Going Backward to Move Forward? The Effects of Backward Compatibility on the Sales of Previous and New Generation Console Video Games

In several product categories, such as electronics, video games, computer hardware and software, and other hi-tech products, backward compatibility--the property of a current generation of hardware to allow previous generation of software or accessory to work with it--is an important strategic decision for firms introducing hardware upgrades. We empirically investigate the effect of Microsoft Xbox’s decision to make its new generation console (NGC, Xbox One) backward compatible with selected games for its previous generation console (PGC, Xbox 360) on the sales of video games for both PGC and NGC. We assemble a unique dataset containing aggregate and individual data from a large proprietary game retailer and data scraped from gaming websites during 2013-2017. We analyze the effects of backward compatibility using a difference-in-differences approach and appropriate synthetic control methods. Our results show that when a video game console firm makes its NGC compatible with some PGC games, the average unit sales of backward compatible PGC games decrease relative to non-backward compatible PGC games. However, the dollar sales of backward compatible PGC games increase relative to non-backward compatible PGC games due to a relative price increase effect. The effects are heterogeneous across games; unlike low-selling games, high-selling games experience disproportionately large revenue lifts. Interestingly, the results also show that the sales (units and dollars) of NGC games increase due to a spillover effect, driven by console upgrades and enhanced budget for new games for the previous owners of backward compatible games. Based on our results, managers should consider high-selling games, games for general audience, action games, and those with high user ratings as the primary candidates for backward compatibility