Wedbush Securities analyst talks about everything under the sun in the gaming industry.
If you are into video games then we are pretty sure that you must have heard about Michael Pachter. He is the managing director at Wedbush Securities, and also writes investor reports for some of the biggest video games publishers in the industry. In short, Michael Pachter knows stuff that most people don’t know.
GamingBolt got in touch with Michael Pachter and were able to discuss a wide variety of topics including VR, PlayStation Now, Xbox One’s cloud gaming, expected E3 announcements, the state of Half Life 3, Agent and The Last Guardian, and much more.
Note: This interview was conducted on Friday, April 18, 2014. Michael Pachter had been on a flight the evening before, so he hadn’t had the chance to see the NPD numbers at the time this interview was conducted.
Pramath Parijat: Hi Michael, and thank you for taking the time out to do this. I guess I wanted to start with the NPD numbers from last month.
Michael Pachter: I have to say, I don’t have them yet, so I don’t know what they are yet, other than the PlayStation and Xbox numbers.
Pramath Parijat: Well, the PlayStation sold more than the Xbox.
Michael Pachter: Yes, it did.
Pramath Parijat: Yes, we found it quite surprising, considering how much hype the Xbox One had going into March. There was Titanfall, there were bundles, there were unofficial price drops. Everyone expected the Xbox One to come in first for this month. I mean, everyone expected this to be the Xbox One’s month, and that didn’t quite happen. So I guess the question that arises is, given all the hype and marketing the Xbox One got going into this month, if it didn’t come out on the top this time, is there actually hope for the console to be competitive with the PS4 in the future?
Michael Pachter: You know, I think that the Xbox One will probably continue to lag, as long as it’s priced higher. And I agree with you that there were a lot of retailer specific $450 Xbox One bundles, so that made it more competitive with the PS4. Now again, I didn’t see the US numbers for the PS4, while I know the Xbox One was 311,00.
Pramath Parijat: I think the PS4 was at 321,000, so ahead by about 10k.
Michael Pachter: Yeah, so the Titanfall digital copy probably doesn’t have the same value as a physical copy to most people, because they can’t trade it in. But the PS4 and Xbox One were priced about the same, and they sold about the same, and I think that’s right. I think they need to be priced the same to run neck and neck.
And I think that Sony has actually done a very good job with the PS4, especially with PS+, you know, giving away so many games. So, Sony is probably going to stay ahead until Microsoft figures out how to price the Xbox One competitive. Consumers don’t care about Kinect- so it’s not something that has a high perceived value.
"You know, I think we’re probably going to hear about new games, but I don’t think anything special’s gonna happen [at E3 2014]. If anything, I think we’re going to see a reduction in the prices for the old consoles, so I think we’re going to see a price cut for the PS3 and Xbox 360."
Pramath Parijat: It definitely looks like Sony has done a better job with the PS4 as far as the console’s PR is concerned. I mean, if you look at the announced and released so far, it is definitely arguable the Xbox One wins in terms of both quantity and quality, but the PS4 is somehow perceived to be better value.
Michael Pachter: Yeah, I think that’s right. I think I agree. I think it’s mostly that, $399 sounds a whole lot better than $450 plus a free game.
Pramath Parijat: I think it’s mostly the same problem that Nintendo is facing with the Wii U- they’re throwing in all these games, they’re dropping the price left and right, but people just don’t seem to care, they don’t see the value, Nintendo hasn’t done a good job communicating that.
Michael Pachter: Right.
Pramath Parijat: So, how do you think all of this influences the big three going into E3. What do you see them doing going into E3?
Michael Pachter: You know, I think we’re probably going to hear about new games, but I don’t think anything special’s gonna happen. If anything, I think we’re going to see a reduction in the prices for the old consoles, so I think we’re going to see a price cut for the PS3 and Xbox 360. I don’t think we’re gonna see anything on the next gen consoles, and I think we’ll see a bunch of games, so, truthfully, I think Nintendo’s probably got more content coming this holiday that we don’t know about than Microsoft or Sony.
You know, as an example, we have Take Two just announcing Borderlands on last generation consoles. You know, that’s a surprise, I’m surprised anybody’s bringing out a game on the last gen consoles at this point in their life cycle. You know, Grand Theft Auto, okay, the Rockstar guys are freaks, you know, they can’t get anything right, but I’m really surprised we couldn’t get Gearbox to release a next gen version of Borderlands, I mean, what’s wrong with them? So, you know, I think we’re going to hear about some next gen games that’s coming this fall, but there’s probably not going to be a lot of stuff we don’t know about.
One will be the Visceral shooter game, by Electronic Arts, which may or may not be called Battlefield, we’ll some of that. We don’t know the name of this year’s Call of Duty, we know Sledgehammer’s making it, so we’ll probably see something about that- you know, stuff that I think will get people excited, but I highly doubt we’re going to see a lot of new stuff. I think Evolve is the only new title that has been announced, but I really don’t know a whole lot about it, there’s a magazine article about it, but that’s it. So I think we’ll see some game footage, especially since it’s supposed to come out this holiday.
