Are Gaming Consoles Still Relevant?

The digital home has been coming for decades. Ma Bell knew; 30 plus years ago, its vision of the future was "data and pictures at your fingertips." Star Trek knew; iPads were a standard accessory over 20 years ago in the show. And now reality is finally catching up.

This means big changes are needed in the console arena if they're going to be able to survive this new frontier. Our televisions are now smart and possibly 3D. Our Blu-ray players are smart and affordable. Our smartphones and tablets stream movies wirelessly to our TVs, and smartphones have become our gaming platform of choice.

During previous console releases, selling points have included:

1. Better graphics
2. Inexpensive Blu-ray player
3. Streaming HD content
4. Innovative games, etc.

But these selling techniques won't work anymore for the following reasons:

1. Current consoles already take complete advantage of the TV with processing power to spare (except for the Wii). We are at "movie quality" graphics.
2. Blu-ray players are now as low as $65, down from the $400 to $1000 range during 2005, when the last consoles were released.
3. Streaming HD content is now possible from phones, tablets, computers, TVs, Blu-ray players, etc.
4. Nintendo had a firm hold on the innovating gaming arena in 2005. But now smartphones and tablets have taken most of the gaming market share.

So let's be honest: we don't really need a new gaming console, at least not one in its current incarnation. This is probably why Sony Corp. (NYSE: SNE) previously claimed that its PS3 was good for another few years and didn't plan an upgrade until 2015 or 2016.

Except, when does anything ever go according to plan? The three major console manufacturers -- Sony, Microsoft, and Nintendo -- are in constant competition with each other (even when they won't admit it). Perhaps so much so that they've forgotten to look beyond the console market for other threats to their gaming market share. While the console market for the last few generations has generally had a long lifecycle, the rest of the world has continued to innovate around them at exponentially faster rates.

Semico Research Corp. goes into a deeper analysis of the imminent threats facing the console market in the March 2012 Semico IPI report that includes forecast figures for consoles and tablets.

What does the future hold for the gaming industry? The next few years must look terrifying to console manufacturers for the following reasons:

• Gaming has moved to smartphones and tablets, where they're priced under $5, while console games are still around $30 to $60.
• Xbox 360 and PS3 are already lagging behind the iPad in terms of screen resolution.
• Console games are stagnating in the creative department. Some of Nintendo's recently announced game releases include Mario Tennis, a Brain Age Sequel, Sonic the Hedgehog (from Game Gear), and another Fire Emblem game. (All sequels and remakes.)
• Console game sales in the US have been on the decline, down 21 percent in December 2011, down 34 percent in January, and down 20 percent in February.

Sony, Microsoft, and Nintendo all see Apple as a huge threat on the horizon. Apple has taken over the handheld market during the last six years, creating a world that is changing too fast for console manufacturers to keep up with, but they're not going away without a fight.

Nintendo is in the unique situation of trying to play catch-up with Microsoft and Sony, while trying simultaneously to jump ahead and compete with Apple. Sony, within just a few months, changed its tune from "no new console anytime soon" to "you never know." Sony's new CEO is from the company's PlayStation division, and rumors are already swirling about a new PS4 with an AMD GPU. Microsoft has said no new console for 2012, while rumors of a new tablet-like controller speak of a 2013 release.

Nintendo, Microsoft, and Sony are all geared up to be content providers via their individual networks. This strategy has problems of its own as consumers buy hardware to play games. If one piece of hardware can play all games, then most likely the consoles will become regional systems, with Microsoft popular in the Americas, while Sony and Nintendo fight for Asia Pacific market share. This scenario guarantees the next-gen consoles will not be able to maintain the large penetration rates and market shares of the past.

The next-gen consoles should be considered media portals more than gaming systems. Both Microsoft and Nintendo expect their next-gen controllers will be remote controls for the TV, browsers, and gaming devices. The controllers may even be used as portable display devices. They seem to be trying to bypass the tablet market instead of embracing it by licensing out content.

A video-on-demand service will be in the next-gen systems. Nintendo has been several cycles behind the Xbox 360 and PS3, for example, adding Hulu Plus functionality months after the Xbox 360 and PS3 did. According to Nielsen, 33 percent of time spent on the Wii is actually spent watching streaming video. This shows Nintendo is definitely looking to be the main content provider for the digital ecosystem with its next-gen console.

Pricing will also need to change; Nintendo will probably launch at around $250 to $300, while the Xbox will need to launch at a similar price with the Kinect included. The years of the $600 console are over. Apple has changed people's perceptions of what is affordable and what isn't, which means if the manufacturers are looking to recoup their costs, it will have to be in the controller market. A $300 controller that functions as a tablet, universal remote control, and handheld gaming device may be worth it to the majority of consumers.