Switch

Microsoft’s decision to ease off its 23-year competition with Sony and Nintendo over supremacy in games hardware has opened a path for Japan’s return as the world’s undisputed home of the console.

The prospect of a new, less internationalized era of console wars has raised hopes of happier times for the Japanese survivors but has also caused analysts and investors to revisit the question of how much longer the whole genre of dedicated games machines will continue to exist.

Microsoft head of gaming Phil Spencer last month revealed plans to release what would previously have been exclusively Xbox games for use on rival platforms, as part of a new focus on cloud-based gaming.

While the US technology giant has said it is still working on a new generation of more powerful consoles, analysts think its long-term direction is clear.

“All signs point to the hardware becoming less and less important to Microsoft, so there is that possibility that we could go back to a point like we were in the 1990s where the viable choices of console were all Japanese,” said Serkan Toto, head of the games consultancy Kantan Games.

Giving up the console fight to concentrate on software could be taken as a huge victory for Japan. To many, the birthplace of Super Mario, Sonic the Hedgehog, Final Fantasy, and Pokémon is the spiritual home of the console and has featured the industry’s fiercest “golden age” 1980s and 1990s clashes of Nintendo vs Sega, and later, Nintendo vs Sony.

“It may not happen immediately because the technology of cloud gaming is clearly not ready yet, but from what Microsoft is indicating, there is a possibility that we go back to an all-Japan console industry with Sony and Nintendo each dominating their part of that market in their different, unique ways,” said David Gibson, an analyst at MST Financial.

But the return to a Japan-only industry for dedicated games hardware could more clearly define the console as a commercial cul-de-sac.

That issue, said independent games analyst Pelham Smithers, could be particularly acute for Sony, which last week announced plans to cut 900 staff from its games unit.

“It was tough enough for Sony arguing the need to investors for a PS5—and a lot of people at the time were saying that the PS5 could be the end of the line—but Microsoft’s commitment to console gaming helped,” said Smithers.

Nintendo, meanwhile, faces an issue of timing. Its Switch machine, released in 2017 and now significantly underpowered even when compared with some mobile phones, is to be replaced with a next-generation successor. But the Kyoto-based company has yet to say precisely when and what it will look like.

Analysts said Nintendo is still traumatized by the experience in 2012 when it launched a poorly conceived successor to the global blockbuster Wii console.

Sales of the existing Switch are respectable, said Toto, but more or less everyone who wanted the console has bought one by now. The market, he said, will be waiting for Nintendo’s successor and may hold back on buying games for the Switch ahead of a new machine being released.

Gibson said Sony’s problems are very different: its PS5 machine, now four years old, is popular, but its games business is now guided by “accountants,” rather than people primed to manage a creative business.

Previous generations of the PlayStation had been launched with an expectation that the machine would initially be sold at a loss, before the price of components quickly fell, allowing the company to break even and, in time, allow price cuts for customers.

By its fifth year of release the PS4 had two price cuts totaling $100. The PS5 has had none. “With the accountants in charge, Sony is not prepared to cut prices by $100 to stimulate demand because that would cost $2 billion in profits,” Gibson said.

Microsoft, which has spent huge sums on acquisitions of game studios such as the $75 billion purchase of Activision, is facing similar issues with its hardware economics. Analysts said the US company may have greater motivation than Sony to become an all-platform king.

“The state of the console market right now may not be an advertisement per se for Japan getting its mojo back. It feels more like these three very idiosyncratic businesses are doing well or not for idiosyncratic reasons,” said Robin Zhu, games analyst at Bernstein.

There is a chance that Microsoft’s new direction is a “win, win, win situation,” according to Atul Goyal at Jefferies, because of the different situation each company finds itself in.

Microsoft, he said, could pump up returns by offering its games across different platforms, while Nintendo and Sony would face “less intense competition” and benefit from having a wider choice of titles for customers.

But, as Zhu said, one factor that might keep Microsoft from killing off the Xbox entirely is the same thing that will keep Sony and Nintendo in the market—the fierce loyalty of gamers.

“The concern [Microsoft] will have is that you’ve already convinced your customers to buy the hardware; by telling them that Xbox games will be on every other platform, you risk upsetting your highest engagement and most dogmatic customers,” he said.

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