Pramath Parijat: I did want to ask you a question about these last gen consoles, and how publishers are still making games for them. Ubisoft is actually developing a version of Assassin’s Creed exclusively for last gen.
Michael Pachter: I actually didn’t know they were going to do that, is it going to be two different Assassin’s Creed games this holiday?
Pramath Parijat: Yes, at least that’s what all the rumors and leaks seem to be saying. So there’s Unity, which is for the Xbox One, and PS4, and PC which is confirmed, and then there’s supposed to be Comet, which will launch on the 360, and PS3, and maybe Wii U. I find it highly interesting, this console cycle has already been longer than any other console cycle so far, and publishers still seem to be resistant to move on from it. I understand the install base argument, but that was also true for the PS2.
Michael Pachter: Yeah, I think the difference this time is that the PS2 was $149 when the PS3 launched, and the PS3 still isn’t there yet, so we haven’t even seen the big price cuts yet. And the Xbox was discontinued when the 360 launched, and the Gamecube was discontinued when the Wii launched- and, you have, not that the Wii is that great of a console, but it’s still being sold, and the Xbox 360 is still being sold, and it’s still not $149.
And not only did it sell 100,000 units yesterday, or 110,000, but if they could get that price further, then there are a lot of people who don’t make a lot of money who would love to play games, a lot of families with nine, ten, eleven year old kids, who don’t have an Xbox 360 or a PS3 yet, and so are probably not thinking about a PS4 yet, so an Xbox 360 or a PS3 at $199 sounds highly appealing to them.
So I think the publishers are counting on them, on that audience, staying pretty strong. And the success of Grand Theft Auto V, you know, 32 million units, tells you that there’s a lot of potential for sales there. You know, I ran into this guy a couple of days ago, I was in Connecticut, and this security guard recognized me from Pach Attack, and I asked him what consoles he had, and he said PS3 and 360.
And I asked him, you don’t have a new one yet, and he said no, I’m waiting to decide which one to buy, and there’s still a lot of content for my old console, so I’m waiting until holiday. I think he’s very typical of a lot of core gamers: you know that security guy, he’s a hardcore game, but he obviously doesn’t make a lot of money; if you only make $30,000 or $35,000 a year, it’s hard to spend $500 on a console, I get that.
"I think that Sony hopes that people will pay for PlayStation Now, but you won’t pay any fee for it unless there’s content on it you can’t get otherwise, and it becomes a chicken and egg problem- if there’s no content for it, you won’t sign up, and if you don’t sign up, there won’t be any content for it, because they can’t afford to buy it. So, there isn’t a cheap way to get compelling content on there, and if they don’t have it, you won’t sign up."
Pramath Parijat: In many ways, it’s like the Windows XP problem- fourteen years later, Microsoft still can’t get people to move on from XP.
Michael Pachter: Right. [laughs] Which, by the way, I’m still using XP, so I completely understand.
Pramath Parijat: Right. So, basically, you said that Nintendo will have the biggest content based announcements at E3 this year, especially compared to Sony or Microsoft.
Michael Pachter: Yeah, I think so. I mean, I think we are so overdue for some Smash Bros. and/or Mario Kart, I think we’ll see them, I think they’ll be playable, and I think they have to have them out by this holiday. I mean, if they don’t get these games ready soon, then you can just forget the Wii U. It’s like, come on: how many years does it take after launch to have one of your core, highest selling franchises out?
Pramath Parijat: I think Smash was already announced for a Holiday release.
Michael Pachter: It is, but we haven’t played it, we haven’t seen it, so they gotta have it, it’s gotta be playable, it’s gotta look great, because that stuff, that matters. That’s an exciting thing for E3. It’s a big game. Although, it’s a big game for a big install base, I mean, it’ll sell 30 million units, if there were 30 million Wii Us out there, but unfortunately there’s only 5, so it can’t sell more than 5 million.
Pramath Parijat: So, you don’t think for example that the 3DS Smash Bros. game, which launches earlier, will have a negative impact on the Wii U game?
Michael Pachter: You know, I don’t think that- I mean, look, I don’t even know how many 3DSs are out there, there’s something like 50 million. I mean, there’s plenty of them out there, and yes, there’s some overlap, but it’s never going to be the same game, it’s not the same experience, it’s not the same audience.
Pramath Parijat: Okay. So I did want to talk about PlayStation Now, which you have been critical of before, back when they announced it in January. And since then, Sony hasn’t exactly shown much to consumers, and all these reports that we get from the closed betas indicate that there’s long loading times, you know, 50 seconds, a minute. Do you think it’s actually going to be successful?
