Outlook: The Battle of the Consoles Rages On

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With this note, we are publishing our video game hardware and software sales forecast for 2014 to 2016, and are making our industry growth model available to clients. Our model incorporates our views about the relative success of the next-generation consoles from Sony (NYSE:SNE), Microsoft (NASDAQ:MSFT) and Nintendo, and reflects our belief that the addressable market for handheld hardware and software will be smaller over the next three years than it has been historically.

We expect Sony’s and Microsoft’s new consoles to thrive over the next three years, with cumulative worldwide sales of 37.7 million PS4 and 29 million Xbox One consoles by year-end 2016. We do not expect Nintendo’s Wii U to fare as well, with cumulative sales of under 20 million by 2016.

We expect a modest reversion to more normal software attach rates or “tie ratios,” with software sales of approximately 3 units annually over the next three years for each Xbox One and PS4 sold, and with tie ratios of just over 2 units for the Wii U and just under 1 unit for the 3DS. We think that Nintendo consoles are more susceptible to competition from mobile and tablet games, as we believe that a disproportionately high percentage of Nintendo customers play more casual games, and are therefore more likely to view mobile and tablet games as close substitutes to software developed for Nintendo’s platforms.

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