Microsoft's Xbox revamp: Is the sun setting on game consoles?

Its amazing how much things can change over eight years. When Microsoft unveiled the Xbox 360 back in 2005, the company owned the video game market along with Sony and Nintendo. Now, with its new console set to be unveiled Tuesday reports suggest it could be called the Xbox Infinity the landscape is dramatically different.

Mobile and social games have come out of nowhere to become a multibillion-dollar concern, luring both developers and resources away from the traditional business.

PC gaming has seen a revival, with digital distribution services such as Steam providing further competition.

The overall games market will continue climbing to $83 billion by 2016, but mobile and online will increasingly make up the lions share of that after surpassing consoles and PCs this year.

Meanwhile, Nintendos newest console, the Wii U launched this past November has been a dismal flop. And overall game sales fell to $9 billion in 2012 from $11 billion a year earlier, according to research company NPD Group.

Big game publishers are feeling it. From widespread layoffs by Electronic Arts to bankruptcy by THQ, the ground is shifting under every company that has traditionally focused on consoles. Its no wonder that some are questioning whether devices such as the Xbox still matter.

"We continue to face the uncertainties of the console transition," said Bobby Kotick, chief executive of game publishing giant Activision, during a recent conference call with investors.

"There are still many unknown factors, such as pricing, launch dates and quantities, the level of first-party support and, importantly, consumer purchase intent in a world where consoles are no longer just competing with each other, but also with new platforms, such as smartphones and tablets."

The numbers game

Publishers are right to be wary. Mobile and online games such as those played on Facebook have exploded in popularity since 2007, going from around $12 billion in global revenue in 2007 to about $30 billion this year, according to tracking firm PwC.

The overall games market will continue climbing to $83 billion by 2016, it predicts, but mobile and online will increasingly make up the lions share of that after surpassing consoles and PCs this year.

The pain in the console market could continue, since big publishers will likely take a wait-and-see approach with Microsofts new device, as well as Sonys upcoming PlayStation 4, both of which will likely launch this holiday season. Even if the two consoles sell well, theyll still come out of the gate with a minuscule installed base compared to the 150 million Xbox 360 and PlayStation 3 units currently in homes.

With so-called triple-A, big-budget games costing tens of millions of dollars and taking several years to develop, publishers are certain to release any major titles on older consoles as well as newer ones, which will ultimately give gamers little reason to buy the next-generation machines.

The pressure will thus be on both Sony and Microsoft to spur their own sales with top-notch first-party-produced games, similar to how the first Halo pretty much single-handedly sold the original Xbox in 2001. If those big hits dont come, the new consoles could end up dead, not unlike the scenario Nintendo now finds itself in with the Wii U.

New competition

Its a familiar situation that has occurred during the transition between every generation of game consoles, but there is one big difference this time all the other competition for gamers money and developers attention.

Aside from Steam, mobile and online, a few new potential threats lie in wait.

Valve, the company behind Steam, is readying its TV-console-like Steambox, while San Francisco-based startup Ouya is steadily improving its eponymous device, which lets developers make Android games for the television.

And the elephant in the room is tech giant Apple, which is expected to eventually flex its considerable muscle in mobile games on the TV.

So how are the console makers going to fight back against all of this mounting offense?

For one, theyre relying on their traditional advantage - providing high-end, immersive experiences for the living room that simply cant be matched in other ways. Only consoles promise that sit-back-on-the-couch experience, with deep games that provide rich sound and graphics, well-told stories and high production values.

"Content is still king, and content through the console is still the best experience. Its a far greater one that youre going to have anywhere else," says Stephen Turvey, vice-president and general manager of Sony Computer Entertainment Canada.

Some of that experience can be duplicated by PCs, which can be hooked up to a TV and even connected to traditional console controllers, and many gamers are doing just that. Console makers have also made it easier for players to defect back to PCs, ironically by over-complicating their own devices with multiple logins, patch updates and lengthy install times. What was once a simple act of popping in a disc and playing has in recent years become a decidedly more PC-like experience, yet without the benefit of steadily improving processing power and graphics.

This lost simplicity of console gaming has become a priority for Sony, which is promising fast startups on the PlayStation 4 thanks to automatic logins and updates.

"What we heard loud and clear is that gamers want that simplicity in their experience," Turvey says. "They want to be able to turn their PlayStation on and play their favourite game right away. They dont want to have to wait and go through those updates."

Many expect the next Xbox will offer similar capabilities, perhaps by having the Kinect voice and gesture sensor built right in. That way, the console would be able to recognize players right away and automatically sign them in, and perhaps even allow them to load and restart games with voice commands.

Connected content

Both Sony and Microsoft are also pushing the additional non-gaming capabilities of their consoles in an effort to make them necessary fixtures in the living room.

The majority of Netflix subscribers, for example, already use the service through a game console, while buying and renting TV shows and movies on the devices is becoming increasingly popular.

Microsoft in particular is expected to push the live TV and sports capabilities of its next console, as well as potentially adding Skype video calls to it. The company declined to comment on its plans for this article.

Put it all together and analysts are expecting a bounce-back for consoles over the next five years. PwC, for example, sees an uptick in global console revenue from around $30 billion to $35 billion by 2016, while Wedbush Securities analyst Michael Pachter expects 10 to 15 per cent growth over the next five years.

If anything, the next few years should see a normalization of the console market, which was artificially spiked in the current generation by Nintendos Wii. That console, released in 2006, became popular with non-core gamers such as moms and seniors thanks to its innovative motion controller. Yet, while those casual players may have bought a lot of consoles, they didnt actually buy a lot of games, which was ultimately bad for the industry since publishers ended up spending resources on games that didnt end up selling.

"Those guys [casual gamers] are gone and I dont think theyre coming back," Pachter says. "But the people who do buy consoles will be more dedicated and buy more software, so its not a bad place to be."

Its looking like consoles will continue to matter for some time yet, although for the long-term, the writing in the form of cloud gaming is on the wall. Eventually, with further advancement of broadband networks and overall computing power, games will be streamed to televisions in the same way that Netflix movies currently are. Buying a box to plug into the TV to play games will ultimately become irrelevant.

In that vein, perhaps Infinity is the perfect name for the next Xbox, since it could be the last console Microsoft ever releases.