Michael Pachter: I don’t think that’s the reason that it will fail- I don’t think loading times are the reason it will fail. I mean, it practically takes that long for your Xbox 360 or your PS3 to boot up. So, I don’t think that that’s the issue. I think the issue is: Content. I mean, I know that Sony first party content is going to be there, but I think it’s very unlikely that there will be third party content. I think the analogy is Netflix. In order for Netflix to get a lot of content, they spend a couple of billion dollars a year. If Sony wants a lot of content for its streaming service, it’s gonna have to spend a couple of billion dollars, and they’re not going to.
They can’t afford it, and they’re not going to do it. So, I think that Sony hopes that people will pay for PlayStation Now, but you won’t pay any fee for it unless there’s content on it you can’t get otherwise, and it becomes a chicken and egg problem- if there’s no content for it, you won’t sign up, and if you don’t sign up, there won’t be any content for it, because they can’t afford to buy it. So, there isn’t a cheap way to get compelling content on there, and if they don’t have it, you won’t sign up.
So I think it’s destined to fail, because I don’t believe Sony will invest what it takes to pay for content. That’s really something- I mean, Netflix, you know, the reason I think they are successful is, because they paid money for the content, and then people came, and they were losing money for a while. And I simply don’t think that Sony’s gonna do that.
"Microsoft has to consider giving a price cut to Xbox Live, though I think Sony may not be making that much on PS+, so they may try to raise the price, because if they see Microsoft charging $60, they may try to charge $60."
Pramath Parijat: PS Plus for example, we talked about it earlier, how you get so many great free games, and so many of those are third party games, sometimes just a few months from release. So if Sony can make that happen, if they can ensure third party support for PS Plus, isn’t it feasible for them to get third parties on board for PS Now as well?
Michael Pachter: No, see, I think it’s different because PS+, I mean let’s say they offer you Assassin’s Creed 1 or something, then the way they pay Ubisoft for that- remember, Assassin’s Creed 1, it’s a digital copy, so the game is at most $20 at retail, and my guess is, they can get Ubisoft to give them a ‘free’ copy for 10 bucks or something. So they probably say, okay, let’s just say there are 20 million people on PS Plus- everyone who’s on it technically gets Assassin’s Creed for free, but of those 20 million, probably only 2 million actually bothered to download it.
So, it only costs them $20 million, and in the meantime, they’re collecting $100 million a year- no, I’m sorry, it’s more than that, $50 a year, so a billion dollars a year from those people, so they can afford to do that fifty times, you know, to generate ‘free’ games. So they’re doing that. They’re paying just on the basis of the people who use it. That’s different from PS Now, because on PS Now, you get unlimited gameplay for a whole bunch of different games… how much are they gonna charge you?
They’re probably going to charge you $10 a month, but there aren’t going to be 20 million people signing up unless there’s lots and lots and lots of free games… and PS Plus gets you that, and it gets you online multiplayer, it gets you all these things, so people sign up for it.
PS Now gets you nothing, except gameplay, and nominally, it’s going to cost more than twice as much, so people will expect more than twice as many games. I don’t think they can afford to do it. It is the same concept, you’re right, but they’re going to have to pay guarantees, because publishers who sell them the content have no idea how many people are actually going to use the games, so there are going to have to be minimums. And Assassin’s Creed might cost them the same 20 million, but how many people are going to pay $10 a month to play the seven year old Assassin’s Creed 1? Not very many.
That’s the problem- if it’s free, it’s a part of PS Plus, then you’re going to want to play online anyway, and that game has some additional value you get on top of that. But if it’s the only thing you’re getting for 10 bucks a month? Nobody is paying 10 bucks a month. And it’s not a game download service, so you’re not downloading anything, and streaming it, you’re having this experience that may or may not work- no one knows if it actually works yet.
Pramath Parijat: Okay. So we were discussing PS+ and how it adds value just now, and I found that interesting, because until just a few years ago, an argument could be made that Microsoft charging like they do for Xbox Live is acceptable, while today people generally call them out on it, because Microsoft is supposed to be adding ‘value’ to it artificially, by putting free apps behind the paywall, such as Internet Explorer, or Bing Search, and their free games offering isn’t as good as Sony’s is, and Live Gold is more expensive than PS+ is. So, do you think Microsoft will make any move to make Xbox Live Gold seem more competitive with PS+?
Michael Pachter: You know, they’re trying. I mean, I don’t know if you’ve heard of her, but they’ve hired a woman, Nancy Tellon, from CBS. And she’s a television executive, and she is in charge of their original content strategy So she’s going to create some original TV shows, and I think you’re going to see them license some TV content, so they’ll end up being a mini-Netflix. So, I don’t know if most consumers care, but they’re going to try and add value like that. When they started, they offered Netflix, and no one else can get it for a year, and that was cool, that was value.
