Thoughts post E3 2019

Gavin Baker
4 min readJun 23, 2019

My conclusions post E3 are the following. First, streaming is real and Microsoft’s xCloud is the likely winner. Second, publishers are using Stadia, other potential new distributors and the threat of app store regulation to drive down platform take rates. “30% is over” was a direct quote from a CEO. Third, console wars/cycles are now semi-irrelevant.

Streaming should drive TAM expansion by lowering the cost to play and increasing potential videogaming occasions (console player who is traveling, etc.), but it is unlikely to have any real business impact until mid 2020/early 2021 as the technology needs to mature. Analogies between game streaming and traditional streaming media (Netflix) are strange in my ever humble opinion. The content “head” is dramatically more important in gaming vs. TV/movies where the “tail” is much more important. i.e. Movies from the 1970s and 1980s are likely viewed at over 10,000x the frequency at which games from the 1970s and 1980s are played. Older TV shows like the Office and Friends are top 10 streaming shows today. I understand that League of Legends and CS:GO are “old” games relative to when they were launched, but they are being continuously updated unlike Friends and the Office. Said another way, the top 10 videogames account are both much likelier to be newer and account for a *much* higher share of gaming engagement than the top 10 movies/TV shows in any given year (head content in videogaming generally equates to newer or frequently updated content). And the social aspect of almost all the top 10 games today only reinforces this — people want to play games with their friends.

Streaming and subscriptions are linked only because of Netflix’ success — one is a distribution method, the other is a business model. Subscriptions could be a nice transition to F2P models for existing content owners. I am curious to see how it evolves but the subscriptions could replace the $60 upfront purchase price over time and allow easier monetization via F2P models as I suspect gamers would be less resistant to microtransactions in a game that was part of a subscription vs. one they had purchased.

Stadia is impressive technology and am curious to see how it compares to xCloud when that enters beta this fall , but most publishers seem to simply be using Stadia as leverage with the existing platforms. Stadia doesn’t have nearly enough “head” content today to succeed especially given that xCloud will effectively have all Xbox/PC content when it launches.

Content owners have more leverage in videogames vs. TV/movies as distribution options increase via streaming given all of these dynamics and they are beginning to use it to drive down take rates. The CFO of one of the two major console platforms acknowledged take rate pressure and said that it “was heyday for the publishers.” As an example — not a prediction — take rates declining from 30% to 20% would drive a 14% digital revenue increase at 100% incremental pretax margins. This would further incent publishers to drive higher revenue, higher margin digital distribution at the expense of lower margin physical distribution.

Console wars and cycles are increasingly irrelevant. The last two console cycles saw share shift entirely based upon mistakes by Playstation/Xbox. PS3 lost share to Xbox360 because PS3 tried to use the console to drive blue-ray adoption, which led to worse value proposition for gamers. Xbox carefully studied all of these mistakes and repeated all of them with the Xbox One, which was initially more expensive and less powerful due to the Kinect focus — i.e. a worse value prop for gamers. This led to significant share shift to the PS4 from the Xbox platform. No one is going to make a similar mistake this time, so share should be roughly stable. Sony had a significant 1P title edge last cycle but Xbox appears intent on closing this gap. As a sidenote, it would be so awesome if the new Halo was a great game. The Arbiter might be my favorite videogame character ever. Cross platform is also eroding the importance of the underlying platforms and social network aspects (game/platform intersection at clan level) that make switching console platforms difficult. Better streaming from Xbox/Xcloud and more seamless PC integration *might* be a differentiator for Xbox but Playstation will use the same underlying tech so emphasis on *might. Console cycles are also slowly becoming less relevant with backwards compatibility, digital libraries and cross platform play (still more common within platforms than between). Mid cycle upgrades like Xbox One X and PS4 Pro are further smoothing the cycle.

*I will admit to being excited for 8k HDR gaming at 120 FPS, which will require a console or PC for the foreseeable future. Obviously monitor prices have to come down quite a bit for this to be a widespread reality.

** Note that this was originally posted as a thread on Twitter on 6/16/2009.



Gavin Baker

Founder, CIO & Managing Partner, Atreides Management LP. Former Portfolio Manager, Fidelity OTC Fund. No investment advice, views his own. More: