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With iOS 7.0.3 and Apple TV 6.0, iPhone and iPad games are already playable on a TV, according to Kyle Richter, but can be hard to control. When it comes to playing iPhone and iPad games through Apple TV, AirPlay currently has too much latency it takes too much time for your game to respond on the TV and if Apple (AAPL )is to truly take over the games console market, Apple TV needs to be able to also handle the larger blockbuster games, which can be 50-60Gb.

So it is far better and easier to upgrade Apple TV and make it a games console, which can also be the household media center and backup drive.

What does this new Apple Games TV need?

  • 64 bit A7 which can be at a much higher clock speed as it's always plugged in
  • Fusion Drive, like the iMac, with a 64Gb or 128Gb SSD, so a 50Gb game can be resident while you are playing
  • Choice of 1TB and 3TB hard drives
  • Multiple Bluetooth or WiFi channels for multiuser gaming
  • Standard game controller attachment for iPhone/ iPad/ iPod Touch (now in production by Logitech etc.)
  • Properly calibrated compass, gyroscope, accelerometer in the 5s (this could be the current delay, as firmware updates are tested). Those in the 5c, from a different supplier, already work fine

What would this cost?

  • $399 [same as Sony (NYSE:SNE) PS4] for 1TB or $499 (same as MS Xbox One) for 3TB

Apple offers the iMac Fusion Drive upgrade for $200, but iMac pricing already includes a 1TB hard drive and so the $300 extra on top of the $99 for the current Apple TV should cover costs + the usual Apple margins. While Apple could hit a lower price point now, it can save any discounting for older models when it launches a new model for the holiday season every year.

Who will buy an Apple Games TV initially?

  • Gamers who want to play some of the 160,000+ iPhone and iPad games on a TV
  • Owners of the 13 million old Apple TVs
  • People using the Mac mini as a media center and those who want a media center
  • People wanting a local backup device for iPhones, iPads and Macs

Why will games companies want to standardize on Apple's console?

  • 70% margins for all games sold through the app store (about twice their current margin, adding $300M to $400M to profits on a top selling title)
  • Much cheaper developer licenses
  • No need to deal with physical stock
  • Payment from a "no risk" distributor every month
  • Can offer cheap upgrade packs, say $5, between blockbuster new versions
  • Marginal titles are now much more profitable
  • Improved cashflow
  • Concentrating on iOS will reduce development costs and risk for new titles
  • Online distribution takes away the market for secondhand games from which games companies receive nothing
  • Supports new styles of gameplay with some parts mobile or on a second screen

What is the market size?

Sony and Microsoft (MSFT) both sold about 80M of their last generation consoles, Nintendo over 100M over about 7 years with minimal changes in hardware. While average game prices are $25 to $30, blockbuster titles can be $40 to $60 and nearly 900M copies of games have been sold for the Nintendo (OTCPK:NTDOF) Wii alone.

In 2012, according to NPD, US sales of consoles + console games were just over $7 billion and in 2011 over $9 billion.

What can Apple make from this?

  • Year 1 sales of 10 to 15 million units + associated games will add $5B to $10B in good margin revenue
  • Year 2, as top titles are launched on the Apple Games TV, $15B to $20B seems possible

While the margin for the Apple Games TV will probably be around 40%, Apple will only end up paying credit card charges and bandwidth fees on its 30% margin of all games sales and a top end game like Grand Theft Auto brings in $1 billion in sales. With the huge volume of business through iTunes, online hardware and retail sales, Apple's cost per transaction should be minimal. Even after the additional costs for data centers are added in, margins on Apple's 30% of game sales are likely to exceed 80%.

  • Makes the iPhone/ iPad/ iPod Touch a must have for gamers, as a controller
  • Strengthens the Apple consumer lock in (USA, Japan are the top video games countries)

Why the delay when holidays are looked on as the best period to launch a new console?

  • Need to properly calibrate compass, gyroscope, etc., in the 5s

Other possibilities include:

  • Apple expects NAND prices to go up this quarter (Analyst Conference Call), so making the SSD more expensive (it will be better to lock in long term prices next quarter, when the rush for high capacity iPad Air, phones, etc., is over)
  • Need to spend more time on A7 with higher clock speed
  • Wants to time the launch for the Chinese New Year now that games consoles are allowed in Mainland China
  • Apple feels another new product launch won't add substantially to sales this quarter
  • Even with a launch in calendar Q1, future updates can be in time for the holidays

Why hasn't Apple launched this before?

  • A new games system stands the best chance of gaining traction when the rival consoles are updating to a new generation
  • Microsoft, Sony and Nintendo have now are now busy producing their new consoles and will find it very difficult to change their business model until it's too late
  • It needed a 64 bit ARM chip with Apple's integrated graphics for the performance to be competitive
  • Games companies needed a successful track record with iOS

What can Microsoft, Sony and Nintendo do about it?

  • This will disrupt their console business model where substantial profit comes from developer fees and games royalties to subsidize hardware in the early years
  • Sony and MS can market the power advantage of the AMD chips but with Apple offering a yearly upgrade and desktop clock speed (say 2x mobile) any AMD advantage will disappear
  • Go to an online distribution model for all games and only charge 30% distribution fee will mean losing money on each Xbox One and PS4 and writing off development costs. Sony and Nintendo have had limited success with online sales
  • Nintendo has historically priced hardware so it makes money from launch but the Wii U has been selling weakly about 4 million so far and, given the strength of iOS in Japan will be under attack in its home market by Apple's much more attractive offering
  • Nintendo has strong in house games franchises (Mario, Princess Zelda, Pokemon) to attract customers but would be wise to port older titles to iOS both for the revenue and to find new customers

Winners

Apple and major games companies like Activision Blizzard (ATVI), Electronic Arts (EA), Rockstar Games, Ubisoft.

Losers

GameStop (NYSE:GME) and other dedicated games stores, as well as Microsoft, Sony and Nintendo.

Source: Apple: Time To Take Over The Game Console Market