Bits For Rent

An amazing thing is happening right now in the world of consumer goods, though I’m sure almost everyone has seen or heard something about it by now. Companies are converging from all sides to fill gaps in product lines, thanks in large part to the creation of a few fantastic portable handheld devices in the past few years.

As I’m sure most of you can recall from just a few weeks ago, Apple was once again in the spotlight as it finally lifted the curtain on its long awaited tablet computer. Unfortunately, the device was not everything it the hype had claimed it would be: the device is large, thick, heavy, and lacks some very useful features such as an internal camera; its entry level price of $499 is also wildly outrageous with only a 16GB internal hard drive, and it does not include the almost-mandatory 3G feature (which will also run you at least $15/month to use). Furthermore, the reliance on the stripped down iPhone OS places the device in a precarious position. Now, it is not feature-rich enough to perform the same tasks as a $200 netbook–streaming Flash-based video, running multiple applications at the same time, using Office, etc.–and it is actually being handicapped by limitations that, on a 3.5″ iPhone or iPod screen, would seem perfectly reasonable.

Basically, by creating what many are simply referring to as a “big-screen iPhone,” Apple has filled a gap in its product line with something that is both easily replaceable (jumping to a MacBook or iPod touch) and utterly lacking in terms of iconic appeal. Whereas the slick aluminum casing of a MacBook or the glossy black shell of an iPhone immediately inform the user of what type of device it is they are handling, the mish-mash of aesthetics in the iPad is a sign of Apple’s own uncertainty as to whether this creation is more of a handheld (big glass screen accompanied by that one little Home button) or portable computer (aluminum casing on the back, keyboard attachments, etc.).

iPad: Digital Readers Face New Threat

Now, let me also say that this device is incredibly important for other reasons. First, it is attempting to unite several unrelated consumer markets under the Apple banner. Just as Apple used the iPod as a Trojan Horse for the iTunes store, so too is it attempting to use the iPad to enter a new market, eBooks. Now, until this point, the eBook market was easily divided into four parts: Google offered a wide selection of free books that have entered the public domain on its website and through other companies’ online stores; Sony, the first to actually enter the market, has its own store which it recently revamped to become more appealing and competitive; Barnes and Noble made a brave foray into the battle with its Nook reader last fall, and is seen as the strongest challenger to Amazon, who has controlled the eBook market with an iron fist thanks to its excellent Kindle reader and the easy-to-use, low-cost, ubiquitous Amazon.com eBook store.

What has occurred now, however, is something quite sinister. Eager to not make the same mistakes as the recording industry (but ultimately ignorant of the fact that all media will soon be digital and commoditization of entertainment is inevitable), the publishing world has, with Apple’s entry into the market, seen fit to give the dedicated eBook reader market the snub. At the same time as Apple was preparing to reveal its new wunderkind, Amazon and Macmillan, one of the largest publishing houses in the book world, were in a very public spat over the future of book prices. Basically, MacMillan wanted to raise the price of new release eBooks to be closer to those of the actual hardcover, since the hardcover book is where the company usually makes its money on a book release. Long story short, Amazon asked MacMillan to kindly go fuck itself (apologies for the language, dears) and pulled all Macmillan books from its store, and then a few days later doubled back on its stance and asked if the two could still be friends.

See, Amazon believed, like Apple once did, that $9.99 is the sweet spot for a new book to be priced at. But most publishers don’t care about that. They want to have discretionary pricing, somewhere between $12-17, to vary between books depending on how popular they are. Now, I know you got to this point and you’re thinking, “Great, dude, but seriously I couldn’t give two shits about book prices and company bickering. What does this have to do with me?” And you’re mostly right to be thinking that. But here’s the thing: while it’s important that we don’t sink the price to fast on the publishing industry and make the paperback the next CD, we also want to be able to sink prices for digital content, because everyone agrees that lack of a physical copy ultimately reduces the value of a good by a considerable margin. Especially since when you buy most things digitally nowadays you’re just buying a license to use that good, not the actually good itself. But that’s a whole different post about digital rights that I am not going to be writing. Let’s finish up with the books and then move on.

