Early sales have been strong for Sony's (NYSE:SNE) PlayStation 4 and Microsoft's (NASDAQ:MSFT) Xbox One. The new consoles, which launched within a week of each other in November, have sold a combined 12 million units, twice what predecessors PS3 and Xbox 360 moved during the same period.
That's encouraging, but not enough to guarantee that high-priced consoles are here to stay. PS4 has sold 7 million units while Microsoft claims 5 million sold to retail (but not all sold though to customers) -- a small fraction of the potential total audience. It's still possible that the buyers are mostly hardcore gamers and neither console will approach the 80 million or so units its predecessor sold.
The scene for the next stage in seeing whether consoles are here to to stay will be set at this week's Electronic Entertainment Expo.
"E3 will be critical in helping investors decide if the early success of Xbox One and PS4 is sustainable beyond the early adopters," Sterne Agee analyst Arvind Bhatia told USA Today.
At the show Sony and Microsoft will be showing off their systems along with new games. E3 will also feature a number of companies hoping to derail Sony and Microsoft, the most notable being Nintendo (NASDAQOTH:NTDOY), which is trying yet again to sell consumers on the WiiU as a viable alternative gaming system.
Nintendo's last stand
Sales for WiiU have been disappointing. The console has been around longer than PS4 and Xbox One having launched in November 2012. It has moved more than 6 million units, but only 310,000 of those sold during the company's most recent quarter. Momentum for the console has essentially stopped. But some industry experts believe a comeback is possible.
"It's no secret that the WiiU is struggling, but as Nintendo says: a single game can alter the fate of a platform," wrote GameSpot's Edward Makuch. "By the time Nintendo's E3 briefing takes place on June 10, Mario Kart 8 will have already provided a nice sales jolt for the Wii U in the U.S."
The latest Mario Kart title has been a winner, selling 1.2 million copies during its opening weekend. Whether that will spur sales of the console have yet to be seen. But Makuch suggested that the company could capitalize on that momentum by offering details at E3 as to when new titles in its exclusive franchises -- including Legend of Zelda and Mario -- would be released.
The company is also slated to show off a previously announced sequel to its popular Super Smash Bros. series, as well as a line of collectible figurines that leverage the WiiU's GamePad's near-field communications technology. Think of it as a knock-off of Skylanders and Disney Infinity but using the Nintendo family of characters. It's also possible that a price cut for the struggling console could be announced.
It's early in the game to count out WiiU but its success or failure is not likely to impact PS4 and Xbox One. The first Wii sold over 100 million consoles, but that didn't seem to affect the success of PS3 or Xbox 360.
What about the others?
Some of the main potential rivals to Sony's and Microsoft's consoles won't be attending E3. Instead they will be at a rival event, the Nvidia (NASDAQ: NVDA) Gaming Expo, held at a parking lot across the street from the Los Angeles Convention Center where E3 is. The Nvidia event focuses on PC-based gaming, but neither it nor E3 will be showing off what was expected to be a potential rival to the consoles -- Valve's Steam Machines.
Though Valve announced the Steam hardware platform at the 2014 Consumer Electronics Show, the company has pushed it back to 2015. That gives the existing consoles an extra year to build up audience. The Steam hardware would theoretically make it easier to hook up a PC gaming system to a television. The Steam software platform -- which allows for the download of games on PCs and a traveling library not tied to any one machine -- is interesting, but it can't challenge consoles until the hardware technology exists to make it simple for casual gamers. Until a Steam device exists that puts the content on my TV and a controller in my hand, I'm not interested and it's hard to imagine the vast majority of the potential console audience would be either.
How big is the market?
Console game sales (not including sales of game systems) fell to $8.8 billion in 2013, far below the $10 billion-plus years of 2009-2011. But sales of games for consoles are expected to climb to $9.5 billion this year and reach $11.5 billion in 2018, according to Pricewaterhouse Coopers.
"The evolution of the consoles and the new technology creates the demand for new purchases," PwC's Sean De Winter told USA Today.
As more people purchase current generation consoles the market for games should only get bigger. Also good for Sony and Microsoft (and a reason others want to hone in on the console market) is that more games will be sold via digital download. Digital sales on video game consoles will surpass packaged discs by 2019, IDC analyst Lewis Ward told the paper. That means that if customers have a company's console, that company should make more money on game sales as retail stores are cut out of the supply chain.
It's a about time
Even if Nintendo can revive interest in WiiU it seems unlikely to disrupt Sony and Microsoft. Valve's Steam Machines may someday be a challenger, but giving PS4 and Xbox One an additional year of lead time probably limits its potential to compete.
The biggest challenge facing Sony and Microsoft is not their competitors but their own previous success. The Xbox 360 and PS3 are still impressive consoles on which most new titles are released. Both machines have a large, satisfied user base that will upgrade at some point but is in no rush to do so. If Microsoft and Sony stay the course, both are likely to continue to build on their successful launches. Numbers for both Xbox One and PS4 may not spike but they are likely to grow steadily. A competitor is not impossible (and a surprise one could even come out of E3) but no credible challengers have yet to emerge.