Weekly Update

Tied to the drive

After toying with the idea of going download-only for the next generation of PlayStation console, scheduled for release next year, Sony has decided to include an optical drive after all, the Wall Street Journal reported this week. Presumably, that means a Blu-ray Disc drive.

Sources told the Journal Microsoft also intends to include a hard drive in the next generation Xbox, which is also expected to be released in 2013. Leaked photos of Nintendo’s Wii U console, which will officially be unveiled at E3 later this month, showed a front slot-loading optical drive, although the exact format (Blu-ray, DVD, something else) was not clear.

Whatever the format, though, it’s clear that optical disc drives and physical media will survive through at least one more generation of video game consoles. But why?

Video games in general are increasingly going mobile and social, where they’re entirely web-based. Even among console games, sales of game downloads are rapidly overtaking retail sales of new game discs. Delivery of movie, TV and other video content to game consoles is almost entirely electronic at this point. Including an optical disc drive only adds cost to the console while relying on physical media adds to the cost of manufacturing and distributing game content, even as consumers are increasingly comfortable with downloading or streaming the content they want.

According to the Journal, Sony executives ultimately decided against a download-only console out of concern that broadband speeds and access vary widely around the world and a download-only distribution model could hamper game sales in countries with dodgy Internet connections. Microsoft may have had similar concerns, according to the Journal’s sources.

A desire to maintain backward compatibility with gamers’ existing content libraries was likely also a factor. An inability to play old games on the new consoles could cause consumers to delay purchasing the new consoles until a broad enough selection of new, downloadable content was available.

No doubt another major factor, though, is that eliminating physical media in the near term would simply be too disruptive to the existing game business and distribution channels even if it means higher costs and slimmer margins on console and game sales in the medium and long term.

Though sales of new games through brick-and-mortar retail channels are falling rapidly, game publishers, including the major console makers, have an incentive to prop them up as long as possible. No corner of the media content business has survived the transition from analog to digital distribution with its analog pricing power intact and there’s no reason to believe game publishers will fare any better.

Revenue from the sale of recorded music may have stopped falling, but the retail price of music has been permanently reduced to a fraction of what it was at the height of the CD boom and record company gross revenues will never again be the same. Book publishers are now staring into the same abyss as books become downloadable. The publishers’ efforts to fight that permanent price erosion have now landed them in court facing price-fixing charges from the Department of Justice. The movie studios have seen gross revenue plunge as DVD sales get replaced by digital alternatives. Hastening the switch to all-digital game sales by eliminating physical media can only hasten the reckoning for game publishers.

The higher costs associated with distributing content on physical media also serves as a barrier to entry to potential new entrants in recorded media markets, to the benefit of the incumbent distributors. Digital distribution, on the other hand, leads to disintermediation by giving game developers, authors and musicians direct access to their audiences without going through established publishers/distributors. That phenomenon is already well underway in the disc-less world of social and mobile gaming, where startups like Zynga and Rovio have raced ahead of old-line console-game publishers. The same dynamic is sure to be repeated in a disc-less console market whenever that day arrives.

Finally, though retail sales of new games are declining, console makers remain dependent on brick-and-mortar retailers for sales of hardware. While Microsoft and Sony may have been worried about spotty broadband connections in deciding to preserve optical discs in the next generation of game consoles, they were certainly more worried about how Wal-Mart would react to being asked to sell hardware that would not generate follow-on sales of game discs and the foot traffic that brings to Wal-Mart stores.

So optical discs and optical disc drives will survive into the next generation of video games, not because they’re necessary or an efficient way to distribute digital content, but because Microsoft, Sony and Nintendo are afraid to launch a new generation of consoles without them.






Question of the week

Should video game publishers ditch the disc?