So, I think they understand what they have to do, but the truth is, if you have an Xbox, you’re stuck, you don’t have a choice, it’s not like you can switch to PS+ on your Xbox 360 or Xbox One. But I think your question is right, I mean, we started out talking about the PS4 outselling the Xbox One, and one of the reasons is, if we’re gonna play online, well, I get PS+ for $10 less, and I probably will download one or two games, that have $10 of value, nothing too crazy, so when you think about the all in cost- gosh, PS+ will only cost me $30 a year, instead of $60, and I pay $100 less for the console- that’s a pretty compelling value proposition.
So I think the answer to your question is yes, Microsoft has to consider giving a price cut to Xbox Live, though I think Sony may not be making that much on PS+, so they may try to raise the price, because if they see Microsoft charging $60, they may try to charge $60.
Also if Sony decides to raise prices, it just does it. It’s not like an announcement per se, and the way Sony has been operating, I mean, first of all, they had a bad PS3 cycle that they recovered from. My view is, Sony’s been pretty clever about giving away a lot of ’free’ stuff. So I think, my view is, Sony will announce that PS Now will be free for PS Plus members, at least for a while, some type of trial period, and that way, essentially they can let you stop giving free games, and let you stream games unlimited, and that way, they can raise the price of PS+ effectively.
So I think that would be the smart thing to do. Possibly say, if you don’t want to sign up for PS+ for a year at a time, we’ll let you sign for PS Now for $5 a month at a time, on and off. I think that’s the smart way to do it, but we’ll see what they really do.
"If we’re just working in the cloud and streaming a file, we don’t care what box it’s on, it’s just a file that’s operating on a server somewhere. So as you go in that direction, can’t you see Activision getting all excited, you know saying, let’s just get rid of consoles and quit paying margin to Microsoft or Sony or Gamestop, and have you play Call of Duty in the cloud? So I think that’s one of the risks with this overarching strategy of cloud gaming, it’s an issue with Microsoft’s emphasis on the cloud, and with Sony’s PS Now. "
Pramath Parijat: I can see them doing that- integrate PS Now into PS Plus, and stop offering free games in lieu of that. But if they did do that, would it be across all their systems, or just PS4, do you think?
Michael Pachter: I would imagine it would be across all system, but again, I don’t know how PS Now is going to work, so we’re going to have to see. Technologically, I just don’t know how it works, I mean, one would think they can do it across all three, but we’re going to have to see how it goes. I mean, I don’t know the technology behind it, I don’t know how it will be on the Vita for example
Pramath Parijat: So, basically, PS Now is cloud based gaming, and you’re not too big on it. That’s interesting and relevant to the console wars, because last year when the Xbox One was unveiled, the entire conceit was ‘the power of the cloud,’ basically. And, I mean then of course, Microsoft went back on a lot of that, but do you think there’s ever any scope for cloud gaming to be used properly in the Xbox One’s case to its advantage?
Michael Pachter: I don’t know. I think it’s funny, I think the distinction between these two consoles in terms of power is really a headline than it is a practical matter. It’s not like anybody says ‘oh, I can play the game side by side, and the PS4 game plays better.’ I mean, maybe it looks better, or that’s what some people say, but they generally run at the same speed, the same framerate, the same resolution, so I don’t really understand how people say one looks better than the other, I don’t believe them, and I know everybody loves to say that they can tell, but I am sure that the average customer can’t. So I don’t think it will make any difference at all, and I don’t think Microsoft is going to try to bring in the ‘power of the cloud’ to make up for anything.
It’s an interesting issue, really, once you move to the cloud, and it’s going to be one with PS Now as well: once you move to the cloud, all that you need is a file, a client, in your disc drive or resident on your console… but you don’t need the console at all. So, why can’t you just put the client on your FireTV from Amazon, and just play the games there? So, I think the console manufacturers are going to have to tread very carefully with cloud computing, because it kind of makes their machines obsolete.
If we’re just working in the cloud and streaming a file, we don’t care what box it’s on, it’s just a file that’s operating on a server somewhere. So as you go in that direction, can’t you see Activision getting all excited, you know saying, let’s just get rid of consoles and quit paying margin to Microsoft or Sony or Gamestop, and have you play Call of Duty in the cloud? So I think that’s one of the risks with this overarching strategy of cloud gaming, it’s an issue with Microsoft’s emphasis on the cloud, and with Sony’s PS Now. They run the risk of making their consoles obsolete.
Pramath Parijat: I have always gotten the impression that that’s where we were headed anyway. I mean, they all talk about moving away from hardware to services, and I always got the impression that that is what they’re going for. You know, the last console generation, everyone talked about it, so if it were to happen, maybe it would happen this way.
Michael Pachter: But why would you need Microsoft for that? Why would you need Sony? Maybe you need Google, or Yahoo, or Amazon. I mean, I think that part of the thought process behind FireTV and potentially an Amazon smartphone, is that Amazon has invested tens of billions in Amazon Web Services, and they would love to be the cloud solution for everyone for everything, and then Microsoft loses. And Microsoft won’t like that. So, I think it’s in Microsoft and Sony’s best interest to try to keep consoles alive.
