Connected Consoles Benefit from Three Added Revenue Streams

The current generation of video game consoles has out-of-the-box connectivity, creating additional revenue streams from subscriptions, downloadable content, and advertising. An IDC report, “Worldwide Connected Console 2007 – 2011 Forecast: Downloads for Dollars,” looks at the anticipated $981 million in revenues derived from connected consoles in 2007, and expected growth through 2011.

Video game consoles are sold at a loss; manufacturers hope to build an installed base and recoup money through licensing fees paid by game publishers. Fees have eroded to entice publishers to release games on their platforms due to the current market in which game production costs continue to rise.

“The losses are traditionally offset by higher margins of the software, but some of those margins are dissipating,” said Billy Pidgeon, program manager of consumer markets: games at IDC.

Revenue from connected consoles, the Microsoft Xbox 360, Sony PlayStation 3, and Nintendo Wii, is expected to reach $981 million this year, and grow to $10.5 billion in 2011. The income accounts for 2.5 percent of the video game market worldwide, and could represent 18.6 percent of total market revenue by 2011.

Three key areas where the console manufacturers can realize growth on the current generation systems are subscriptions, downloadable content, and advertising and sponsorship deals. Pidgeon sees downloadable content as the break-out category, though advertising is expected to provide increasing revenues.

Subscription rates are expected to grow from $476 million this year to $2.4 billion in 2011. In that time, share of revenue for subscriptions will recede from 48.5 percent to 23.2 percent. Downloadable content revenues are expected to see an increase from $493 million in 2007 to $7.2 billion in 2011, or 68.6 percent of online revenue for consoles. Downloadable content also offers branded or sponsorship opportunities, Pidgeon said downloadable content for free is a great way to do advertising.

Advertising revenue from sponsored services, in-game ads, and product placement in connected consoles is expected to grow from $12 million in 2007 to $858 million in 2011. If realized, it will account for 8.2 percent of market share for online console revenues.

Early in a console’s lifecycle, the addressable audience may be smaller than a PC audience for casual games and downloadable content, though Pidgeon said advertising on a console network has its merit. PC users can jump around to other networks while console gamers are captivated.

“Online on the PC has more opportunity, but lower value of the consumer unless you can aggregate a group and keep that network,” Pidgeon said.

Microsoft has a lead, having released the Xbox 360 a year before Sony and Nintendo got their consoles to market. Microsoft also plans to integrate Xbox Live with the Live audience on the PC and other platforms. “You’ll have that entire Live interface up and running on the PC as well, and appealing to different user bases, and eventually mobile,” said Pidgeon.

Pidgeon expects Sony to build out a similar, cross-platform network.

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