Posted by: seanmalstrom | October 23, 2016

The Implosion of the TV

There is a saying among business types that you want your mistakes to ‘be small’ and your success to ‘be big’. What this means is, as an example, is to not spend money to make money. If you do not spend much for your business enterprise, you will have a ‘small failure’ but a massive success if it takes off. But if you spend a massive amount, your victory may be small but your failure will be massive.

Video games are risky proposals. I am a fan of the ‘cheap game’ that becomes big as opposed to the ‘expensive game’ that needs a Propaganda Ministry of Hype in order to get decent profit, a Minecraft or Tetris over a AAA game. A video game CONSOLE, on the other hand, is extremely risky and goes into the risk of BILLIONS OF DOLLARS. There are more failed consoles than succeeding ones. The video game business is very hard, and the game console business is much harder. Anyone who says otherwise has no clue.

Nearly every console company has cratered. They may have brilliant games, but they need brilliant businessmen. Sega is a brilliant game developer. But Sega didn’t have brilliant businessmen running the company. From Peak Sega in Generation 4, Generation 5 created so much losses from the Saturn that it destroyed Sega as a console company. The Dreamcast was just a goodbye for Sega to beef up its IPs for one last time.

Sony and Microsoft are not game companies. They are extremely gigantic corporations whose hands are in many industries. They can sell their consoles at a loss and try to do so as a form of ‘dumping’. “I will lose billions of dollars on this hardware because I know other companies, like Nintendo, cannot do that.” And Nintendo cannot!  But this is saying ‘Nintendo is unwilling to lose billions of dollars in launching a game console’. Nintendo has enough money to so, if they chose, but Nintendo doesn’t because Nintendo isn’t stupid. In fact, I’d say it is stupid for ANY company to lose billions of dollars to launch any product. “But it is razor and blades business model.” God, you’re an idiot. Razor and blades are not a billion dollar gambit.

Nintendo has its flaws (the biggest flaw is irrational pride in its IP and 3d, Nintendo is unwilling to confront the fact that not everyone likes a Nintendo IP and that it can fail when combined with 3d). However, Nintendo does not share the flaws that Sega does in business overseers.

Back when Generation 7 started, Nintendo was doomed. Nintendo is ALWAYS doomed. The ‘smart’ analysts said that the future belonged between whoever would win in a ‘console war’ between Microsoft and Sony over CONTROL OVER THE LIVING ROOM. It was more than just game consoles. It was HD-DVD versus Blu-Ray. The only way for ‘Revolution’ to do anything was to be the ‘second console’ to both Microsoft and Sony gamers. Oh, and the PSP was going to dominate the handheld market. The DS was going to be destroyed. Real analysts and game industry executives actually thought this. THEY DRANK THE KOOL-AID. When presented with an opposing idea, for the video game market is historically very unpredictable and doesn’t bow to assumptions, they became HOSTILE. Here’s what happened, the DS wiped the floor with the PSP, and the Wii outsold the Xbox 360 and PS3. It was sales not due to multi-console ownership but due to primary ownership. It was an amazing business phenomenon to watch unfold.

Why were so many people so wrong? And why was Nintendo so right? It has to do with the word ‘assumption’. Assumption means Ass = U + Me. Most decision making is not logical but emotional. We start off with ‘assumptions’ and then apply the logic. But do we apply logic to the assumptions? There were dangerous assumptions being played by the Game Industry and analysts then.

The biggest assumption was basing gaming around television technology. “TVs are becoming HD. Therefore, HD gaming is the future.” Are we sure about that? Youtube, which blew up in popularity then or before then, had video quality worse than VHS tapes. Are the values of TV and movie consumption identical to the value of video game assumption? There was so much focus on television technology, especially about Blu-Ray and HD-DVD, that there was little focus on video game technology. “The PSP has little discs. The DS uses cartridges. It is like the PS1 versus N64 all over again!” cackled analysts and hardcore gamers. But the handheld video game market wasn’t really researched or understood. Had it been so, it would become obvious why moving parts in a handheld is a bad idea (Sony would use carts for the PSP successor). Also, Gameboy withstood many competitors and did so despite the competitors being in color or having better graphics. The point is that the video game market operates by different values than the home movie market.

Now, let us move to Generation 9. Eyes are on Nintendo with the first Generation 9 console: the Switch. Why is Nintendo doing the Switch?

A better question would be: what is the future of the video game market? What is the future behavior of video game players?

And just like in Generation 7, only assumptions are being used. Let us go through them.

Assumption One: Dedicated handheld game consoles have no future because of the smartphone/tablet revolution.

This assumption explains, in the person’s minds, why Nintendo is making mobile games and why the Switch is ‘semi-home console’. Everything Nintendo has said about this subject is somehow ignored by the assumption holder. Nintendo never truly ‘beat’ Sony. Sony failed in the handheld space because of mobile. 3DS decline from DS has nothing to do with ‘sick, sick obsession with 3d’ but has everything to do with mobile.

