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The video game market is a moving target.
We're moving out of an era dominated by the Big Three gaming consoles: The Nintendo (OTC BB: NTDOY.PK) Wii, Microsoft (Nasdaq: MSFT ) Xbox 360, and Sony (NYSE: SNE ) PlayStation 3 have ruled the roost for the past five years. But they're starting to show their age, and only one is slated for an upgrade anytime soon. At the same time, ubiquitous broadband connectivity, coupled with ever-more powerful computers running speedier Web browsers, has given rise to a new age of online gaming -- and then there's the whole smartphone idea putting some of the most popular games of our time quite literally in the palm of your hand.
So consoles are fading, and newfangled platforms are on the rise. Is this the end of specialized gaming hardware as we know it?
The new threat
There's no question that the new wave of social and networked games is big business. CNBC reports that Zynga, which runs ultra-popular Facebook games such as FarmVille and Zynga Poker, will run an IPO very soon with a total value target as high as $20 billion. That would instantly make Zynga more valuable than traditional market leaders Activision Blizzard (Nasdaq: ATVI ) and Electronic Arts (Nasdaq: ERTS ) , which currently command market caps of $12.8 billion and $7.2 billion, respectively.
And the field is only getting more crowded. Online giant Google is hiring a product manager for social games, hoping to catch the wave before it's too late. Aside from Nintendo and its DS line of handheld consoles, Apple (Nasdaq: AAPL ) might be the mobile gaming leader thanks to a wealth of iPhone, iPad, and iPod Touch games.
What the old guard is doing
The traditional powers aren't sitting still, of course. Electronic Arts is putting its back into downloadable games and smartphone titles, reaching $800 million in digital revenue in fiscal year 2011. "The consumer has changed," says CEO John Riccitiello. "200 million console players have become 1.5 billion consumers gaming on multiple devices." Under those conditions, a strategy shift is almost mandatory.
Digital delivery was a driving factor when Activision merged with Blizzard. CEO Bob Kotick is "excited to make the most of tremendous opportunities in digital engagement, social connectivity and the growing appeal of our content." But digital sales still remain a minority of Activision's total business, leaving plenty of room for improvement.
Even little Majesco Entertainment (Nasdaq: COOL ) is pulling its attention away from the hot-selling Zumba Fitness title, which requires a motion-detecting console such as the Wii or Xbox Kinect, to refocus on online and social games. CEO Jesse Sutton is busy launching Facebook games along with "a number of to be announced iPhone and iPad titles."
Meanwhile, privately held Valve Software is experimenting with new financial models by releasing Team Fortress 2 for free on its all-digital Steam distribution platform. The business model for the popular team-based shooter now relies on micropayments for goodies and upgrades in the game.
All the old rules of game development and sales are being thrown out the window. Welcome to the new world.
If you can't beat 'em, join 'em
As you can see, the incumbent video game titans seem quite content with moving to the new platforms -- everyone is totally excited about Facebook and smartphone games right now. That flexibility is good news for EA, Activision, and other limber game publishers but potentially devastating for Microsoft, Sony, and Nintendo.
Could Nintendo be wasting time and effort on launching the Wii U into a market with no place for new hardware? I wouldn't bet against Mario and friends, but the gang might need to move online somehow. That would be a blow to Nintendo, given that the company likes to actually make money on its hardware sales rather than subsidize unprofitable consoles with high-margin game titles.
The social revolution is less of an issue for Sony, where executives sparkle with glee whenever the gaming division happens to make a profit. Microsoft would love to milk runaway hit Kinect for all it's worth before giving up on consoles, but video games make up a tiny fraction of Redmond's Windows and Office bulk.
Cortez may have burned his ships to keep his troops interested in the conquest of the Aztec empire, but Sun Tzu would rather keep his options open and Nintendo should subscribe to that strategy instead. I'm betting Nintendo will join the social gaming trend in a small way while trying out the long-term traction of the 3DS and Wii U systems.
This seismic shift in the gaming industry is part of a much larger online move known as cloud computing. To learn much more about this revolution and how it's changing the face of business, click here to watch a short video we put together for you.