It's a secret that's out in the open. As Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) delay their next generation consoles, increasingly the computing power of tablets and smartphones are nearing the capacity of present generation consoles such as the Xbox 360 and the Playstation 3. But that's not all, a new trend is starting up in the TV sector, smart TVs. These are TVs packing a SoC (System-on-chip, CPU+GPU) much like the ones carried by tablets. These TVs, too, can run software, or more specifically, games. Samsung (OTC:SSNLF) and others are already introducing many such models, and obviously one of the great rumors in the market is that Apple (NASDAQ:AAPL), too, will enter the fray.
A chart by nVidia (NASDAQ:NVDA) illustrates the phenomenon. While PCs and consoles traditionally dominated graphics performance, which is central to the gaming experience, as of late mobile phones and tablets have been closing in fast. With the trends remaining as they are, the mobile devices cross the console's power during 2014. Sure enough, consoles should soon see a new generation reestablishing their dominance, but tablets have their own advantages as well, namely mobility. (source: nVidia)
Smart TVs, on the other hand, present a new problem. Once the computing power is within the TV, it will be hard to convince most of the market to buy an additional device to connect to that same TV just to improve gaming somewhat. So the expansion of smart TVs will be, itself, a negative for consoles.
What does this all mean? It means that the console makers, long used to competing only between themselves, and lately being on an extended replacement cycle that greatly helps returns in the industry, will now be forced to compete on a larger market.
That's if they even manage to compete, because there's another factor that's also different between smartphones/tablets/smart TVs and the consoles they are now fighting. That is the software's costs. Whereas a tablet user is widely used to pay less than $10, sometimes $2-$3 or even zero for its games, console games are much more expensive, at an average around $60. It's hard to change that preposition, because consoles are usually sold on a razor-and-blades model, where the expensive hardware on the console is sold at breakeven or a loss, with the expectation of making it back in sales of expensive content/software. That, too, is at risk.
Size of market
Finally, another problem emerges. As ecosystems such as Apple's iOS and Google's (NASDAQ:GOOG) Android establish themselves - and it's quite likely that the smart TVs will end up running on them as well - the addressable market for these platforms will end up being much larger than the one available for a new console or handheld gaming platform like the Sony PS Vita. This might well drive developers away from the consoles and into those ecosystems. The lack of software will then drive away customers and the lack of customers, drive away even more developers, in a vicious cycle.
Estimates point towards 16 million Xbox 360s; 15 million Playstation 3s and 12 million Nintendo (OTCPK:NTDOF) 3DSs having been sold during 2011. So at this point the sector still represents an attractive target for developers, even though these numbers are already dwarfed by iOS or Android sales. And already there's talk of lower sales for 2012, with Strategy Analytics predicting a 19% slump in sales.
Also, during the last 9 months up to March 31 2012, Microsoft made $7.8 billion in revenues and $637 million in operating income in its "Entertainment and Devices Division" division. That's 14% of revenues, but just 3% of operating income (source: MSFT's latest 10-Q).
The present trend seems highly unfavorable for consoles and console makers. Since only 3% of Microsoft's operating income comes from consoles, it seems little exposed. But Sony and particularly Nintendo are already feeling the heat. In the past, Nintendo with the Wii and Microsoft with the Kinect, managed to find new reasons to stick with these gaming platforms. In the future, it would seem that computing power alone won't be enough and either some breakthrough innovation is found, or console's functions will slowly be assumed by tablets and smart TVs.
The consequences might be far-reaching, from console component makers, to the software houses that depend more on console and PC games, versus those developing for the new platforms. (As an aside, this could mean that hard-core gaming would once again be the province of PCs, which are a bit less vulnerable to the dynamics I described).