcoming consoles from official announcements and executive interviews along with a few speculated features.

 

Not only have Microsoft and Sony revealed that the upcoming Series X and PlayStation 5 share similar specs but they also have expressed similar themes emphasizing speed, performance and gaming content:

  • Ultra-fast technology with vastly improved loading times powered by the next generation of SSDs and faster chips
  • Enriched and engaging experiences with higher class visuals, responsive controllers and ray tracing technology that allows cinematic-quality lighting and sound
  • Expanded access to content with streaming services, cross-generation play and backward compatibility

Previous console launch strategies relied on a mixture of hardware, games catalog and pricing. As the two consoles may not be as distinguished in hardware specs from what has been revealed thus far, the launch of the new generation will be greatly impacted by games and pricing, areas where Microsoft and Sony have been mostly quiet. We expect several first-party announcements covering key franchises in due time. In a significant departure from previous console cycle launches, Microsoft confirmed it would not include first-party exclusives on the Xbox Series X in an interview with Matt Booty, head of Xbox Game Studios. Microsoft stated, “all of our games, sort of like PC, will play up and down that family of devices … if someone invests in Xbox between now and [Series X] that they feel that they made a good investment and that we’re committed to them with content.”viii It remains to be seen if this strategy will result in lower launch sales for its console but higher returns in the long run for Microsoft’s gaming content and services.

While pricing remains an open question, it could be a significant differentiator given the back-and-forth history between the two companies. In previous generations, sales of the PS3 were initially slower than the Xbox 360 as it was initially priced higher to account for its Blu-ray player. In the most recent generation, the initial Xbox One was priced higher while offering lower specs than the PlayStation 4. Resultingly, Microsoft experienced comparatively slower sales, which have not caught up with Sony. Xbox head Phil Spencer commented, “I would say a learning from the Xbox One generation is we will not be out of position on power or price … If you remember the beginning of this generation, we were a hundred dollars more expensive, and yes, we were less powerful. And we started Project Scarlett with this leadership team in place with a goal of having market success.”ix

We head into this next generation with a greater variety of services like streaming, business models like subscription plans and device compatibility that could further impact console sales. We anticipate an exciting year for the industry.

 

i Brightman, James. “Epic Games Store has generated $680M so far, with exclusives being ‘critical,’ says Tim Sweeney.” GameDaily.biz, 14 Jan 2020.
ii Niko Partners. “Niko Partners Estimates Nintendo Switch Sell Through Exceeds 50,000 Units on Launch Day In China.” Niko Partners, 10 Dec 2019.
iii Sony. “Q2 FY2019 Consolidated Financial Results.” Sony, 30 Oct 2019.
iv Haigh, Marilyn. “Why Japanese gamers don’t buy Xbox.” CNBC, 8 Oct 2019.
v Nintendo. “Consolidated Results for the Six Months Ended September 30, 2018 and 2019.” Nintendo, 31 Oct 2019.
vi Brown, Peter. “Xbox Series X Exclusive Details: Meet Microsoft’s Next-Gen Console.” GameSpot, 16 Dec 2019; Brown, Peter. “Xbox Series X Specs: Twice As Powerful As Xbox One X.” GameSpot, 13 Dec 2019; Ramée, Jordan. “Xbox Series X: Specs, Confirmed Games, Release Date, Price, And What We Know So Far.” GameSpot, 21 Jan 2019; Spencer, Phil. “Power Your Dreams with Xbox Series X, Available Holiday 2020.” Xbox, 12 Dec 2019; Tuttle, Will. “Everything We Announced at the Xbox E3 2019 Briefing.” Xbox, 9 Jun 2019.
vii Gera, Emily. “PlayStation 5 may use Samsung SSD to load games faster.” VG247, 25 Nov 2019; Loveridge, Sam. “Everything you need to know about the PS5: Release date, launch games, and more.” GamesRadar+, 20 Jan 2019; Rubin, Peter. “Exclusive: A Deeper Look at the PlayStation 5.” Wired, 8 Oct 2019; Rubin, Peter. “Exclusive: What to Expect From Sony’s Next-Gen PlayStation.” Wired, 16 Apr 2019; Ryan, Jim. “Game & Network Services Segment.” SIE, 21 May 2019; Ryan, Jim. “An Update on Next-Gen: PlayStation 5 Launches Holiday 2020.” PlayStation.Blog, 8 Oct 2019; Sherr, Ian. “Sony’s PlayStation CEO wants a seamless transition to its next-generation console.” CNET, 4 Jun 2019.
viii Barton, Seth. ““All of our games… will play up and down that family of devices” – Xbox’s Matt Booty ends the next-gen exclusive as we know it.” MCV, 10 Jan 2020.
ix Warren, Tom. “Xbox chief says Project Scarlett ‘will not be out of position on power or price.’” The Verge, 14 Nov 2019.