Sony’s PlayStation 5 or Xbox Series X? Backward Compatibility with Older Games Plays into Console Wars

Sony and Microsoft have both upped their game with the release of their latest consoles, PlayStation 5 (PS5) and Xbox Series X this November. However, when it comes to backward compatibility with previous generation games, Microsoft’s Xbox has a head start, says a professor at the University of Illinois’ Gies College of Business.

“While PS5 is compatible with 99% of the games for PS4, the previous generation console, Xbox Series X goes far back with its backward compatibility feature. It spans multiple generations of games from the original Xbox, Xbox 360 and Xbox One,” said Unnati Narang, assistant professor of marketing at Gies Business.

In a recent paper she co-wrote, Narang examines the effect of Xbox One’s backward compatibility feature on its previous and new generation games. “What we found in our research is that when Xbox One allowed compatibility with older Xbox 360 games in November 2015, the unit sales for the old console games decreased, but the revenues from both old and new generation console games increased. The revenue lifts came largely from more popular games,” added Narang.

So, not all games benefit equally from backward compatibility?

“The selective launch of compatibility for some games allowed us to understand these effects at the game level,” said Narang. “High-selling games, games with an ESRB rating of E (everyone), action games, and those with high user ratings proved to be the primary beneficiaries of backward compatibility among the older generation games."

Narang and her co-author Venky Shankar also examined the spillovers to new-generation console games. In other words, what explained the positive impact of Xbox One’s backward compatibility on its own (new) games?

The research used detailed data on individual gamers’ game and console purchases over three years, 2014-2017, from a large gaming retailer to understand the potential explanations for the spillovers. “The data revealed that those who already owned backward compatible games before 2015 were twice as likely to upgrade to the new console. Since these preowners no longer needed to buy old games they already owned, they also had more spending capacity to buy the new console games due to a budget effect,” Narang explained.

Narang’s research shows that the effects of backward compatibility, although positive overall, may not apply evenly to all games and buyers. Managers should strategically launch backward compatibility based on their likely impact on sales as well as customer expectations.

Unlike the Xbox, for PS5 most games are covered under backward compatibility with only a very short list of excluded games. “What we are seeing now is a move toward standardization in the gaming industry for backward compatibility. Competition between rival platforms often results in these standard wars,” says Narang.

What does it mean for the future of console wars and the role of backward compatibility? “Console makers and publishers need to appreciate the complexity of the backward compatibility decision. New considerations, such as availability of multiple generations of games on the new console, playability on online gaming networks, and compatibility of disc and digital versions, will play a critical role going forward. PS5, for example, launched with a digital edition of the console, which isn’t compatible with the PS4 discs,” added Narang.