Xbox Addict

Is the next console cycle the last we will see

UK-based firm Ibis Capital has released a new report for investors looking for opportunities in video games, highlighting a mature, profitable industry that’s nevertheless in the midst of a major transition. One of the focal points for this transition is the continued growth of digital distribution, which Ibis speculates could mean the end of consoles as we know them (via Gamasutra).
The Wii continues to be a market leader, having captured 47 percent of the global platform revenue according to the report. The Xbox 360 is currently at 35 percent, with the PlayStation 3 following at 18 percent. Hardware sales totaled in $22 billion in 2009, with software totaling $55 billion.

But while the report expects growth to be driven by the next generation of consoles, it’s uncertain whether there will be another generation beyond that. Ibis notes, "Digital downloadable content and game delivery reduce likelihood of a 9th generation console cycle, creating potentially significant long-term issues for Sony, Microsoft, Nintendo and GameStop."

This is not the first time that analysts have predicted the end of the console cycle as we know it. Last year, Wedbush Morgan’s Michael Pachter predicted that this generation will be the last of the "true" console updates. For its part, Ibis predicted that the PlayStation 4 will be arriving in 2014.

The report also breaks down other elements of the industry in detail, painting a picture of a business in transition. Independent developers have been negatively impacted by the ballooning cost of PlayStation 3 and Xbox 360 development, which is between $15 and $30 million per game. Rising costs have also created a high-risk, high-reward environment that has prompted publishers to focus more heavily on established franchises like Modern Warfare.

With such high development costs, it takes sales of between 500k and 1 million units just to break even. Those conditions prompted developer Ninja Theory to go multi-platform after the PlayStation 3 exclusive Heavenly Sword failed to turn a profit despite more than a million units in sales.

In the meantime, mobile games and free massively multiplayer titles have fragmented the market, leading to the rise of multiple business models. The Ibis report notes Apple’s attempt to corner the mobile gaming market with the iPad; World of WarCraft’s dominance of "hardcore" online gaming and Onlive’s attempt to be a leader in cloud-based gaming for both markets.

Consoles continue to drive industry growth, but the report notes that the rise of free MMOs, social and mobile gaming are likely to constrain it in the future. On top of rising development costs and the rise of digital distribution, the video game market is in for some big changes.