There is also a more dangerous assumption that assumes the television will remain the dominant entertainment vehicle in the living room. The reason for this assumption is because for most people’s lives, this has been the case. Before television, there was radio. Before radio, there was… something. I don’t know. But why is there an assumption television is going to be immortal?

Take a look at this story for a source outside of gaming:

Time Warner Inc. and AT&T Inc. have survived the evolution of color TV and cable over the decades. Now they’re merging to adapt to the latest technological shifts: smartphones and streaming.

More consumers are getting their entertainment online from Netflix Inc. and watching on iPhones instead of TVs. That’s putting pressure on traditional entertainment companies and pay-TV providers. For many, it’s no longer enough just to make TV shows or own a cable company.

Now, I did not make this up. This 86 billion dollar merger is not some ‘backwater’ story in a business paper. This is front page news and one of the biggest technology business stories of the year if not decade. And why is it occurring? It is because of the shift AWAY from TV. (The reason why this is happening now is probably because they realize they could not do the merger with the next administration.) There is much propaganda in the world and much rhetoric, but if we listen to money, especially when BILLIONS of dollars are at stake, this is clearly fire behind the smoke. Big, gigantic companies like AT&T and Time Warner are altering their companies entirely based on the declining future of TV. Think about it.

Now let us return to the Game Industry and its assumptions.

The second assumption is that the TV will always be there. If this is not true, if there is a substantial decline coming to the TV lifestyle from the upcoming generation, certainly game console companies would be reacting to it. After all, they have billions of dollars at stake too. And the truth is that we see reactions coming from the three console makers.

Nintendo

Nintendo, whose primary audience is younger, might be detecting this shift first. The Wii U was already an attempt for the home console to separate from the TV. Nintendo also has data on how their handhelds are used. Are 3DS and DS systems used primarily as mobile, or are they being used as replacements around the home too?

The Nintendo Switch shows that Nintendo has little faith in the TV future.

Microsoft

Microsoft is connecting all its consoles, computers, phones, and everything together. PC gamers can play Xbox One games now. The exclusivity is gone. Why? The Xbox Franchise was about stopping Sony’s disruption into gaming developers where they make games for PlayStation and not Windows. The Xbox Franchise was also about putting Windows media and OS into the living room. If the TV is on the decline, there is no reason to take over the living room. The Xbox Franchise lacks a reason to exist which might explain Microsoft shifting the ‘Xbox experience’ to PC, mobile, and other streaming ways.

Sony

Sony admitted that the reason why the PS4 Pro exists is to prevent PS4 gamers to go to PC. Now, we are in a switcheroo where Sony is creating a console as a defensive measure. Sony has never had to create another console as a defensive measure before. The reason why gamers played consoles and not PCs is because ‘comfy couch’ and the glorious TV. But if the TV is in decline, suddenly the PlayStation entertainment model is in jeopardy.

But what about the first assumption? Is mobile destroying dedicated handheld consoles?

If we look at all of the data, we find this is the OPPOSITE effect in some areas such as Japan. Japan also went smartphone crazy years before the rest of the world did. Handheld use is actually up in Japan while home consoles are down! “So why is it different in America and other parts of the world?” But is it so different? The DS suffered no effects from mobilie. The 3DS decline could easily be explained by the lack of interest in 3d output and 3DS games (such as the ever brilliant ‘Federation Force’).

If you go back to the early 1980s, home consoles were declared dead and extinct. The reason why wasn’t just because of the Atari crash. The reason why was because of home computers. Why buy a console when you can buy a home computer? A computer can do so much more and play games? Electronic Arts refused to put games on the NES because of this. A big reason why the NES took off is that a huge market was missed by home computers: children. Children do not want to learn how to program. The generation that grew up with the NES are a Blue Ocean consumer, and they do not realize it.

The same exact argument is being made today against dedicated handhelds. Smartphones and tablets are ‘mobile PCs’. Even Iwata picked up on enunciating the differences. “But Sony’s handhelds died for a reason! It has to be mobile!” But Sony’s handhelds performed fine in Japan.

What I think is going on is that Nintendo, studying data on future trends of future generations, sees the decline of the TV. The Switch is independent of the TV.

“This is a bold change.”

Not really. Not if the data for the upcoming generations is accurate. The company who I think may be in big trouble is Sony. Will there be an audience to buy a PS5 for their TV sets? Maybe. But it will be a declining audience. PS6? PS7? In fifteen years, our living rooms may have expelled the TV entirely. Most likely, the TV will just be a ‘big ass monitor’ which we stream stuff to when we want. “But Sony could go the Nintendo route and make a console independent of the TV.” Sony tried that twice and failed. When you go independent of the TV, you cannot just cram the largest superconductors into a plastic box. Also, Sony would have to go against Apple and Samsung indirectly.

Nintendo is betting against the TV with the Switch. Since consoles are a billion dollar proposition, is Nintendo being completely irrational here? Probability says no. There is a rationality behind Nintendo’s declaration of independence from the TV. I would not bet against Nintendo on this move.

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