Mike Reynolds: Hi, I'm Mike Reynolds, a senior reporter covering the media industry with the S&P Global Market Intelligence tech, media and telecom news team. Welcome to "MediaTalk," a podcast hosted by S&P Global, wherein the news and research staff explore issues in the evolving media landscape. Today, I'm joined by S&P Global Market Intelligence Kagan research analyst Neil Barbour, who specializes in the video gaming market. How are you doing today, Neil?

Neil Barbour: I'm good.

Reynolds: All right Neil is going to share his thoughts on a number of things that took place in the first quarter, including console shipments overall and some of the key players there and why they experienced declines. He will also assess the gaming market overall and the performance of its key components and constituents during Q1.

Finally, he's going to give us a bit of a read on the second quarter and how the whole year may play out.

A lot of ground to cover, Neil, so let's get to it. A tough first quarter for global console shipments, down by about one third from the first quarter of 2023.

Barbour: Yeah. We had seen evidence of the market losing momentum at the end of 2023, but things really took a turn in the opening months of the year. Switch sales are still declining, which would be expected considering the age of the console. But what's surprising is that the PlayStation 5 and Xbox Series consoles are in what are supposed to be the prime of their lives, but those shipments are falling, too.

Reynolds: Is that because there's other options or are the products too old and at this point, still too pricey?

Barbour: Yeah, good question. Time is definitely not on the Switch's side, and Nintendo went so far as to say that they'll be discussing details on the Switch's successor within the next year. So the door has pretty much been shut there. But in terms of the newer consoles from Microsoft and Sony, we've talked about lofty pricing and the lack of cuts to MSRP before, but it's becoming more obvious that the kind of content that would compel consumers to upgrade just hasn't materialized.

Reynolds: You mentioned the Switch and that announcement. So people, consumers just waiting for better, for newer?

Barbour: So there are a couple of factors at play here. I think earlier you mentioned other alternatives. We're looking to get big games like Fortnite and Roblox. And not only can you play those on phones and PCs that may already be installed around the house, but those games are still supported on the older game consoles as well. So if you have a functional PlayStation 4 — and we estimate that there's around 50 million of those out there — you can still play those games as well as Call of Duty and Minecraft, Genshin Impact, Grand Theft Auto, and yeah, I could go on with a half dozen other high demand titles.

Reynolds: It's like your TV — keeps working for a long time, right?

Barbour: There's just not a lot of urgency to upgrade.

Reynolds: If we could take a look at some of the players, you've mentioned them along the way — Sony remains the king here, but its console shipments were down maybe close to 30% in the quarter.

Barbour: Yeah. And Sony's own forecast indicates that sales are going to continue to trend down over time. A couple factors at play: We're looking at the lack of price cuts, which usually are implemented at around this time in a console's life cycle as well as perhaps the delay of a couple key titles out of 2024 and into 2025.

Reynolds: And you mentioned Nintendo. When might we see the new Switch?

Barbour: Nintendo is a little behind schedule. Typically, they refresh their hardware every six or seven years. If a new Nintendo Switch or its successor device were to emerge over the next year, that would make it eight years, nine years, depending on the the cadence of when it actually releases. I guess the Switch being such a big hit likely kept it around longer than what is typical. They were able to monetize that huge install base — software is a higher margin product than hardware. So the things that we're looking at now is how big of an upgrade are we getting? Will it support legacy Switch software, which we suspect it will, and how easy that transition is going to be?

Reynolds: So, I think Nintendo, you guys reported console shipments were down about 36% in the quarter and the declines even sharper though for Microsoft, right?

Barbour: Yeah, Microsoft is really in the wilderness in terms of hardware sales at this point. We estimate shipments fell well below 1 million. They're less than a sixth of what PlayStation is moving. And that has an extra sting to it this time around because Microsoft really paid up for Activision Blizzard and Bethesda a few years ago to improve their fortunes in the gaming space, but those efforts have not yet driven a lot of console sales.

Reynolds: Meta Platforms Inc. is a little bit different in terms of how you view it. But it's the smallest player among the big players here.

Barbour: That's right. We have the Quest 1 and Quest 2 virtual reality headsets included in our console look, but we've elected not to include the Quest 3. We look at the capabilities and messaging around that platform and have determined that it resembles more of an everyday computing platform, closer to a laptop than a gaming console. So as Meta focuses more on the Quest 3 and mixed reality, we see it increasingly less exposed to the console model.

Reynolds: Interesting. You guys have also done some forecasting, Neil, so maybe we can look a little bit further out about console shipments. For the most part, it would seem that downward is the direction if we go out from '23 into 2028.

Barbour: Yeah, we believe console vendors will try to push the life cycle of their consoles a year or two longer than what is typical, much like Nintendo did with the Switch, perhaps to make up for time lost to the pandemic. So the PS5 achieves an install base as large as the PS4, but maybe it takes a little longer than it would have. So sales are stretched out across a longer timeline, or there's no maybe big breakout years or pair of breakout years in the middle of the life cycle like there were in past consoles. And another key assumption in our model is that the Switch successor will not be as popular as the original Switch. Nintendo has a history with losing its audience a little bit after a successful console. It happened with the Wii U after the Wii and the GameCube after Nintendo 64. A sense of déjà vu sets in with consumers as they look at the same characters and the same games. And sometimes it takes a few years for that demand to reset.

Reynolds: Where's Take-Two Interactive Software Inc.? They have a big game that is going to arrive, and I'm assuming salespeople can be very happy then?

Barbour: Yeah, that's right. That's one of those key titles that we were looking at 2024 in previous models. And it looks like that got pushed to 2025. These are big games. They take a lot of development resources and sometimes they suffer delays. And now that some games have come and went — I'm thinking of Spider-Man Two and Halo, a few others didn't quite deliver on the scope and scale of sales that maybe were expected — all eyes have turned to this major tentpole release in 2025 to drive console sales.

Reynolds: So I guess maybe we'll get a big boost when that top title from a Take-Two Interactive finally makes the scene.

Barbour: That's right. We're talking about Grand Theft Auto 6. That's one of those key titles we were talking about earlier that we had expected to arrive perhaps in late 2024. These are big games, cost a lot of money, have a lot of development resources behind them, and sometimes they miss their ship dates or slated ship dates, so to speak. So, now it's been officially announced as a 2025 game. And notably, it will only be available on the newer consoles — won't be on phones, won't be on PCs. It won't be on the PlayStation 4 at release. So, that's the big tentpole release to drive sales for the new consoles.

Reynolds: Is that a holiday thing or will it come out midyear? Any sense for that?

Barbour: I don't think we have an exact date. Before, we've seen Grand Theft Autos come out in summer and then get a bigger push toward the holiday season, but it's up in the air.

Reynolds: Okay. As we go further out on the calendar toward the end of the decade in 2028, Neil, how did things map out from geographical footprints?

Barbour: Yeah, we continue to see the console segment as a North America first story, but there's an opportunity for APAC and other smaller markets to take some share over the forecast, particularly as broadband penetration grows in those regions and some regulatory overhang rolls off.

Reynolds: So, China is going to grow. What about Europe?

Barbour: Europe we see as flat to slowly losing some share over the forecast, particularly as some of those APAC markets grow in strength.

Reynolds: Okay. We're going to shift gears back to the first quarter of 2024, this time looking at the revenue side. Kagan's analysis excludes hardware and instead focuses on software, in-game purchases, and game-based subscription services. So it was a much better first quarter performance from that perspective, Neil?

Barbour: So this is where things get interesting. Even though the hardware sales are declining, software is still going strong. In fact, this was the biggest first calendar quarter for the console software business on record. And the key is what we were discussing earlier — all those live service games: Fortnite, Roblox, Call of Duty. They're still driving revenue on older platforms as well as the newer platforms. Kagan has long estimated that consoles maintain significant install bases after new hardware is introduced. This is really the first time that platform holders and publishers have been able to monetize that long tail.

Reynolds: What are some of the other revenue drivers here? Mobile has been a driving force in the industry for a while, but maybe is that receding a tad?

Barbour: We've seen this story emerging over the past 18 months. It just doesn't seem like there are any big growth opportunities for the mobile space in its current configuration. It's still a big audience. It's the biggest market in gaming, but publishers appeared to just be trading users back and forth between different games.

Reynolds: So it's a churn thing, like in the video business. If you like something, you're there; and then when you get tired, you move to the next.

Barbour: Right. A lot of the existing models — free to play, energy-based top offs, virtual currencies — it appears those have found most of the market they're going to find with the hardware that's available to consumers at this point.

Reynolds: Okay. And how about on the PC side?

Barbour: The PC platform usually gets a pretty good boost in Q1 because it carries a lot of legacy, massively multiplayer games in Asia, and those games have a lot of Lunar New Year-themed events that lift engagement. That effect is starting to wear off a little as those games age out and those players move to mobile. So what we're seeing now is PC start to benefit from any of the same dynamics that are growing the console market — perennial live-service games and ports of stand-alone titles. Sony's Helldivers 2 was a big hit on console and PC in the quarter.

Reynolds: Okay. We're getting toward the end here, Neil. We're almost at the end of the second quarter when you guys tally things up in the months ahead, what's your sensibility for what the second quarter is going to bring?

Barbour: I think we're going to see another pretty good quarter for console and PC built on the resurgence of Fortnite, which had a good content rollout, to Star Wars in the quarter. Roblox still appears to be growing. Call of Duty had a few interesting hooks in the quarter. We don't see a lot of stand-alone titles moving the needle right now. But it's another dynamic where Q1 and Q2 are not that heavy historically with new releases. So there could be some surprises in the stack.

Reynolds: Given what you just said there, are there some things coming around in the third and fourth quarter? And your crystal ball for the entirety of 2024 in that regard?

Barbour: We're looking at a few interesting mobile titles emerging. Star Wars: Hunters is the one that we have our eye on at this time. I think if you look at the end of the year and how bare the release calendar looks, this is an industry that still depends on a big Black Friday shopping season. And I think we may be set up for a down year at the register.

Reynolds: Okay, we'll check back over the course and see how things turned out. This concludes this episode of "MediaTalk." I just wanted to thank Neil for spending a lot of time sharing his views and analysis of the gaming world and the various dynamics that continue to change it. Really appreciate it, Neil.

Barbour: Great, thanks, Mike.

Reynolds: All right. This is Mike Reynolds. Thanks to all of you for listening. We'll catch up soon on the next edition of "MediaTalk."