Pramath Parijat: Yes, and of course you’re never going to see Nintendo move to a cloud based strategy.
Michael Pachter: Well, never’s a long time. Nintendo needs to rethink its strategy, period. You know, I think they’re fixated on compelling hardware supported by compelling software, and that’s just not the model anymore. That was the model 25 years ago, but it doesn’t work anymore.
"All the HBOs, and the Showtimes, and CNBC, and CNN, and Discovery, and A&E, and we now have huge penetration, but t comes to content. If you don’t have content, we’re not investing in the hardware. So, the only way we will buy VR headsets is if Activision, EA, Take Two, Ubisoft all announce they are making VR games out of their core franchises. Then you’ll do it."
Pramath Parijat: Okay, so along with cloud, the other big thing going on in gaming currently is virtual reality. I mean there’s Oculus Rift, there’s VR from Sony. So, what do you think is the potential for VR gaming going forward? Do you think it’s going to be like 3D gaming, where it comes, makes a splash, and disappears without a trace, or is it going to be a mainstay?
Michael Pachter: Yes, I think it’s going to be a fad. I think that no one solved the vesticular motion problem which is where you get disoriented because your eyes are seeing something that the rest of your body isn’t experiencing. I think it’s an interesting concept, don’t get me wrong, and I think Facebook is right, there is potential for it beyond gaming… I mean, gaming is a fun reason to buy something, especially a device like Oculus Rift, but the truth is that maybe virtual surgery, or something like Ender’s Gameor actually doing anything that way, there’s huge potential beyond gaming, but nothing as far as gaming goes.
Pramath Parijat: So sort of like the Kinect, basically. Great applications beyond gaming, but nothing for gaming itself.
Michael Pachter: Right, and just like there aren’t very many compelling Kinect games, other than maybe sports or dancing, that anyone actually says amount to much, similarly I think there will be a few virtual reality games that will be compelling and great, but a hundred? I doubt it. It’s hard to develop for, people aren’t going to develop for it unless there’s a large install base, and it’s too much of a niche for a large install base to ever show up without software. So I’d say fad is the right term.
Now Facebook might turn it into something that every household has one of, because, you know, maybe you can shop in a virtual grocery store, so Amazon might use VR so you can subscribe to Amazon Fresh, and shop for your groceries by walking up and down the aisles and picking them out, I mean that kind of stuff makes sense to me. But I think that’s a much more practical application. And would I buy a VR headset for $10 so I could do something like that? Yes, I probably would. But would I pay $500 to do it? No, and I doubt many will. So, I don’t know what the applications are, but I think it’s a fad.
Pramath Parijat: So the only way for these sets to take off is essentially via a subsidized model?
Michael Pachter: Facebook has already invested $2 billion in it. And I just read an article yesterday, I think about Google Glass, where they are selling them for $1500. Who’s buying that? I mean, without a subsidy, that’s too much money. I mean, it’s funny, and I remember this vividly, when 3DTVs first came out, and they were something like $5000, about five or six years ago. I remember three rich guys who got them, and that’s it, and these guys are still waiting for content. How many movies are made in 3D a year, 20? There’s just not enough content, it’s a fad, and it won’t get a mass install base unless there’s a lot of reason to buy it.
It’s just like the PC in the 1980s at $3000 or $4000, was too expensive for people. Even though it was amazing, it was just too expensive. But the reason it caught on is businesses saw that it was worth buying, and businesses bought them, and the prices came down to $500 or $1000, and we bought them at home. But, you really are going to need some kind of an application for something like Google Glass or Oculus, I mean we don’t know how much it costs, something commercial that makes it worth buying, before it’s worth spending any money on by anyone except for super rich people. I mean, I would never buy it, and I qualify as rich. No way!
Pramath Parijat: I understand what you are saying, but the exact same argument was used for HDTVs, and they did catch on eventually.
Michael Pachter: Yeah, but HDTVs didn’t really catch on until there was programming. It was actually 2003, when the big television networks all started broadcasting in HD. And when they said we will start broadcasting in HD, we said, okay, there’s enough content now, we’ll buy HDTVs. And as we got HDTVs, we had half a dozen cable channels convert to HD feeds each year. All the HBOs, and the Showtimes, and CNBC, and CNN, and Discovery, and A&E, and we now have huge penetration, but t comes to content. If you don’t have content, we’re not investing in the hardware. So, the only way we will buy VR headsets is if Activision, EA, Take Two, Ubisoft all announce they are making VR games out of their core franchises. Then you’ll do it.
"The Japanese market is a culturally biased market. They don’t buy a lot of Chevrolets and Pontiacs either. They don’t even buy a lot of Volkswagens. I mean, the rich people will buy Mercedes and Porsches, but they culturally favor their own products, and I honestly don’t blame them, we Americans are the same, we have this pride in American brands, and so I think Microsoft has trouble there."
