Take-Two's President Karl Slatoff recently spoke at the BMO Capital Markets Technology & Digital Media Conference where he gave some insight as to how the company is handling the launch of next-gen consoles. It's been over a month since Sony's (NYSE: SNE ) PlayStation 4 and Microsoft's (NASDAQ: MSFT ) Xbox One were released, causing a transitional period in the gaming industry.
Success at launch
"There [were] a lot of doubters about whether or not the console – the console market in general is dead," Slatoff said, "and I think the successful launches for the PS4 and the Xbox One have proven that obviously console gaming is alive and well and there's some people who are very excited about these launches."
Sony and Microsoft have announced that the PS4 and Xbox One have sold over 2 million units since their launch in November. The sale of these consoles has outpaced the launch of current-gen consoles, and for the time being has quelled fears that console gaming might be coming to an end. The Xbox One and PS4 are available in 19 and 32 countries, respectively. In the UK alone, the PS4 is being reported as the fastest-selling console in history, selling around 250,000 units compared to Xbox's 160,000. While it's not 100% clear which console will find itself in the most living rooms (cough PS4 cough), both have had successful launches that have given game makers the challenge of transitioning to the new consoles.
Game makers have had to release titles across two additional consoles this holiday season. These extra releases caused an increase in both game budgets and development team sizes. These increases should remain constant until game makers stop releasing games for current-gen consoles. Next-gen game development has its own cost increases, however.
Next-gen consoles provide game developers with additional capabilities and superior technology that allow them to create more advanced games at a cost.
The $60 price tag for "AAA" games has remained consistent, meaning that increases in game development costs will come at the companies' expense. The increase in the cost of game production for this console transition is less than in the past, however, "primarily based on the fact they were already in the HD – in high definition mode with our current generation," according to Slatoff. Changes that game makers made for current-gen consoles including larger development teams should help to lessen the negative impact of rising game costs going forward.
There is also a learning curve for game makers to fully understand the new systems. Ubisoft (NASDAQOTH: UBSFF ) CEO Yves Guillemot has said, "In the first couple of years the costs should remain close to what we had before. After two years we think they will really grow because we will do – again, we will take more and more advantage of the possibilities of the machine." Budgets increase as developers design games that realize the potential of next-gen systems. Around two years down the road, companies will focus more on improving next-gen games as they phase out title production for current-gen.
Final Foolish thoughts
Game makers like Take-Two and Ubisoft are experiencing increased expenses from the combined production of next-gen and current-gen games. These costs can be offset by rising sales of popular games like NBA 2K14, which is now the highest-selling game in the series thanks in part to the console launches. Moving forward, the cost of game development will increase as publishers become more familiar with the new consoles. This transition should be easier for companies and will have less impact on their earnings than previous console launches.
What's the Fool watching in 2014?
There’s a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.