Last month Sony unveiled the capabilities and controller for their new console, the PS4. The second of the three competing home consoles in the next-next generation of TV-based gaming, it gave a sense of where this market might be going. Unfortunately, where it seems to be going is ever-closer to a death spiral since the economics Sony and Microsoft have fostered are now the biggest threat these entertainment divisions face. With the noose tightening around home consoles, what could possibly save this once-proud market from collapsing inward under its own vast weight?

There were few surprises in Sony's slick presentation. The new box has the same hardware and controllers as the already leaked information suggested, the Gaikai buyout allows Sony to offer a neat play-immediately demo function but nothing truly game-changing, and the new console will guess what you'd like to play and download it for you speculatively. The biggest surprise – Sony finally overcoming their need to own everything they deal with and offering social media integration – is hardly a shock given that the 360 already does this. You don’t need to be an analyst to know that the Share button will not be anyone’s reason to buy a PS4, for all that it’s good for Sony to have you promote them. Although PS3 players were quite happy with what they saw at the press event, Sony will need much more than this if they are to escape the noose.

In terms of the difficult decision about their controller, Sony played it safe. Another gamer-friendly DualShock with a slight upgrade in line with what Nintendo did (an added touch screen). Classic Sony copycat policy. The Move will straddle generations, which means Sony couldn’t bear to drop it but didn't dare to require it, rendering it a hindrance to developers and marginal to gamers. Sony might believe they could offer a Move SKU for mass market players later on, once the gamers are bedded in. I think this is a lost cause at this point, but I’d like to be surprised.

Sony’s announcement was highly anticipated by a somewhat anxious retail because the disk-based games sector is struggling right now (as high street closures attest) and there is a general sense that something is needed to inject new life into the market. This might seem surprising: although the Wii outsold its competitors by a third, the installed base of the PS3 and 360 (each about 70 million units) exceeds every previous-generation home console but the original PlayStation and the PS2, which is the biggest selling console of all time (albeit only a whisker ahead of the DS). But these apparently buoyant numbers disguise the problem created by an escalating arms race between Sony and Microsoft, which has its roots in the rather marginal PC boxed games market.

There are, broadly speaking, two kinds of technology markets: incremental markets like cars, flashlights and airplanes change only gradually because there is rarely any basis for escalating to another level. Slight continuous improvement is the essence of the incremental markets. Conversely, exponential markets like computers, consoles and cellphones offer giant step-changes between generations of hardware (or continuous logarithmic expansion in the case of PCs) thus encouraging consumers to replace their equipment regularly in order to keep up with the curve. However, for this to work there has to be reasons for the curve itself – hence the unholy alliance between corporate operating systems like Microsoft Windows and microchip companies like Intel who feed a mutually beneficial technology escalation with very little intrinsic benefit to the end user. Microchip technology is involved in almost all exponential markets, which does raise the possibility of this area eventually topping out, flattening exponentials into incremental markets – but this certainly isn’t the case at the moment.

For game consoles, the same kind of partnership as between OS makers and microchip companies exists between home console manufacturers and AAA game developers: the latter create demand by wowing players with what can be done, allowing the former to sell new and better machines. However, there is a problem with this arrangement in videogames: the escalating cost of developing AAA games places incredible strain upon the developers. Budgets and team sizes necessarily balloon to match the technical requirements meaning more money goes in but alas proportionately more money does not come out the other side. That’s the noose: the justification for a powerful games console is more technically impressive games that turnover bigger revenue with lower profit margins and ever-greater risk. To make this work requires something like World of Warcraft’s monster subscription model, but very few other games can pull this off. Instead, publishers find crypto-subscription models such as annual releases (possible only by fielding multiple developers), instalments of DLC, or the double whammy of premium purchase price and microtransactions that is set to become the new normal.

The most successful development companies still produce big profits – but the number of companies operating on this scale necessarily dwindles, and success is only attainable in the most over-competed, popularist genres – it isn’t coincidence that gun games dominate AAA development. The scope of the problem is indicated by the massive step down from AAA to the ‘next biggest thing’: team sizes of 250 fall to team sizes of about 25 (and then to 2.5 or fewer in the indies at the bottom!). Similar economics apply to movies, but the fall in revenue from a Summer “tent pole” blockbuster to a typical rom-com is much less stratified than in games. Crucially, the sweet spot for return on investment in videogames seems to lie primarily with teams of 25 not 250, which isn’t the case in film. It all lends a surreal quality to the upper market which makes it hard to believe that it’s sustainable in its current form.

The good news is that PS4 is much easier to program for and development budgets shouldn't need to rise by an order of magnitude this time around. But even if costs just double, there’s tremendous pressure on developers to recoup more money from games whose sales can’t  double because there is no relation between cost-to-make and audience size. It’s hardly surprising that EA are now declaring “microtransactions for every game!” The noose tightens with each generation, leaving fewer and fewer franchises competing for a bigger pot of money but without bigger returns, which is to say, unstable profitability. Ironically, indie games are more profitable than ever (admittedly on a very cosy scale) while AAA’s face an ever-taller financial cliff to scale in order to reach profitability. The latest State of the Industry survey confirms the 'rise of the indie' – there are more and more indie developers, and an ever-narrowing space for the big developers.

Don’t get me wrong – home consoles aren’t an endangered species, but they are at least threatened by the economic circumstances they’ve created for themselves. They also face stiff competition in the mass market from tablets, particularly Apple's iPad: Nintendo’s slightly disappointing sales for Wii U may reflect the number of casual players now getting their game fix somewhere other than the TV, a situation that Microsoft and Sony will also face in the near future since no home console can break even without selling to mass market players eventually. As the TV ceases to be the centre of the entertainment world and dedicated games machines lose ground to more flexible devices, the noose around blockbuster games continues to tighten. If we aren’t headed for a crash, then we are at least feeling choked. The PS4 tightens the noose just a little further, and you have to wonder which companies are going to be strangled out of the market by the constrictions this time around. Something has to give – and as usual it’ll be the big-but-not-giant publishers and the successful-but-not-huge developers that find themselves at the wrong end of this game of hangman.

What did you think about the PS4 or Wii U? Do you think the home consoles have a bright future? Share your thoughts in the comments!