Pramath Parijat: So it has to be the big ones? Not the indie developers?
Michael Pachter: It has to be good content. So is it possible that the indie developer will make good content? Well if the indie developer is John Carmack, sure. But if the indie game is Minecraft, do I really need to play Minecraft in VR when I can play it for free on my PC? I don’t think so.
Pramath Parijat: So another thing I wanted to talk to you about is how Microsoft slowly seems to be righting the ship, I mean they have Phil Spencer on board, and they seem to be doing the right things, they seem to be hinting at big announcements for E3. One thing we saw last generation, and it was fascinating to watch, was how the PS3 went from being a disaster at launch to being the console to own, arguably, by the end of the generation. So, I guess price cut and Kinect aside, do you think as far as compelling exclusive content goes, Microsoft can make a case for the Xbox One? Especially given that they have had the weakest first party historically.
Michael Pachter: Iit’s funny when you say they have the weakest first party, because Uncharted, and inFamous, and The Last of Us, I would bet you if you took a single version of those three games, they don’t add up to Halo. And I would say if you take the next three games made by Sony’s first party studios, they won’t add up to Gears of War. So, I agree with you in the sense that the number of titles Sony has is more, but I think in terms of sales, it’s much closer, and might actually tilt in Microsoft’s favor.
So, I don’t think you should make too much of an argument about how weak Microsoft’s first party content is, because most of Sony’s first party games that are successful are not gigantic sellers. I think that ultimately, for the Xbox One to be successful, the Kinect has to be decoupled from it, and I think that might be hard, because there’s a lot of stuff going on with the hardware where it’s all integrated, and it might not work.
But I think that you will probably get in 2015 a redesigned Xbox One that has no Kinect, and I think what will accelerate that process is if Sony cuts the PS4’s price: if there is a $349 PS4 on the market, Microsoft has a real problem. They’re gonna have to do something, and they’ll have to do it really quickly. I think that in 2015, you might see a $349 PS4, and an uncoupled Xbox One, and if you see both of those for $349, the consumer wins, and they will both sell very well. Microsoft is not looking to lose this cycle.
Pramath Parijat: It’s funny, and it’s interesting because I thought of Japan: the Wii U bombed, I mean it bombed everywhere, but still, and the PS4 seems to be tracking behind even the Wii U at this point in time. And Microsoft says that it believes it can still revitalize the gaming market in Japan, it thinks there’s a shot there, and it sounds funny, but then you think of Sega, who historically sucked in Japan, but had an impressive cycle with the Saturn there. So I guess the question is, do you think there’s any chance at all for Microsoft to do well in Japan this time around?
Michael Pachter: Nope. [laughs]
No, the Japanese market is a culturally biased market. They don’t buy a lot of Chevrolets and Pontiacs either. They don’t even buy a lot of Volkswagens. I mean, the rich people will buy Mercedes and Porsches, but they culturally favor their own products, and I honestly don’t blame them, we Americans are the same, we have this pride in American brands, and so I think Microsoft has trouble there.
And also, you know, culturally, I thought Sony’s recent sale of Square Enix investment was interesting. I mean, that content, if you play Final Fantasy, is unique. And I don’t know if it’s fair for me to brand it as uniquely Japanese, but it’s certainly different than any kind of game you have ever seen from a western publisher. So whatever that is, whatever it is about Japanese games- they’re just different, I love them! They’re odd, odd in a really endearing, fun, entertaining way, but I don’t think any western studio knows how to make content like that.
You see it sometimes, but there’s something about Japanese games and tastes, like The Wonderful 101, it’s just completely different. I would say everything Nintendo makes- I mean, no one has ever made a game that competes with Nintendo, and, you know, I’m not a big Smash Bros. guy, but you can’t look at Smash Bros. and say it competes with Mortal Kombat. It’s just so different, like everything Nintendo does. There’s just something about Japanese games, that western developers and publishers and manufacturers have never been able to crack, and I think that’s a large part of the reason why the Xbox has never been successful in Japan, and why it will continue to struggle.
Pramath Parijat: I did find your comment about Sony selling its shares in Square Enix pretty interesting, because it seems to me that it’s just part of a larger strategy on Sony’s part to de-emphasize Japanese content this generation. They seem to be moving more towards western and western oriented games.
Michael Pachter: Well, the race is being won in the west, and I think Sony has probably figured out that they don’t really need exclusive Japanese content to sell the console in Japan. I mean, the next Final Fantasy is going to be on PS4 whether Sony owns a stake in Square Enix or not. And Square Enix will put it on Xbox One, and if they do, it doesn’t matter, that version will sell primarily to the audience in the west that owns an Xbox One and wants that game.
So I think it really didn’t make any sense on their part to lock that content down, because it didn’t help them all that much in the west. Final Fantasy sells a lot in the west, but it’s a game changer in Japan, and there’s not going to be an Xbox audience there, so I don’t think that matters. It’s not a console seller in the west, I don’t think.
