New consoles have traditionally relied on the draw of exclusive software to push adoption. The rising cost of game development means that there are fewer platform-specific titles than ever before. A new console simply doesn't have the installed base to make platform exclusivity viable for third-party publishers. These conditions have given rise to cross-generational titles--games that will be scaled to take advantage of the new hardware but are also available on current-gen systems. What does this trend portend for the industry?
Cross-gen, then and now
Flashback to the launch of Sony's (NYSE:SNE) PlayStation 2, and (outside of sports titles) you would be hard pressed to find software with SKUs available across hardware generations. Skip ahead to the launch of the Microsoft (NASDAQ:MSFT) Xbox 360 and you could purchase cross-gen versions of Activision Blizzard's (NASDAQ: ATVI) Call of Duty 2 and Tony Hawk's American Wasteland, among others. With the launch of the PlayStation 4 and the Xbox One, there are hardly any games from third-party publishers that aren't also being released on current-gen systems.
Activision's Call of Duty: Ghosts will launch on almost every platform under the sun (yes, even the Wii U). When it's all said and done, Electronic Arts (NASDAQ:EA) will have released a version of FIFA '14 on twelve platforms, including the PlayStation 2, a system first released in 2000 (though no, it's not releasing on the Wii U). By all indications, Electronic Arts, Activision Blizzard, and other publishers will continue to release cross-gen titles well into the lifecycles of Sony and Microsoft's new machines.
Choose your Destiny
Heading into the next hardware generation, Activision's Destiny stands as the company's biggest investment in new IP. The first-person shooter is built around a persistent online world and community features, and has often been cited as a poster child for ushering in the next-gen experience. The game will also be launching on the Xbox 360 and PlayStation 3, however. Doesn't this make the $499 Xbox One and $399 PlayStation 4 less essential?
After the fall
If you were to ask around about the biggest game coming to Microsoft's next-gen console, you'd probably hear a lot about Titanfall. The game is developed by Respawn Studios, headed by the talent that engineered much of Call of Duty's successful formula, and will be published by Electronic Arts. As per a partnership between the company and Microsoft, the game will launch on Xbox One, Xbox 360, and PC. With a Spring 2014 release, Titanfall has the potential to be a defining title in the early life of the Xbox One along the lines of a Halo or a Gears of War. That said, its impact in the mind and market share battle against the PlayStation 4 could be mitigated by its availability on the 360.
Cross-gen games are smart business for publishers, but they have worrying implications for the health of the console industry at large. Console revenue has been in decline, and signs of market saturation are evident. There seems to be high interest and demand for the launch of each new system, with the early edge going to Sony's PS4, but this should not be taken as an indicator of long-term success. If the underlying pitch for the respective systems' first years on the market is that users will have access to the high-end versions of cross-gen titles punctuated by first-party releases, post-launch sales could be disappointing.
The prominence of cross-gen development among third parties makes first-party performance more important than ever for Sony and Microsoft. As in previous generations, you can expect many of the titles that take best advantage of the hardware to come from studios close to the manufacturer. The Xbox 360's first-party IP's enjoyed a distinct sales advantage when stacked against Sony's PlayStation 3 efforts. How much of this carries over after some serious public relations stumbles will play a large role in the Xbox One's lifetime performance.
Down the line
The longer cross-gen titles continue to be the norm, the less chance the PlayStation 4 and Xbox One have of outperforming their predecessors. With Nintendo's Wii U drastically underperforming the last cycle's market-leading Wii, it is very likely that console gaming will see its first generational contraction. That doesn't mean that Sony and Microsoft can't hack it or that the industry is imploding, but delivering the right software and experiences to define the next-gen systems early will be key to their success.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard and 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.