Will PS4 and Xbox One Sales Suffer Due to Lack of Games?

If developers stop making games for the current generation of consoles, the Xbox One and the PlayStation 4 may fail to sell anywhere near as many as their predecessors did.

Mar 12, 2014 at 11:20AM

Sony's (NYSE:SNE) PlayStation 4 has sold more units than Microsoft's (NASDAQ:MSFT) Xbox One, but both companies may be in the same boat when it comes to a lack of developer interest in making games for the new consoles. The third player in the game, Nintendo (NasdaqOTH: NTDOF) may be in even more dire straits as interest in creating games for its WiiU platform is almost nonexistent.

According to a poll conducted by the Game Developers Conference, only 20% of developers surveyed said they intend to release their next game on Sony's PlayStation 4. That tops Xbox One's 17% and Wii U's anemic 4%; 14% reported they are currently developing games for PlayStation 4, versus 12% for Xbox One and 4% for Wii U.

With the Xbox One and Playstation 4 being on the market since November 2013 the consoles are both still relatively new. As the products mature, however, the release of highly anticipated games can be important in keeping up sales momentum. Without new games, potential customers wavering on whether to buy a new console may elect not to.

Where are the developers going?
Whereas the potential financial rewards of developing console games was once enticing for developers, the high cost and risk of failure are scaring some away. The GDC poll shows that lower costs and less risk are leading developers to PC and mobile platforms. 

"When it comes to developer intent, it's still lower-barrier PC and smartphone/tablet development that attracts most developers surveyed -- 51% plan to make their next game for smartphone/tablet, while 52% anticipate releasing their next game on PC/Mac," the survey said. Meanwhile 53% of respondents are currently working on PC or Mac titles and 52% are creating titles for tablet/smartphones.

(The numbers add up to more than 100% because some developers are working on games for release across multiple platforms).

Console games are expensive to make
Analyst group M2 research estimated that the average AAA game in 2010 cost $28 million to make, with flagship series like "Call of Duty" venturing into $50 million territory. Just 10 years ago, budgets hovered closer to the $5 million to $10 million range," TechnewsDaily reported. 

Game manufacturers do not generally share their costs, but it's safe to assume that those numbers have climbed with the better graphics and more impressive processors offered on the new consoles. 

Big video game companies are failing
The past few years have been hard for companies that exist primarily to make games for consoles. Major player THQ was liquidated after bankruptcy. Disney (NYSE: DIS) shut down both Junction Studios (which made its Epic Mickey Wii game) and LucasArts (which made Star Wars games). Even Sony laid off a quarter of its game development staff.

Irrational Games, the Boston-based company behind the wildly successful "Bioshock" and "Bioshock Infinite" console games, also closed its doors. The reason its founder Ken Levine gave on the company's blog for the closure may be telling for the future of the whole industry. 

"To meet the challenge ahead, I need to refocus my energy on a smaller team with a flatter structure and a more direct relationship with gamers. In many ways, it will be a return to how we started: a small team making games for the core gaming audience. I am winding down Irrational Games as you know it. I'll be starting a smaller, more entrepreneurial endeavor at Take-Two.... In time we will announce a new endeavor with a new goal: To make narrative-driven games for the core gamer that are highly replayable. To foster the most direct relationship with our fans possible, we will focus exclusively on content delivered digitally."

Notice he mentions digital delivery and says nothing about making games for consoles. In the video game world, small may be the new big.

Being small comes with smaller risks
The GDC survey shows that developers are not only putting their efforts into lower-risk games from mobile and computer platforms, they are also self-funding and self-releasing projects.

"Developers polled expressed an overwhelming preference toward self-publishing their projects, with 64% of respondents not working with a publisher on their current project, versus 19% who are (17% said they work at a publisher)," according to the survey.  

And while crowdfunding receives plenty of media attention, self-funding (raising no money from outside investors be they venture capitalists or individuals) is the most popular choice. "Fifty-two percent said that at least part of their funding comes from their company's existing funds, and 46% of respondents said they contribute their own personal funds toward the creation of their projects." Only 11% are using crowdfunding, the report said.   

Self-funding makes a lot more sense when the financial outlay is smaller, as it is for most mobile or PC-based games compared to console games. 

Less games will mean less console sales
"The industry has condensed games development to focus on blockbuster titles – likely because of the rising costs of development requiring a commensurately sizable pay-off at the end — and even those blockbusters are diminishing in quantity," TechCrucnh reported. "It's now a couple of big titles per company per year – titles that are also mostly sequels or proven formula games, rather than something new."

This is devastatingly bad news for the console industry. If fewer companies make big-ticket console games, then there are fewer chances for a title to emerge that gets customers to pay $399 for a PS4 or $499 for an Xbox One. As developers focus on mobile and PCs, it's also less likely that the next craze will be console-based. Whether it's "Angry Birds," "Flappy Bird," "Words with Friends," or countless other titles, the innovation in the game world has shifted to mobile. 

Microsoft, which has deeper pockets than Sony, might be able to pay some developers to make blockbuster exclusive titles for Xbox (like the just-released "Titanfall"), but the company can't force innovation.

Lack of games may not doom the current consoles since they are more than just game-players, but it dramatically hampers their growth. If "Super Mario" had not been released, the original Nintendo Entertainment System would not have been as big a hit as quickly as it was. The same can be said of "Halo" for the Xbox and "Sonic the Hedgehog" and "Madden Football" for Sega Genesis.

If the next generation of groundbreaking titles like those are released for phones, tablets, and PCs, this generation of consoles will have a hard time competing. 

One company that should stand out
Like the gap between an Xbox One and the original Atari console, 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.

Daniel Kline is long Microsoft. He does not own a PS4 or an Xbox One. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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