There is no denying that sales for the latest game consoles from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) are off to a strong start. Following up on the longest-running hardware generation on record, gaming enthusiasts have proven quite eager to get their hands on updated video games.
The PlayStation 4 enjoys a commanding sales lead over the Xbox One, but the combined U.S. user bases for both consoles is somewhere in the neighborhood of 60% higher than total PlayStation 3 and Xbox 360 sales at the same point in their respective lifecycles.
This fact would seem to bode very well for the future of these companies, but current sales figures cannot be taken as wholly predictive. The following three trends could be major threats to the reign of Sony and Microsoft.
The collapse of Nintendo hardware
Nintendo (NASDAQOTH:NTDOY) stock is up over 35% in the past month, thanks to the announcement that it will begin publishing games on mobile platforms. But the big move highlights the deterioration of the original hardware business, and a weakening Nintendo has the potential to be bad news for Sony and Microsoft. In a 2013 interview with IGN, Sony President of Worldwide Studios Shuhei Yoshida said the following:
We need Nintendo to be very successful, to help induct as many consumers who like to play games with controllers, right? With sticks and buttons. Because we believe they are great things.
After years of lackluster hardware sales, Nintendo has finally entered the world of mobile development and publishing. Research firm Digi-Capital estimates that mobile gaming revenues will have undergone 23.6% compound annual growth from 2011 to 2017, while combined sales of Nintendo's latest releases are on track to come up roughly 150 million units short of the 255 million DS and Wii systems sold in the previous hardware generation. Mobile games will allow Nintendo to reach a much wider audience, and its entry to the space could produce better than usual margins on software. However, the new strategy may end up further weakening the core hardware business.
The surging popularity of mobile games and relatively weak performance from Nintendo 3DS and Wii U consoles already meant that fewer children were being introduced to gaming through traditional platforms. However, a new generation of gamers will soon be able to enjoy Nintendo content and characters without the sticks, buttons, and pricing models that might have otherwise normalized the consumer ecosystems found on Sony and Microsoft platforms.
Exclusive content on PS4 and Xbox One has been lackluster
First-party games and other exclusives used to be one of the defining reasons to purchase a given console, but neither the PlayStation 4 nor Xbox One currently play host to a strong lineup of content that cannot be experienced elsewhere. Other than a few select titles like Bloodborne (Sony) and Sunset Overdrive (Microsoft), which enjoyed strong reviews and sales, the first-party output from both platform holders has been characterized by delays and disappointments.
At Microsoft, its Halo: The Master Chief collection was put forth as one of the key Xbox One games for the crucial holiday season, but the title shipped with game-breaking bugs that hindered its multiplayer mode for months. It also soured what might have otherwise been a landmark release and impetus for renewed popularity of the Halo franchise. That is on top of Quantum Break, another high-profile action exclusive that has seen multiple delays, now expected for 2016.
While first-party output on the Xbox One has been sub-par, Sony looks even weaker with its PS4 support. The company had originally promised its Driveclub racing game as a free download for subscribers of the PlayStation Plus service alongside the PS4 hardware launch, but the game received multiple delays and disappointed fans and critics alike when it finally released last October. The game was plagued by bugs, and the once-touted free version has been put on an indefinite hold. The cinematic action game, The Order: 1886, was also subject to a delay and bombed with critics upon its February release. Making matters even worse, PlayStation 4 lost its marquee 2015 exclusive when Uncharted 4 was pushed to 2016.
The first year following the respective releases of PlayStation 3 and Xbox 360 saw platform-defining games like Uncharted (Sony) and Gears of War (Microsoft). It is quite clear that the new consoles are lagging when it comes to blockbuster exclusives.
The growing popularity of mobile and set-top gaming and the return of the PC
Those seeking the thrills of interactive entertainment have more ways to get their game on than ever before. Mobile is still booming, anticipated to account for 60% of the roughly $100 billion total sales that the gaming industry is projected to hit in 2017. Companies like Amazon and Google are also providing increased gaming features on their respective set-top boxes, and the next Apple set-top box is rumored to be much more gaming friendly. Of these three companies, Amazon is most focused on growing its gaming strength, buying up developers and game engine licenses while bringing its original titles to the iOS platform.
PC gaming is also in the midst of a resurgence, matching revenues generated on consoles. Platforms like Valve's Steam are spearheading the digital distribution revolution, offering deep discounts that complicate the value proposition of $60 new releases found on consoles. The upcoming Steam Box systems aim to combine the ease of use of consoles with the customization and deals offered on PCs.
With more viable gaming platforms to compete against, more people getting into gaming via non-console devices, and weak exclusive offerings from Sony and Microsoft, the two console makers face some very big challenges going forward.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), and Google (C shares). 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.