Bottom line: Amazon was trying to be the only game in town for publishers and consumers, much like Apple. It wanted exclusive or highly restrictive control of digital publishing rights to books, and it wanted to set the prices for the publishers. In other words, it was taking the pie and telling the publishers how many slices they could have. Now, thanks to the new agency model almost every major book publisher will be switching to (and that is being endorsed by Barnes & Noble as well as Apple), publishers can set prices wherever they want, and the seller will get a flat 30 or 35% cut from that selling price. This means that while prices may start high, we will actually be able to see classic economic theory play out here: the price will fall for a book and as it does the sales will increase. This gives maximum profitability to the book industry, and ultimately everyone wins. Sure, we consumers don’t profit as easily from it as before now that Amazon has lost its death grip on the market, but in the long run, provided you and I can wait a bit after a book comes out, you will still get a good price on that digital copy. Better yet, now it won’t come at the cost of bankrupting the businesses and authors you’re trying to support.

That’s it for me on eBooks for now. I actually don’t own one, but am very interested in the prospect. If you have one or know someone who does, I’d love to hear about it. Send me a line and tell me what your thoughts are. For now, though, if you’d like to read more on how pricing is hurting the book industry, I suggest this blog post as a good place to start.

What Lies in Between

I mentioned earlier that the iPad is important not for what it does well or does poorly, and there are certainly plenty of things that can be listed for both categories, but for what its affect will be on other devices. In the run up to the device’s announcement, we say several new tablet computers be revealed by Dell and HP. These are quite similar to the tablet in that they are touch-only slates, but where they actually surpass the iPad in terms of usability is that they run a fully functioning Windows OS. That means multitasking, Flash video (hello, Hulu!), Office, the works. Just as the iPhone brought out the heavy competition from Sony (Xperia), Google (Android OS and Nexus One phone), HTC (Windows and Android-based phones), Palm (Pre), and even BlackBerry (Storm and Storm 2), so too will the iPad bring with it a flurry of imitators and also-rans. Only this time, the also-rans have a chance to surpass the mighty Mac: they do not operate under the same self-imposed restrictions as Apple, who consciously limits the utility of its devices by denying certain features or applications from being run on it. This race for that middle market is actually the most competitive of all. For once, Apple’s prices and willful indifference may be its undoing. Which is all well and good.

See, as much as I love my MacBook Pro and my iPhone, I do believe that they’re too expensive and I do believe they could be better devices. If Apple wasn’t so concerned with preserving its brand value as well as its insane, 40% profit margins on everything it sells, it could be the most crushing company in the world. Instead, it opts to play the niche, exclusive supplier card, letting consumer interest and fervor boil up and over until we’re all champing at the bit, white froth foaming from our mouths, begging to given a chance to buy their product, no matter the price. Lucky us, eh?

I’ll leave with one more thought. The only reason any of the above things have occurred is because of the creation of the netbook market. These devices, little 8-10″ laptops that originally ran off of Linux or Windows XP and sell from $200-500, are now the biggest growth category in computer sales. In the late 1990s, we saw the rise and peak of the desktop PC. Nowadays, people don’t want to buy a big old box system that often because there are so many parts and its not portable; to use it, you become rooted to one spot. (Actually, this is why the iMac is such a brilliant device, but I won’t rant about Apple anymore today.) So then we moved down: desktop-replacement laptops with big old 15″ or 17″ screens came into vogue. They weren’t big on portability, but they did just about everything a desktop could do (other than play video games well, which is slowly changing). Then, about three years ago, the laptop market started to get saturated with cheap computers. Suddenly, a nice 13″ or 14″ laptop, perfect for web browsing, video viewing, and word processing, cost somewhere between $400 and $800. A 15″ MacBook Pro at that time still cost $2000, but it was eventually lowered to $1699. This was a critical time for computers. Dual core processors, cheap RAM, ever-increasing hard drive sizes… we were really hitting our stride back then and shifting the course of computer development from the push for making everything as fast as possible to making two or four or six of everything as fast as possible and as small as possible. Which is why we have the netbook. Using a small, energy efficient Intel chip called the Atom, these devices became the student’s and professional’s choice for on-the-go computing. With a USB 3G modem to gain access to AT&T, Sprint, or Verizon networks, a netbook transforms into exactly what an iPad is attempting to be: a large smartphone which enough screen space to actually get productive work done on it.

