History tends to repeat itself, and it feels like 2004 all over again. In 2004, both analysts and gamers alike predicted the end was near for consoles due to lagging sales, new games lacking innovation, and the rise of free Internet gaming websites. This was also right before the seventh-generation console debuts of Microsoft's (NASDAQ:MSFT) Xbox 360 in 2005 and both Sony's (NYSE:SNE) PlayStation 3 and Nintendo's Wii in 2006.
The same doomsday story has resurfaced, despite the recent eighth generation console releases and the success of both Activision Blizzard (NASDAQ: ATVI) and Take-Two Interactive (NASDAQ:TTWO), all while mobile developers like Zynga (NASDAQ:ZNGA) have struggled. In the end, mobile gaming will disappear well before console gaming ever will.
Console gaming life cycle is misinterpreted
Many analysts misinterpret declining sales of hardware and games as a sign of declining interest in video games overall. The video game industry generates an all-time high of $66 billion worldwide, and that is expected to grow to nearly $80 billion by 2017. Other analysts believe that mobile gaming on smartphones and tablets will replace console gaming, given that the global mobile gaming market is expected to more than double in five years to $29.6 billion.
The fact is that over half of the households in America own a dedicated gaming console, and many of those that do own two. Historically, console gaming has followed a predictable product life cycle for each console generation. Sales peak in the first couple of years for both the hardware and software. Product maturity actually occurs when rumors of the next generation of consoles surface – which is often several years away. This is the point when sales start "plunging" because gamers stop investing in their current consoles in anticipation for the next ones.
Gamers proved naysayers wrong again
So far this year, hardware sales have seen a 30% + year-over-year drop. The trend should reverse given that both Sony's PlayStation 4 and Microsoft's Xbox One each sold over 1 million units on release day alone. In fact, both companies stated that demand surpassed records set by their previous generations of consoles.
Mobile gaming is volatile, fragmented, limited, and unsustainable
It doesn't matter if more people play games on smartphones than ever before. Mobile gaming is a lose-lose situation for gamers and developers alike.
In 2012, Zynga was on top of the mobile gaming world. The company's stock peaked in March after its December 2011 IPO. It had six of the top 10 games on Facebook, with titles like Farmville and Texas Hold'em Poker. Now, Zynga has just three titles in the top 10 and the company's third quarter 2013 earnings showed revenue fell 36% YOY.
Newcomers like Rovio, which is known for Angry Birds, and King's Candy Crush, are now seeing success. But even Rovio's run looks short-lived since every new game has the words "Angry Birds" in the title; this leads many to believe that the company is just trying to extend their 15 minutes of fame.
The financial environment across mobile gaming is unsustainable. Apple currently pays $5 billion across its 235,000 iOS app developers. This means the average developer makes $21,276 per year. Because the industry is extremely top heavy, with just a few games making nearly all the money, many developers disappear because good programmers are expensive and no one works for free.
"Free" means you still pay in some way
Mobile gaming continues to nickel and dime players. More and more users are becoming turned off by the fees within "free" games to either level-up, acquire new abilities, or to just beat the game. Other mobile game developers punish gamers with non-stop ads during gameplay until gamers shell out the money to stop them.
Despite complaints by gamers regarding the increased costs of games through expansion packs, multiplayer add-ons, membership fees, and peripheral costs, console games are still selling at huge quantities. Activision Blizzard's Call of Duty: Ghosts didn't outsell the previous "Call of Duty" installment, but it is currently the best-selling PlayStation 4 game.
Take-Two Interactive's Grand Theft Auto V took the top spot for the second month in a row in October, selling 1.1 million copies. The game also exceeded $1 billion in sales in just three days. Given the fact that King's Candy Crush Saga is estimated to be making nearly $900,000 per day in revenue, the comparison still heavily favors console gaming.
Console gaming isn't going anywhere. Mobile gaming is an industry of one-hit wonders where success is temporary and the vast majority of game creators try to avoid bankruptcy. If anything, console gaming is just getting started again. The eighth generation is here and consoles have more features and are more advanced than ever before. Look for trends to shift as mobile gamers spend more time on their PlayStation 4 and Xbox One consoles, and less time being nickel and dimed on their smartphones and tablets.
Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive. 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.