Will Web Games Kill Consoles?

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.

Fool contributor Anders Bylund owns shares of Google, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Apple, Google, Activision Blizzard, and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, Nintendo, Google, and Activision Blizzard. They have also recommended creating a synthetic long position in Activision Blizzard, a bull call spread position in Apple, and a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2011, at 12:56 PM, CluckChicken wrote:

    Will Web Games Kill Consoles?

    - No. Just like concoles have not killed off the PC games. Phones/pads will be the home of the simple games, consoles will be where you find the medium complex ones and the PC will have the highly complex ones.

  • Report this Comment On June 29, 2011, at 1:31 PM, manriquesoto wrote:

    Web games are suited to casual gaming which is a total different audience from that of console games.

  • Report this Comment On June 29, 2011, at 4:02 PM, pmart wrote:

    Consoles will probably become more integrated with mobile devices as time goes on. I can also see a move towards streaming games rather than downloading or buying a hard copy, but I don't think that clunky box under my TV will go away until internet connected TV's are powerful enough to run Call of Duty.

  • Report this Comment On June 29, 2011, at 4:49 PM, Brettze wrote:

    I never care much about those shallow quality of graphics inherently found with consoles and online games.. They remind me of pre Pentium games of 20 years ago.. I am more excited about ultra high quality graphics that offer realistic surroundings like shadows, smokes, light streaks, hot girl bodies, violence, Some violent games are way over the boundaries and should be restrained by game developers.. They are in over their heads sometimes.. I also mean real walk through surroundings that gives me goose bumps! I wonder when Microsoft's Kinetec technology will ever catch up with those kinds of games I am talking about here.. eh? I want to be able to pretend to be a real soldier running through explosiions and bullets to save a hot lady!!

    C;'mon MIcrosoft with your kinetc technology, go get 'em!

  • Report this Comment On June 30, 2011, at 8:28 AM, leeharrison1984 wrote:

    not a chance that web games will kill consoles. As others have stated, they are totally different audiences. What is much more likely to happen, and has actually already begun, is console makers incorporating the most popular web games into their marketplaces for play on the consoles. XBOX360 has been doing this for sometime already, including a number of extremely popular indie releases.

    Consoles killing PC games... not likely either but consoles definitely have dragged the overall quality on PC games down due to poor porting practices.

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