So while Steve Jobs is convinced that the netbook is a piece of garbage and that Apple will never make anything so small and uncomfortable and ugly, let the others sit back and laugh. The iPad has attempted to define where there in between actually lies, but that space is a dangerous one. Pressure from both sides may soon see the middle market flooded with an odd array of laptops and tablets and super netbook hybrids. As history has shown us, the computer world is never as cut and dry as it originally may seem, and I suspect that this market is where a great deal of innovation will soon be found. And as a consumer, I’ll be right there waiting to see what’s next.

Last year, the video games industry saw record sales of over $30 billion in units of software sold. Compare to the last great year for software, 2004, that is an increase of over 50%. In addition, console makers pushed a record number of hardware units for each of their respective systems, with 10.77 million PS3s sold, 10.8 million 360s, and almost 25 million Wiis. This is without considering the enormous success found in the handheld market, where the DS is the fastest selling system ever and Sony’s PSP is doing markedly well in a field that, during the age of the Game Boy, was mostly uncontested. Even with the begin of a significant decline in sales of PS2 hardware, which did not receive a price drop to the sub-$100 mark until April of this year, it is evident that 2008 marked a new high in demand for video games and game hardware. The question we must now ask ourselves is, can it ever happen again?

The Secret Formula

The success seen in 2008 can be boiled down to a combination of several factors: a line-up of highly sought-after games released throughout the year, the maintenance of the PlayStation 2 as a viable and active platform, the short supply of Nintendo’s Wii for nearly an entire year, and the demand for new gaming experiences from the PS3 and Xbox 360.

2008 met with a great amount of hyperbole when in first began, according to some to even have the potential to eclipse the last unofficial great year in gaming, 2004. Grand Theft Auto IV was finally coming to market, along with Gear of War 2, Fable II, Resistance 2, Super Smash Bros. Brawl, Mario Kart Wii, Miyamoto’s strange new Wii Fit, LittleBigPlanet, Call of Duty: World at War, and a new Prince of Persia and the hope of, possibly, Gran Turismo or Killzone 2. Not all of these titles would ultimately end up having great sales success, and some, such as Dead Space, would catch us completely off guard at that summer’s E3 expo. Still, it was clear that the market would be ripe with highly anticipated new titles, particularly featuring franchises known to lurk the elusive casual gamer back to the couch for another go at his favorite series. GTA, Mario Kart, Wii Fit, and Gears of War 2 would prove to have the strongest of the individual game sales — each with multiple millions of units sold — and there was an unbelievable number of music titles (Rock Band 2, Guitar Hero World Tour) purchased as well. Truly, 2008 was a great time to be playing video games.

Also key to the strong success of the industry, only this time serving in a reserve role, was the PS2. With games such as SingStar and Buzz! available on the system, the PS2 became a very compelling party box/portable karaoke in 2008. The system also featured a few hardcore title releases, such as the stellar Persona 4, but was most impressive for its sales in another, more casual category: sports. Despite the next-gen glitz and effects work in the PS3 and 360 versions of FIFA, Madden, NBA, and MLB games, the PS2 maintained large sales numbers for all of the latest additions to these franchises. Clearly, the armchair quarterbacks once thought to be lumped in with the hardcore market have continued to make the economic decision to update their software for a system they already own (at a price of $50 rather than $60 for each title), instead of purchasing a $200-400 system to play them on. Considering that 2008 brought witness to one of the worst economic declines in America’s history, the logic certainly makes sense. Factor in the fact the HDTV penetration still has yet to rise to the level predicted by early analyst reports and you have a very clear proof-positive that the world still needed PlayStation 2 in 2008. The system sold nearly 9 million units last year, just shy of its successors, but increased its global install base to a whopping 140 million units. As any developer would tell you, you can’t just ignore that kind of established market. Surprisingly, however, no single PS2 game was able to make it into the Top 10 sales charts for 2008. The decline of a system will always be predicated by a fall in its software sales, and the data for 2008 shows that PS2 has likely seen its last meaningful year.