"I think Valve is a brilliant company, and I think – they won’t do this, but I think it would be brilliant of them – that they release Half Life 3, and they make it exclusive to Steam Machine, because that would sell 10 million Steam Machines right there."
Pramath Parijat: So, just to be clear, if Sony seems to be de-emphasizing Japanese content because of the race in the west… what does that even mean for The Last Guardian? Because I want it out already.
Michael Pachter: Is that ever coming out? I don’t know. When’s that coming out?
Pramath Parijat: No one knows anymore.
Michael Pachter: You know, again, that game will sell well in Japan, and will probably sell well in the west too, to an audience that cares for that kind of thing, and that’s a PS3/4 exclusive, that’s obviously not coming out on the Xbox… I just think Japanese content is less important in the west to sell consoles, I think shooters are more important here in that regard.
Pramath Parijat: So speaking of western games Sony announced that never showed up, then… how about Agent? It was announced, what, seven years ago? And it never showed up after that?
Michael Pachter: Yeah, you know, it’s very funny, I asked Take Two back in 2010 if they were still working on it, and they said yes, it’s still under development, and then I asked them in 2013, and they said, we have no further announcements to make about Agent. So I have a feeling it’s been dropped, but knowing Rockstar, you know, it could be their big game for this year. PS3 exclusive [laughs].
Pramath Parijat: So, another title that’s been announced forever, and it never shows up, is Half Life 3. And it’s a joke, it’s actually a joke at this point. But do you think Valve is actually even focusing on that game anymore? Do they care? Or do you think the success of their free to play games like DOTA 2 and Team Fortress 2, and Steams, and trading cards, and what not, do you think with all of that, they are not as focused on SP content as they used to be?
Michael Pachter: I think Valve is a brilliant company, and I think – they won’t do this, but I think it would be brilliant of them – that they release Half Life 3, and they make it exclusive to Steam Machine, because that would sell 10 million Steam Machines right there. I don’t know what they’re doing, but it’s possible they’re doing something just like that. I mean, they could put it out on PC and sell 15 million copies just like that, but I do wonder if part of the delay involved is somehow tying it in with the Steam Machine.
Pramath Parijat: The Steam Machine is in itself fairly interesting, because I’ve always thought they’re going about it the wrong way. It reminds me of the 3DO more than anything, with them having a standard that they just license to third party manufacturers, and there seems to be a complete lack of focus and vision, and there seems to be confused messaging. What are your thoughts about how Valve is going about with the Steam Machine?
Michael Pachter: It’s very expensive. And there’s really not any justification to buy one, unless you’re an uber hardcore PC gamer, and you have a very strong desire to play in your living room, and you’re somehow not technologically capable or inclined to connect your PC to your TV, because if anyone really wants to, they can just use their TV as a monitor, and just play their PC games on the TV that way. But I will say, the way that Steam Machine sells and gets content is for Valve to create that content, and the best content they have is Half Life 3, I think.
Pramath Parijat: Yeah, that’s another issue with the Steam Machine concept right there- anything that a Steam Machine will do, my regular PC will do too, and it will do more, and I don’t have to spend a lot of money on buying it. Especially with the Big Picture Mode on Steam.
Michael Pachter: Right, and honestly, if you just have a FireWire, you can hook your PC up to your TV easily, you can almost do it with Chromecast if you know what you are doing. There’s a way to do anything, so I don’t understand why I need a Steam Machine, unless they give me a reason to buy one. I mean, it’s a cool device, it really is, but why do I get it? And which one? Do I get the $500 one, is it powerful enough to do what I want it to, not really. Do I want the $3000 one, yes I do, but for $500.
Pramath Parijat: So basically, it’s coming down to what we were discussing earlier, lack of compelling content.
Michael Pachter: And yeah, like I said, I mean this with the utmost respect, the Valve guys are literally the smartest guys in the room, and do not underestimate them, they know exactly what they’re doing. And if they have this Steam Machine coming out, then they are going to have some content strategy for it.
Pramath Parijat: Actually, I see the Steam Machine as a gamble on Valve’s part to spur the adoption of Linux gaming over Windows gaming, because I don’t thin Valve is happy with the direction Microsoft seems to be taking Windows in right now.
Michael Pachter: Well, it requires some effort to turn a Windows game into a Linux game. I don’t think there’s very many Linux games, are there?
Pramath Parijat: No, but there’s a lot of backporting going on, and the biggest PC games of this year, like say Civilization Beyond Earth, are all announced with a Linux version. So I do see developers and publishers treating Linux more seriously than they used to.
Michael Pachter: Oh, of course, and I think they have to, once Valve says they have to, they’re going to have to.
"I think they should embrace mobile, because I think that mobile would actually sell more content on their dedicated handheld for example, I mean, take old content and sell it on iPhones, and convince people that their content is really great- like ten years old and older. Then I think if you play Super Mario Bros. 3, and you say what a great game and I want the newest one, that drives sales and interest in 3DS, and they would sell a lot."
