Prepared by Ken Luskin KenLuskin@gmail.

com

January 14, 2014

Global Game Console prospects 2014 to 2017

1) Consolidation
In 2013 the game console industry consolidated from 3 major competitors to just 2. While Nintendo will take exception to this depiction, their sales are now simply too low to support them as a serious contender. The cost of developing game console hardware and selling it for a loss, favors conglomerates Sony and Microsoft over any other future competitors. I am NOT counting the future launch of the Occulus Rift as a console, because it is a virtual reality goggle and NOT a full console. The Occulus Rift must be plugged into a PC or console in order to function. Game consoles have become increasingly powerful to the point that it is doubtful that any company besides the 2 entrenched competitors has the resources to absorb the large losses required to launch a competing proprietary system. Virtually all the AAA games are OPTIMIZED for either or both of the 2 major consoles. This means that games look best on a large screen TV while using either the PS4 or Xbox1. The AAA games are then ported over for use on a PC. PC gaming is NOT meant to used on a widescreen TV. PC gaming canNOT be enjoyed by a family or group of friends while relaxing on a couch.

2) Reasons for Consolidation

The initial demand for the new consoles from Sony and Microsoft was significantly larger than any prior launch. Since Nintendo has very few third party game developers, and sales of their new console the WiiU are a small percentage of those from Sony and MSFT, it is doubtful they will be able to compete. Virtually ALL third party developed AAA games are being optimized for either or both of the new consoles. When ALL the software is being developed for only 2 platforms, this makes it virtually impossible for any other console platform to compete. What drives the sale of any hardware is the ecosystem of software or content. The large amount of OPTIMIZED content that is being created for the PS4 and the Xbox1 guarantees their success. This chart from Statista shows the total sales of all Consoles has dropped from 2008 to 2012, but the sales of the PS3 and Xbox360 have been relatively stable during this

Prepared by Ken Luskin KenLuskin@gmail.com

January 14, 2014

period. Sales in 2012 were similar to 2008 even though they were in their 7th year of the SAME model. The largest decline in sales is from casual gamers using smart phones and Tablets, rather than Nintendo devices, and handheld Sony consoles.

3) Result of Consolidation
People who desire to play AAA games on a large TV screen, from the comfort of their couch, and with friends or family, are opting for either the new Sony PS4 or the Xbox1, to the exclusion of the Nintendo WiiU or handheld consoles from Sony. Demand so far exceeded supply at launch, that I estimate only half of the initial demand has been met. Demand can be explained because these new consoles from MSFT and Sony are the first in 8 years, in addition to almost all new content being created for these platforms. Even though there is more content for the new consoles than from the prior launch 8 years ago, there are still only a few popular titles, which is why the huge demand has surprised the pundits. As the amount of content for these new consoles builds, the demand will grow as the bulk of gamers decide to switch from their old consoles to the new ones.

4) Background info on gaming Consoles

Through the end of 2013, there have been a total of about 170 million PS3 and Xbox 360 consoles sold, spread roughly evenly between the two. From viewing the chart of console sales in this article in Business Insider, it is apparent that the combined sales of the Xbox 360 and PS3 is bigger than any other single console model. Because AMD has a similar processor powering both the Xbox1 and PS4, the combined sales are extremely important, although it does NOT really matter how the sales are split. Sony wanted to increase its market share in the large US market, so they launched a week earlier than MSFT. Both companies have indicated since their launches that they canNOT meet demand. In other words, both companies are selling their consoles as fast they can build them. Sony has reported selling 4.2 million consoles through the end of 2013, while MSFT reported selling over 3 million.

Prepared by Ken Luskin KenLuskin@gmail.com

January 14, 2014

Since the PS4 had been on sale for about 5 weeks = 840, 000 a week. The Xbox1 had been on sale for about 4 weeks= 750,000 a week. What is most interesting is that PS3 outsold the Xbox360 in Japan 6 to 1. Sony has such strong GLOBAL demand, and had such a strong home field advantage, that they chose to not launch the PS4 in Japan until Feb. 22, 2014 This delay is ostensibly so that Sony can partially satisfy demand in the US, Europe and other markets, and rebuild inventory before the launch in Japan. In the last 5 years China and India, which together account for 2.6 billion people out of the worlds 7 billion have greatly increased the size of their economies, which means a combined 100 million MORE people now have the earnings power to purchase a game console. China had a BAN on game Consoles since 2000 up until last week.... So pent up demand in China is beyond comprehension. This BAN on consoles in China has resulted in robust PC gaming industry, which grew 38% in 2013. PC gaming is completely different from Console gaming! Console games are played on a TV screen, and can be enjoyed by an entire family, or group of friends. Therefore, those people who suggest that the Chinese market for game consoles will not be similar to that in the US, Europe, and Japan, are badly misinformed. Everything seems to change faster, including the iterations of present devices. Even though 2014 is the 9 th year of the PS3 and Xbox360, the new consoles will probably have a life of only 4 to 6 years.

5) General factors for estimating future demand

Here are the key reasons that pundits are greatly UNDERestimating demand of the combined sales of the Xbox 1 and PS4 over the next 4 years. A) Consolidation of consoles to just PS4 and Xbox1 will result in greater sales of these 2 consoles versus the greater choice offered by 3 or more competitors. B) PS4 are Xbox 1 are first updates in 8 years. C) China lifting the console BAN will result in sales commensurate with the purchasing power demand expectations that the $700 NON subsidized iPhone will sell 40 million units in 2014.