Nintendo Regains the Throne

In contrast, Nintendo could barely make enough of its Wii system to sate consumer demand, and the sales numbers for the system show. The company also found creative ways to extend the life and/or popularity of some of its titles, particularly through the bundling of a remote with every copy of Wii Play, a steering wheel with each copy of Mario Kart Wii, and the balance board with Wii Fit. The last of these is the most fantastic, however, as Nintendo proved to the world that it could sell a game and peripheral bundle at $90 and still have tremendous success. Of course, Guitar Hero and Rock Band also released numerous forms of bundled software and hardware that greatly exceeded this price, but neither could match the success of Wii Fit‘s whopping 4.54 million copies sold.

The X factor for 2008 was, undoubtedly, the Nintendo brand. Nearly all of their major software, aside from Wii Music, was met with both a positive critical response and a tremendous amount of consumer demand. Additionally, Nintendo was able to continue selling these titles to Wii owners beyond the traditional 6-week sales window. Mario Kart Wii and Wii Play, in particular, charted in the Top 10 for the remainder of the year, and continue to have a presence there today, a full year on since Mario Kart Wii was released. Unlike Sony and Microsoft, whose games feature strong sales that quickly taper off after hardcore users have purchased the items at or near release, Nintendo has found an audience interested in diving back into its catalog and purchasing older titles, which allows it to keep selling these games for full price while third-parties and Sony and Microsoft first/second-parties ultimately must drop the price of their titles to reignite sales. Gears of War, Resistance, and Halo are some of the only brands which were able to maintain premium pricing for over a year on these next-gen systems.

Why? While both console makers try to bundle their systems with the latest in either family-friendly or hardcore titles, Nintendo has chosen to include a very basic, but still fun, title with its boxed system since it first launched. The value of its brand as a software maker, and the relative ease with which the titles can be played (using a steering will, standing on a board, flicking a remote, etc.) not only keep the barrier to entry low, but they encourage word of mouth among a far larger audience than a traditional game might.

Dark Clouds Forming

Notice, however, that Super Mario Galaxy and Legend of Zelda: Twilight Princess, while both adored by fans and critics, are not in this list of successful titles. The hardcore game player that has been playing games for multiple generations is no longer the primary software buyer on the Wii. But even then, simple software titles published by third parties also fail to meet with any success. Last summer’s Boom Blox was a critical success, but failed to move more than a quarter of a million units when all was said and done. Its simple design and friendly styling should have sat well with the audience known to own the system, but it was passed over in favor of more copies of Mario Kart and Wii Fit. Likewise, hardcore titles such as No More Heroes, Madworld, and House of the Dead: Overkill have also been unable to inspire much interest on Nintendo’s system in the past year, and even GTA: Chinatown Wars on the DS has vastly underwhelmed when it comes to sales. The large, faceless audience of Nintendo owners, like an old fish, can’t be fooled by the developers lures and promotions. If the game isn’t Wii-branded, they aren’t biting.

This puts the casual gamer (not the lifestyle gamer, as we will brand the Wii-owner) in a bit of an odd position. With the PS2 soon to experience its last, sputtering gasps of life, where does that player go to enjoy the kind of experiences he has been accustomed to. The Xbox 360 is likely not to move below $199 for some time, nor will the Wii be budging from its $250 launch price. But while logic says that the Wii is the casual gamer’s console of choice due to its strong sales and key major titles, the control scheme and game lineup are actually far different than what the PS2 saw — save for the ports of PS2 and PSP games the Wii still sees. The Wii has become a sort of elephant in the room, both too large to ignore but yet too difficult to work with and find success. Designers are at an impasse: find a way to achieve the evergreen prosperity the Wii is seemingly capable of granting, or be stuck just producing expensive, resource-intensive software for the 360 and PS3, which may or may not be successful (EA has seen this with risks such as Army of Two and Mirror’s Edge, and even Sony first parties have had sluggish sales).