Pramath Parijat: I wanted to talk to you about, and this is something we’ve referred to a few times already, is GTA V for the Xbox 360 and PS3. People have been waiting for the PC and next gen versions of the game, or are we stuck with what we have?
Michael Pachter: Well, the PC version, you know, I think is a very easy port. So I am certain that’s coming out, and I would bet anything that it comes out this year. The Xbox One and PS4 versions, not so fast, because to port from 360 to Xbox One is probably very hard. If you look at Titanfall, for example, it went the other way. So, I don’t even know if it’s possible, or feasible. I think they might need to redo the code, which might take them a long time, a year or more, and that’s if they spend their time and attention on that, and from everything I can tell, Rockstar’s busy working on GTA Online. So I would say PC version this year, most likely. Xbox One and PS4, this year? Probably not.
Pramath Parijat: And it does make sense, because it’s not like GTA V needs any help saleswise, I mean it’s sitting at what, 35 million now?
Michael Pachter: Yes, and also in fairness, I think the current group of Xbox One and PS4 owners, anyone in that group who wanted GTA V already bought it, I mean, those are the hardcore first mover rich guys. So it’s the next 30 million who may not have bought it, so it might be a compelling title in a year. I don’t think they leave a lot of money on the table, especially because it launched so late in the last console cycle that they likely already got through to those guys.
Pramath Parijat: Okay, so I kind of wanted to switch gears now from Xbox and PlayStation and Valve to Nintendo for a while. We know the Wii U is floundering in the market, and we know that 3DS is constantly missing Nintendo’s expectations every year, I don’t think it’s ever actually met their targets even once. So do you think there is actually any real threat of Nintendo going third party and exiting the hardware business?
Michael Pachter: Well, not with Iwata in charge. They won’t even consider it. His strategy is, look in the rear view mirror, and see what worked the last 20 years, and emulate that until it works. It’s not working, so there’s nothing they can do about that, as long as he is setting the strategic direction.
Pramath Parijat: But how long do you think will Iwata continue to be in charge if Nintendo continues to flounder?
Michael Pachter: Well, they really need to replace Iwata, and I don’t think it is going to happen.
Pramath Parijat: So, you think Nintendo will continue on this path where they’re not successful, but they’ll keep pushing for it anyway?
Michael Pachter: Yeah, he made a comment recently, in January after their latest earnings reports, he made a comment about how it’s never too late for compelling content to reinvigorate interest in a platform, in this case Wii U. I mean, I think he’s wrong, but that’s what he thinks, so that’s what he will try for.
Pramath Parijat: Personally I do think Mario Kart and Smash Bros. will ignite some interest in the console.
Michael Pachter: Yeah, I do too, and I mean, 5 or 10 million units, yes, but not 30 million units, not 50 million, they’re not going to catch up. But they won’t go third party, so the answer to your question is, no, I don’t think they’ll go third party. I think they’ve convinced themselves, I mean, I think they’d rather pursue their health and fitness initiative.
Pramath Parijat: Do you think they need to go third party?
Michael Pachter: I think they should embrace mobile, because I think that mobile would actually sell more content on their dedicated handheld for example, I mean, take old content and sell it on iPhones, and convince people that their content is really great- like ten years old and older. Then I think if you play Super Mario Bros. 3, and you say what a great game and I want the newest one, that drives sales and interest in 3DS, and they would sell a lot.
Pramath Parijat: So use it as an advertising strategy?
Michael Pachter: Well, sell it for five bucks. I mean, a lot of people would buy them at that price, and these are games they are not selling otherwise. I mean today they sent me a code for NES Remix 2, which I think sells on eShop for $15. If they think they can sell that to the Wii U audience, why not sell it to the mobile audience for the same price?
Pramath Parijat: Well, I guess because Nintendo is aware that the people who own Wii U are Nintendo die hards who might pay that money for NES Remix 2, while the average iPhone user might now want to.
Michael Pachter: Yeah, but for $5, I think people would buy it. And I think it would jump to the top of the charts, which would drive further interest in it.
Pramath Parijat: Moving on, the Vita does have Japan though, the Wi U has… nothing, it’s selling pretty badly everywhere.
Michael Pachter: I think the Wii U has more compelling content than the Vita.
Pramath Parijat: So all said and done, Wii U will sell higher than the Vita?
Michael Pachter: Yes.
Pramath Parijat: So, what kinds of sales are we looking at here?
Michael Pachter: Well, I think they will continue to sell 10-15 million 3DSs for a few years out, and 3-5 million Wii Us. And I think their software sales will certainly contract, given the shrunk install base that they are dealing with now.
Pramath Parijat: Alright, thank you Mr. Pachter. It was great talking to you and you had some great insights, and I would like to thank you for your time. It was really great talking to you.
Michael Pachter: My pleasure, and thank you!