Prepared by Ken Luskin KenLuskin@gmail.com

January 14, 2014

D) 20 NEW games for the NEW consoles will be announced over the next 9 months, which will stimulate the 170 million prior console owners to switch to the NEW consoles. E) Over the last 5 years a generation of children has grown up playing video games on the mobile phones that their hovering helicopter parents have bought for them. AAA games are 10 times as powerful and incredibly more immersive. Pundits do NOT understand that mobile games are to miniature Golf, as real Golf is to AAA gaming: Kids grow up from playing miniature Golf, and GRADUATE to playing real Golf. The validation of the future sales of the Xbox1 and PS4 is the initial launch that is 5 TIMES that of the prior models launch.

6) Metrics of future demand

Without taking into account China and other emerging economies, the consolidation of demand from Nintendo users and the replacement of the old consoles over the next 4 years will at least equal the 170 million older models. 170 million consoles replaced over the next 4 years = 42.5 million NEW consoles sold per year on average. Factoring in the demand from China and growth in emerging economies, plus the new generation of kids addicted to video games, means sales should swell to 60 million or more per year.

7) Per year estimates

From the past cycles, sales did NOT peak until the third year after the initial launch. One of the main reasons for this observation is related to the fact that the new models are not backwards compatible. This means that the new models have much less content available until the 2nd or third year after launch. The bulk of people tend to make the switch to the new consoles after there is as much content available as exists for the old consoles.

Prepared by Ken Luskin KenLuskin@gmail.com

January 14, 2014

Also, after the 2nd year, the old consoles are generally discontinued, which greatly accelerates the switch, because there is practically no new content produced for the old consoles. IDC and AMD were estimating total consoles sales in 2014 of about 40 million, but this was BEFORE China announced the elimination of their BAN. Based upon the estimated sales of about 40 million NON subsidized $700 iPhones in China during 2014, there will be console sales of at least 10 million.

2014: 50 million total console sales with only about 5 million being PS3 and about the same for the Xbox 360. Which means that new consoles will sell about 40 million AMD earns royalties on the Xbox360 and the Nintendo WiiU. Therefore, AMD will earn profits on about 45 million consoles sold. 2015: 55 million Total consoles sold with NO sales of the PS3. Therefore, AMD willl earn profits on all 55 million consoles sold 2016: 60 million Total consoles sold, with AMD earning profits on ALL 60 million sold. 2017: 55 million Total consoles sold, with AMD earning profits on all 55 million sold.

8) Per quarter sales expectations for 2014

In NON launch years when supply is NOT constrained, the Christmas demand during Q4 increases sales so that they are about equal to the first 3 quarters combined. The Xbox1 was only launched in 13 territories out of a total of over 50. MSFT will expand the number to all areas during the first half of 2014. As of December 13th the PS4 was expanded to 48 markets, while the Xbox1 was still only in 13 markets. It is not clear why Sony expanded to 48 markets, when they could not meet demand in the initial launch markets. One of the reasons may revolve around the Xbox1s voice recognition system, which must be tuned to the language and dialects in each market.

Prepared by Ken Luskin KenLuskin@gmail.com

January 14, 2014

Looking at the PS4, the launch in Japan on Feb. 22 will generate a commensurate level of sales relative to total PS3 sales, as the launch elsewhere. PS3 sales in Japan were about 12% of total Global sales. Therefore, sales in Japan during the launch from Feb. 22 to March 30 will be at least 500,000 units. There was initial estimated demand in the US alone for at least 2 million more PS4s than Sony could deliver in Q4. Reports out of Europe were of a similar amount of units in demand that could not be met by Sony. So, based upon the expansion of the launch near the end of the Q4, the unfilled demand in the US and Europe, and the initial launch in Japan on Feb. 22, I estimate that Sony will sell at least 4 million units in Q1 2014. Now, looking at Xbox1, as MSFT expands the number of markets from 13 to over 50 during Q1 2014, they will more than make up for slower per week sales in Q1 in the US and Europe. Therefore, I estimate that MSFT will be able to sell at least 3 million Xbox1s during the 13 weeks of Q1, versus the 3 million they sold during 4 weeks in Q4 2013 in only 13 markets.

Therefore, TOTAL Xbox 1 and PS4 sales will be at least 7 million units in Q1 2014. * Q2 consoles sales will start to benefit from sales in China! * Q2 console sales will start to benefit from half of the 20 new games being launched. Therefore, Total Xbox1 and PS4 sales will be stay at 7 million units in Q2. Additional launch of 10 more games in Q3 will keep demand at 7 million units. Following the console rule of thumb for Q4 (first 3 quarters equals Q4) means 7+7+7= 21 million Therefore, PS4 and Xbox1 consoles sold in Q4 will be about 21 million***

Prepared by Ken Luskin KenLuskin@gmail.com

January 14, 2014

*** In order to meet the massive demand in Q4 Sony and MSFT must stock units in Q3. This means AMD must increase console chip production in Q3. AMD must not only meet Q3 current demand of 7 million units, they also must produce about half of the total sales for Q4. Therefore, AMD must produce half of 21 million= 10 million + 7 million = 17 million chips in Q3 In Q4 AMD chip production should drop back down to about 10 million.