Another point worth pondering is what the next console cycle will bring with it and how long until those systems come to market. If Nintendo remains top dog as it appears it will, they have an incredibly wide array of options to take with their next system. Do they keep it underpowered and focus on controls? To they take a significant leap in graphical ability and open the system to features such as DVD or Blu-ray playback? Do they go digital distribution only? There are things about Nintendo’s past that cause me concern.

First is that when Nintendo has decided to release a new system, they utterly cease to continue supporting the previous one. Even when they claimed the Game Boy Advance would remain one of their “three tiers,” the system was swept under the rug within two years. Compare this to living in a time when Sony was on top, and the PSX and PS2 both had strong lives after their successors were released and you can imagine that the folks at Ubisoft, EA, and Activision must be a little nervous about what new hardware will mean for them.

Second is Nintendo’s history of being obstinate and behind the times with their products. Both the Wii and DS are devices far less powerful than their rivals, yet both manage to sell phenomenally better. The Wii is the first system Nintendo has released that does not use a proprietary format to play games, but even then the system is not capable of playing back a commercial DVD video release. Furthermore, Nintendo is almost always solely interested in Nintendo. The company will refresh its major franchises once or twice a console generation, but remains very inconsistent when it comes to creating new IP. This generation we have seen Wii Sports, Wii Music, Wii Fit, and Brain Age as new lines for the company, but the GameCube saw the creation of Pikmin and the resurgence of Metroid. Punch-Out!! is largely a remake of the former two titles, albeit a very good one, and it remains the only “core” title released by the company in over a year. Which brings me to another point:

Nintendo is slow. They take their time making games, and they’ll be damned if they work any faster because the fans are eager to buy them. The Game Boy Advance had about 6-7 years before it got replaced by the DS, and I’m sure that they’ll be stretching the Wii and DS to do the same, using slight hardware modifications (DS Lite, DSi, GBA SP, GBA Micro, etc.) to refresh the product line and pique consumer interest for longer than the internal tech should probably be expected to last. This is actually great for developers who can capitalize on cost savings later on in the console life cycle to produce games on smaller budgets without sacrificing quality, but it could also ultimately lead to a sense of stagnation.

Other reasons to fear that the games industry may see a weakening in its future is the ultimate failure of the PlayStation 3. Love ‘em or hate ‘em, the console world needs a strong Sony to survive. Sony brought several things to the games industry with the Playstation, and all were changes for the better: the optical disc standard; its connections through the film and music industry provided new outlets for games to be sold through; a sizable new audience brought up on DualShocks and Final Fantasys; most importantly, it provided a slick and powerful entertainment device that wowed consumers and stayed price competitive with the latest offerings from established hardware providers.

That last point has now fallen to Microsoft’s Xbox 360, and it is unlikely Sony can reclaim the mindshare it has lost this generation, even if the rebranding and redesign of the PlayStation 3 are in fact forthcoming. But while Microsoft is content to collect Live subscriptions and collect franchises and developers once exclusive to Sony and Nintendo, Sony is still driving innovation and content. Flower, LittleBigPlanet, Uncharted, Wipeout HD, and Warhawk are all experiences exclusive to the small PS3 install base, but are tremendous titles that should be enjoyed by all. In the last generation, the PS2 was the system almost everyone owned, and the GameCube and Xbox were the sort of extracurricular systems hardcore gamers would pick up to get their Mario or Master Chief fix.

Now, Sony is still publishing a bevy of ambitious, quality product at a reduced marketplace, and the sales numbers show it. While Shadow of the Colossus was able to achieve a sales success ICO could not, it also did so on a system that had over 100 million units sold. Ueda-san’s next project, known only as TRICO now, will be fortunate to have the same success, on a system that costs far more to develop for and that has only a fraction of the user base. But the game will be released, just as will Heavy Rain, Uncharted 2, a new Ratchet and Clank, and more. Because unlike Nintendo, Sony has harvested a fantastic collection of first and second party studios, and they deliver consistently and in quality. So while Nintendo can happily sit back and count stacks of money, it will also express indifference when fans clamor for more of the games they love so much. Aren’t you happy with the Mario Kart you’ve already got? What do you mean Smash Bros. has broken online play? That game will last a decade! So on and so forth. Our new masters are, sadly, omnipotent but not omnibenevolent.

