Forget consoles. Mega-trends in gaming show that hand-helds are the future of games.
By Kevin Chou, contributor
FORTUNE — The availability of Nintendo’s Wii U on Black Friday and Cyber Monday was source of déjà vu. Much like the 2006 release of the original Wii, diehard video gamers have been chattering about trying out the console’s powerful new graphics and novel input device. Sales, not surprisingly, have gotten off to a strong start. The company has already sold an estimated 400,000 units. Many retailers had trouble keeping the game machine in stock.
At first glance, it may seem like Nintendo’s NTDOY Wii U is starting the video game console cycle all over again. New versions of the Microsoft MSFT Xbox and Sony SNE PlayStation are slated to arrive next year, and their first-weekend introductions are likely to be just as eventful. But the long-term outlook for these devices is entirely different. These new consoles, despite their high-profile launches, represent a rapidly decaying ecosystem.
The eighth generation of game consoles we will see in the next 12 months will, over their life spans, sell in lower quantities than the generation that preceded them. That will be a first. The best guess, both from inside our company and from industry analysts, is the fall-off will be more than 30%. Much of the decline will be in the out years of sales, after the most loyal fans have snapped up early units.
If this happens, there will be a one-word explanation: tablets. There can be little doubt that tablets from the likes of Amazon AMZN , Apple AAPL , and Google GOOG are the new consoles. Three powerful mega-trends are causing this change: ever-improving hardware platforms, shifting software business models, and consumers’ increasingly high demand for convenience. (Full disclosure: my company makes games for tablets.)
Take hardware first. Game consoles enjoyed an edge for players, especially “core” gamers, because their specialized graphics and computing hardware outperformed comparably priced PCs or Macs. But tablet designers have begun taking graphics seriously. This is true in both the Apple iOS and Google Android ecosystems. Screen resolutions of tablets now often beat what is commonly available for consoles. And the under-the-hood graphics processing power — what makes game play increasingly realistic and exciting — is catching up as well.
In fact, the latest iPad already has a graphics processing unit more powerful than what will be shipping in the new Wii U — a fact pointed out in many gaming-oriented reviews of the new Apple product. While next year’s Xbox and PlayStation will probably be slightly ahead of the current crop of tablets in graphics capabilities, the superiority is likely to be short-lived.
That’s because new tablets are introduced yearly and can take quick advantage of increases in processing power. Consoles, by contrast, are on a much longer release schedule of five to seven years. Retailers even lament the lag in new hardware releases. GameStop GME just reported its revenue is off, partly due to the length of time between new console releases.
The second big change affecting consoles involves the software business model. In the past, console players have become accustomed to paying $60 up front for a new game. But these same consumers are also spending hours with games that are free to download and play on their tablets. The massive popularity of freemium games on tablets and mobile phones is dramatically changing consumer behavior. As a result, paying $60 for even a major franchise game is going to become an increasingly rare event.
This will be doubly true as more software companies adopt the iterate-and-improve development model of the tablet makers. A traditional game was like a Hollywood blockbuster, taking years to make, costing tens of millions of dollars, and released in one headline-grabbing day. And, more than 80% of its revenue is earned in the first two months. But that isn’t how game software is being developed any more. A new breed of game companies emphasize the sort of games that appeal to “core” gamers, those who in the past had been the core constituency of the console. These games are free-to-play and customers pay for premium content. And they pay consistently over several years. Free-to-play games constantly roll new features out on a weekly basis so the release of a new game is the start, and not the end, of the software development process.
The third mega-trend affecting consoles is tablets’ most obvious benefit to consumers: convenience. You simply can’t play a console game on the subway or at the park or while you’re half-watching TV. The convenience equation extends to software choice as well. Out of hundreds of games available for sale, console players buy approximately eight games over the first three years of ownership. In contrast, tablet players can choose from tens of thousands of games, the overwhelming majority of which are freemium. After all, the number one thing people use their tablets for is games.
To be clear: consoles will not disappear entirely after the next generation. There will be a core group of gamers attracted to the console platform who will insist on upgrading every few years to each new model. But they will represent an ever-shrinking part of the gaming universe. Console gaming, a massive $22 billion dollar industry, is undergoing disruption that will be heavily felt at hardware companies, software companies and retailers heavily invested in the traditional model. For unprepared incumbents, these changes will be every bit as traumatic as those that wracked movies, music, and book publishing.
But there will be life after consoles. But the reality will have changed and tablets will have become the new consoles. Traditional members of the gaming ecosystem can be successful — as long as they prepare for what is inevitably ahead.
Kevin Chou is CEO of Kabam and one of Fortune’s Smartest People in Tech. Privately-held Kabam is headquartered in San Francisco with more than $100 million in gross revenue in its most recent fiscal year. Its titles include The Hobbit: Kingdoms of Middle-earth, Kingdoms of Camelot, Edgeworld and The Godfather: Five Families.