One of the two next-generation game consoles is going to kill it in the marketplace. With the battle for the living room just beginning, the real question on everyone's lips is, "Who will win?" Frankly, I don't care which one wins. Today Microsoft (MSFT) unveiled its latest Xbox, the Xbox One, and for the non-hardcore gamer in your household, it looks like they have built something worth considering. With the early announcement of the power of the SoC that runs Sony's (SNE) PlayStation 4 and the reveal today, it is pretty obvious that Microsoft has chosen to move in a different direction with the Xbox and that direction is only tenuously attached to gaming. Regardless of who winds up with the most market share in two or three years, the real winner in all of this is Advanced Micro Devices (AMD) as they are powering both of these consoles. And this time the console wins were worth it.
In generations past, winning the contract for the latest console was a marginal affair from a revenue perspective as the winner, Nvidia (NVDA) or AMD, would simply get paid a small per unit license fee. For both of these deals, AMD is providing the SoC directly and because of how good their Jaguar cores are - as I've discussed at length previously - they will be able to provide them at prices where the margins make sense for everyone. The days of selling $600 gaming consoles are over. So, for this generation, the supplier had to provide not only power but performance and do it in a thermal design profile that works for the entire system.
Millions of Jaguars
The long and the short of it is as follows. If Sony or Microsoft sell consoles at a similar pace over the next 5 years as the PS/3 sold, then the profit alone to AMD, at $70 for the SoC and 20% net margins, is worth around ~$1.50 per share to the company. That's from one console win. Since Xbox 360 and the PS/3 both sold similarly over their life cycle, factor in both of these wins as worth around $2.50 to $3.00 per share.
AMD's management was not kidding when it said its semi-custom revenue would be 50% of the company's revenue in two years. The modular design and reusable IP blocks of Jaguar make it very customizable and transferable to other fabrication processes for minimal cost.
So far much of the commentary, including mine, has been disdainful of these design wins, but for a firm the size of the current AMD, these are massive opportunities for growth. The market was setup for AMD to win these new consoles and in the midst of massive company turmoil, it was able to get both design jobs done. In both cases, Sony and Microsoft got exactly what they wanted. Whether the market wants what they are selling is the big question.
Nvidia = Loser
One thing that is for certain is that Nvidia is the big loser here. For those that follow my work, you know that I am very bearish on Nvidia as I believe they have no real future product that differentiates themselves over their competition in any of their niches. I reiterate that stance, no matter what the stock has done in the last couple of months, fundamentally the company is on a treacherous path to the future. Aside from the embarrassing miss on the Tegra 4 announced at the earnings report. If anyone believes that the Tegra 4 was pushed back because of the Tegra 4i, then I fear for your money.
Moreover, they are now completely on the outside of the game development loop as the driving force behind gaming will be x86-64 and it will be driven by what AMD, Microsoft and Sony want. Nvidia says it didn't want the console wins, but that's pure marketing. If it had a competitive solution, it would have put in a bid for the business, especially considering that selling the SoC directly was on the table this time, not just designing and licensing the graphics technology.
Consoling the Future
So, now we have a better picture of where the world is moving in terms of future gaming. Microsoft decided to eschew the high end gamer because it didn't see the revenue opportunity as compelling enough and has more ambitious plans to build a living room experience built around the Xbox and Kinect in a natural way. We'll see if the strategy was a valid one.
Given that there is no cutting edge technology in the unit outside of AMD's SoC, I would expect the bill of materials for the Xbox One to be pretty light and Microsoft is not above subsidizing the cost of the console to boost sales and create synergy. Skype integration creates a kind of Philip K. Dick future that, frankly, appeals to my inner geek. It looks to me that Microsoft is looking for the crossover hit that Nintendo's (NTDOF.PK) original Wii was. The price will have to be very attractive for that to happen.
Nvidia thinks that they can compete with Project Shield and its GRiD cloud gaming fabric at $349? Again, I fear for your money if you think that will be a winner for them. It is, simply put, nothing more than a way to sink all of those Tegra 4s it won't sell in the tablet market. The Tegra 4 is perfect for Android-based performance tablets, a market even it admits is small and shrinking.
Sony is looking good here because it has chosen to go after the cutting edge of gaming and that will be the market differentiator. If the rest of the PS/4 is as impressive as the AMD SoC powering it then we may be in for a very interesting couple of years.
But the big winner is AMD as now all of these firms have a stake in its future.