Hope Springs Eternal

My thoughts of Nintendo are dour and biased and overly critical, some will no doubt think, but I am not blind to the opportunities this new era of gaming has opening before it. Take, for instance, what Apple has brought to the table. The iPhone is our first portable, always-connected gaming handheld. With it, we can download new software or title updates anywhere we have service or WiFi, and new games are being added to its store by the minute. Already it has a library in the thousands, and the user rating system effectively allows the cream to rise to the top without Apple having to enforce quality content restrictions and QA each new title it approves. This is a bold, fresh take on gaming, and it is already leading to new approaches from Sony and Nintendo, the latter of whom has already released a WiFi-enabled DSi capable of downloading games on the go and the former who is expected to unveil a new, download-only PSP in a week’s time.

Further, we are about to witness whether or not third parties will sink or swim on the Wii. With EA’s new EA Sports Active title, we have the first polished, major release to compete with or supplement Wii Fit. Can mimicking Nintendo finally bring about strong sales numbers on a system where no third-party game other than Rock Band and Guitar Hero has been able to find sales success? I am sure a lot of people in the industry are hoping so, because so far even the kindest of reviews (hello, Zack and Wiki!) has not been enough to catch the attention of our lifestyle gamer. Which is sad, because the Wii is a fun system with a lot of potential to reignite interest in old franchises and genres. But then, I know two people whose parents bought a Wii and still have it in the box, and my system only gets dusted off every six months. I think that, by reaching for a new audience, Nintendo has found a sort of No Man’s Land where only knows how to survive. Brilliant, from a business perspective, but terrible if you’re the guy they’re doing business with.

Which seems to have also have been the case for the PSP. Stuck in 8-12 year old marketing hell, the console sells well enough but the game sales are utterly laughable. What exactly do people do with the thing? Sony’s plea will always by rampant piracy, but are kids savvy enough to really sit down and create pandora batteries and hack their firmwares? I’m not so convinced. A lot of it probably had to do with that fact that, when faced with a system almost as powerful as a PS2, developers were creating experiences too rich and elaborate for the portable space. Which is why Sony is in the midst of rebranding and rebuilding the device, and encouraging devs to give the system another shot, only this time with titles more like Patapon and Pixeljunk Monsters and less like Liberty City Stories. Will it work? I really hope so. The PS Store should have been there from the beginning, and hopefully a reboot will be just the kick in the ass the system needs to really shine. Making some of its already excellent back catalog available to download is a good start, but we need a lot more of it. Oh, and were are the downloadable PSX titles at, Sony?

Meanwhile, Microsoft and Sony plan to adopt a kill them with gorgeous games approach this year, as Final Fantasy XIII, Uncharted 2, Halo ODST, Alan Wake, Heavy Rain, and possibly a new Metal Gear will all be totally drop-dead looking and wow us all. They have both made unique uses of DLC and Marketplace/PSN Store games to bring users unique and experimental products, and I see both of them continuing this trend. As the industry slowly frees itself from the grip of retail, sales in this space will become nothing short of essential. Sony has taken bold steps in offering full PS3 and PSP games on its store, while Microsoft has sought to satisfy the complimentary needs of its users with a robust Netflix service. All of these are great reasons to consider purchasing either system, and will no doubt be marketed as such in the coming year.

The Big “If”

As for software, 2009 is again looking at a great lineup, but now its Achilles’ heel has been fully exposed. If we are to see another 2008 in this console generation, it will only come at the will of Nintendo. No matter how many quality titles are released this fiscal year on 360 and PS3, if Nintendo does not deliver on the titles they supposedly have waiting in the wings for this fall, 2009 will look like it was the year the recession hit, not 2008. The ball is in your court, Nintendo. Next week at E3, show us what kind of future lies in store for the industry. It’ll be like our own version of Groundhog Day, only the Groundhog knows what’s on the line this time.