Microsoft revealed a subscription Xbox 360 yesterday, a move that has enormous implications for the HD console business. Monthly payments for hardware and services could change everything, says Patrick Garratt.
Imagine walking into a shop to pick up the latest iPhone to find it costs £900. You’d never buy it. Most people would wait for the price to come down and Apple wouldn’t be able to bring out a new iPhone for years. Sound familiar?
The console business is becoming increasingly problematic. Xbox 360 and PlayStation 3 are old, and consoles are almost prohibitively expensive to iterate. Retail’s dying and the current machines are based on discs. A lot of us want to download everything. We can’t. It’s easy to see why many doomsayers have long predicted the console trade won’t be viable after the next round. The dumpy, double-chinned Microsoft, Sony and Nintendo are fighting a losing battle against Apple and Google, what with their turtle-necks, cheek-sucking and magic glass mobiles. The concept of the “console” – a dedicated machine which needs to be sold for a loss and does little more than play games, heaven forfend – is ten years ago, daddio. Xbox and PlayStation are soon to be a thing of the past.
For some, especially those working in the business of mobile, social and casual games, it’s comforting to believe that core, HD gaming is about to go the way of the dodo. But the truth is that console gaming isn’t intrinsically broken. People still want to play video games on their televisions, and they probably always will. The console model is just in a state of flux and the current set-up has been sorely tested thanks to an extended cycle.
Yesterday showed a glimpse of how consoles fit into the future. Microsoft unveiled plans to sell Xbox 360-Kinect bundles through a two-year subscription package in the US, signalling a potential way forward for the entire console business and a shift in thinking that may revolutionise how the public views games machines in general. The premise is exactly the same as the one you, and everyone else you know, blindly accepts every time you buy a new mobile phone. You pay a small fee up front, $99 in this case, and then hand over $14.99 every month for the next two years. The grand total comes to $458 for a 4Gb 360, a Kinect and two years’ worth of Xbox Live Gold subscription.
The cost is roughly comparable to buying the same kit as separate units at current pricing. It’s a good deal, and one which will suit those to whom a $500 outlay on entertainment comes a far second to putting food on the table. While there are benefits to consumers, however, the main winner is obviously Microsoft.
This system locks you into the current price and it’s affordable to many more people than the current set-up, so now you don’t have to wait for a price drop to buy one. Great for platform holders: more people buying now, less pressure to drop prices. And now you’re in a credit agreement with Microsoft, just as you probably are with AT&T, Vodafone or whoever else, at a price you’re (hopefully) comfortable with. This is key: buy into this model, and price drops mean nothing to you any more. A 360 can be $199 today and $50 tomorrow, and it makes virtually no difference. You’re in, you’re happy, and you can forget about it. And so can Microsoft.
This is liberating for platform holders. The consumer-facing price of its gaming hardware ceases to have the same level of import it currently does, and all those analysts screaming for price cuts to stimulate demand start to lose relevance. The pure beauty of all this is that it changes the console model completely, and most certainly for the better. Instead of the world laughing at you because you stand up at E3 and proclaim your new console to be worth five-hundred-and-ninety-nine-US-dollars, you now say, “This incredible new technology is yours for free, with full online services, at a manageable two-year subscription of only $30 per month.”
A PS4 or Xbox 720. For free. On a contract. Day one. You walk out of the store and you haven’t handed over anything. You have, of course, spent $720 without batting an eyelid, but why on earth wouldn’t you sign up for this? A few years ago, I interviewed the people in charge of PlayStation UK marketing at gamescom. I asked one of them about the greatest challenge he faced in terms of selling PlayStation 3, and he said it was one of perception. Sony had to sell PS3 at a massive loss, because the perception is that a games console can’t cost more than £299, whereas you’ll buy laptops for four-figure sums because you just assume that’s what they cost.
People want HD gaming, but it has to make sense. It has to be cutting edge. HD gamers don’t want to play on ten year-old tech, but nor do they want to be handing over what they perceive to be large sums of money when they have far more important things to worry about, such as mortgages and credit card bills.
This is why smartphones have to be sold on contracts. The perception to the user is that the phone is “free”. When you do the maths, an iPhone or new HTC handset costs a great deal of money, but because you never hand over a lump sum you’re willing to commit to maybe £1,000 over two years because you want the hardware and the plan fits within your monthly budget. Imagine walking into a shop to pick up the latest iPhone to find it costs £900. You’d never buy it. It’d be exclusively for those with a large amount of disposable income, which means most people would sit there waiting for the price to come down and Apple wouldn’t be able to bring out a new iPhone for years.
If the concept of subscriptions takes within the console space, the ramifications for Sony and Microsoft could be gigantic. The traditional console model is that you make an over-powered, expensive machine, sell it for a loss and recoup the cost later in the cycle on discs. If we were all buying consoles on monthly payments, we’d be paying full price for launch machines. That means the insane losses suffered by Sony to launch PS3 would, in theory, evaporate. Good for everyone. Apple, specifically, has used this model to devastating effect with iPhone.
And aside from getting you to spend proper sums of money for expensive pieces of technology, the subscription model also locks you into the concept of upgrading. One of the current console business’s greatest flaws is that it makes iteration difficult. Apple, evidently, has no such problem with iPhone, keeping its users at the highest rate of spend possible by constantly releasing newer, better hardware and offering upgrade packages.
With subscription as a normality in the console space, why couldn’t Microsoft bring out a new model every two years with a faster GPU? You enter into a new contract, hand over £100 and your monthly fee goes up £5. It’s back-compat, so you just download all your 720 games again, and off you go with something shiny and new.
People want HD gaming, but it has to make sense. It has to be cutting edge. HD gamers don’t want to play on ten year-old tech, but nor do they want to be handing over what they perceive to be large sums of money when they have far more important things to worry about, such as mortgages and credit card bills. Adopting the smartphone payment model could change everything for consoles. As EA CEO John Riccitiello said in the firm’s earnings call last night, “We are strong believers that console will return to strong growth and represent a great opportunity, one that is in lockstep with our digital plan.”
Don’t believe gaming’s future’s completely Apple-shaped just yet. Apple may represent a threat to the likes of Microsoft and Sony in games, but the rampant success of iPhone’s subscription model may have, ironically, shown an exciting route forward for Xbox and PlayStation’s next generation.
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