Read the full interview HERE

We interviewed a 25-year game console veteran and Former SVP Strategy at PlayStation on the evolution of the console business.

We explore:

  • The original problem of accessibility a game console solved
  • How Sony entered the console business and the relationship with Nintendo
  • The core technical functionality of a console and why it is potential crucial for AR/VR
  • Streaming versus console battle and the role of cross-play
  • Drivers of margin pressure for PC and console platforms
  • How subscriptions changed the financial model for platform owners
  • Risk of Amazon entering the market

Can you bring us back to the start of the console world and share a bit of the history around the console?

One of the important questions to ask, when you have a new business category is, what problem is it solving? What business problem is it solving? What problems is it solving for us, as consumers? It’s worth remembering that, back at that time – we’re talking more than 30 years ago – computers were fairly clunky and their distribution was not as widespread as it is now. They were all in different formats; they had different architectures and different configurations. If you were a game developer, it was a bit of a nightmare. You would not be able to develop the same game for everybody, so you’d have different versions of the game, for different graphics cards. If you were a consumer, it was even worse, because you didn’t really know what you were talking about when you were buying a game. You didn’t know how well it would work on your machine.

Consoles really solved that problem of accessibility, of simplicity. Why that was so important was that, in the early days, video gaming was in category of toys. The target market was a lot younger than it is now. If you’re thinking about your market, of Sega and Nintendo, it really was quite young people. There were economic issues around having access to computers but, also, technical issues around simplicity and robustness. That’s where the console really fitted in. It solved this problem of accessibility and simplicity and took the technical labor out of it.

In some ways, Steam, in the last few years has solved many of those problems of PC. It takes away those issues and works out, for the consumer, what’s going to work on their PC or their Mac. It’s addressed parts of that problem. But there are still affordability and access issues, beyond that, which the console solves. That’s why it existed in the first place, I think, as a reason to attract developers and consumers.

Once in there, the great thing for developers was that they had two types of certainty. One was they knew, to an extent, what the size of their target market was. In those days, that was defined by the installed base, the number of bits of hardware sold. Now we define it by monthly active use. In those days, you could say, we sold this many. The other very important factor for the developer was that they knew what each consumer had in their hand. They could optimize for that machine, which allowed you, effectively, to go further, with any given piece of hardware kit. You didn’t have to think, well, this guy might not have a graphics card like this. Life was better for developers, in that respect.

What it also did was that it added something into the value chain; it added a participant, which was the console platform. The console platform didn’t come for free. If we look at the business model that the console platform players were working on, they were not making money from selling consoles. Nothing much has changed there; in the 25 years that I’ve been in the business, that’s been fairly consistent, though it’s changed in the level of intensity of that factor. What they were doing was that they were making money from the developer and the customer. They were taking a chunk out of the developer’s revenue, which is the model that has continued, since then.

They eliminated a lot of friction in the route to market for games and created a customer base but, obviously, that came at a cost. That was the environment of the console industry, at least at the time when Sony got into the business.

How would you compare how Sony competed with Sega and Nintendo?

When Sony entered the business, there were a lot of puzzled looks as to what on earth was going on. How could an electronics conglomerate compete with a multi-faceted entertainment business, where there were two very, very strong brands? This is a really good disruption story, in a way. You can look at the classic, what value was the new entrant adding, to be able to break into what was a relatively controlled, established marketplace?

There were two types of value which really allowed Sony to compete. The first was around the way that Nintendo and Sega structured their supply chain and the medium they were using for distribution. If you think back to the distant past, games were largely distributed on cartridges. Those cartridges were expensive; they contained a solid-state memory. Every time you were buying a game you were, effectively, buying what is now a memory card or equivalent. So they were expensive. They were really slow, in terms of the process. If you were going to launch a game, you needed to place an order, get a slot off the manufacturer of that, because it didn’t scale that well and wait two to three months for it to come through. If the game was a hit, you’d have to wait another three months, by which time, the demand may have evaporated. Highly risky; if you over-ordered, you had a huge amount of stock and you couldn’t really do just-in-time delivery, for this kind of machine.

The other limitation created by the format that they had was that they weren’t very big. We’re now used to memory cards with massive 32gb, 128gb; they didn’t exist in those days. These cartridges were tiny. Sony came along with the idea of publishing on CD. CDs were not huge, but they were many, many times bigger than the other models. They were cheaper, they were quicker to produce. They could be churned out, very quickly, in factories, in Europe, Japan and the US. So it changed the economics.

There’s an interesting story around why Sony got into CDs for games, because the game CD format is different from a normal audio CD, or indeed, a CD-ROM. That’s because some of the demands and characteristics of gameplay are different. In fact, Nintendo had spotted its weakness, early on, and had asked Sony to develop this format. Sony and Phillips, at the time, were the primary patent holders and technology leaders, for optical discs. Nintendo came to Sony; the relationship was very strong and they asked Sony to develop a CD format that would work for games. The founder of PlayStation, Ken Kutaragi, did exactly that. He worked very hard and, with some creative effort, created a new optical disc that would work well for games, with very fast read times, etc.

What happened then was that Nintendo got cold feet. Miyamoto and some of the development teams were worried about a couple of things. Firstly, they were worried that they weren’t used to it; the consumers might break the CD. Children wouldn’t be able to deal with it; they’d have lots of customer problems. From a user experience point of view, they were worried that a CD wouldn’t be quite as immediate as hard memory. So they pulled out. Having developed and got this technology and, at the time, Sony was quite cash rich, they decided to deploy it. They way that they deployed it was to build what become PlayStation 1.

The advantages of a CD over memory were also there for the consumer. Because there was all this extra memory you could do, what we then used to call, 3D gaming. When we talk about 3D gaming, we’re not talking about 3D visuals. We’re talking about a 3D world, where the player can roam in more than two dimensions. Obviously, that took memory and graphics. That was the first big shift. With the extra memory, the consumer could have a bigger world, a better world. That created consumer benefit and business benefit. That allowed a change and disruption in the market.

Read the full interview HERE