The Next Big Disruptive Threat to Gaming

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Console gaming is under siege!

The sector is being attacked from all angles, and while I firmly believe there will always be a market for gaming enthusiasts, this remains a shrinking market, as an increasing proportion of gamers can now be satisfied with alternatives of lower but sufficient quality.

Can I get your digits?
The numbers speak for themselves. Researcher NPD Group released its estimates of June domestic video-game sales last week, and red was the theme of the report. Software and accessory sales plunged 29%, while overall retail sales fell by from $990 million to just $700 million. Microsoft (Nasdaq: MSFT  ) sold 270,000 Xbox 360 units in June, roughly half the 507,000 units sold a year ago. Sony (NYSE: SNE  ) doesn't report PlayStation 3 unit sales, but NPD still pegs Mr. Softy's market share north of 40% for the 18th consecutive month.

Apple (Nasdaq: AAPL  ) has had a major impact on the market, interestingly by pure accident with iOS. The iPhone maker is probably going to get serious about further disrupting gaming, but now there's another threat to the industry.

What's it called?
Ouya is a small cubic console that costs just $99 and will run Google (Nasdaq: GOOG  ) Android. Any developer can publish games to the ecosystem, and all games will be free to play. The device is even designed by popular designer Yves Behar.

Source: Ouya.

Source: Ouya.

The project began on Kickstarter to raise funds earlier this month, with a goal of $950,000. It hit that goal in just over eight hours, when it topped $1 million. As of this writing, the project's funding has already soared to nearly $5 million, with more than 38,000 backers supporting the project, and the first batch of 1,000 units (that went to those pledging $95 or more) is already sold. And it still has 23 days to go!

Clearly, there's massive interest for such a disruptive offering.

Mobile lessons learned
While the console runs Android 4.0, that doesn't mean you're just going to find your usual fare of Angry Birds, Cut the Rope, or other touch-based games.

Ouya will use a familiar wireless controller, and existing Android games and apps can be ported over easily, but ideally developers will make games just for Ouya. In fact, there will still be a proprietary Ouya store (as opposed to using Google Play), complete with a 30% toll for developers passing through, so while there are still technically some walls to this garden, they're much easier to scale than in the traditional console space.

The approval process is supposed to be minimal, but an important requisite is that all games must have a free play option. "Free" could include just a demo, but it could also be an entire game, with the developer relying on in-app purchasing for sales, taking a page out of the mobile playbook.

Under the hood
The company is upfront with welcoming the hacker culture of ambitious users wanting to modify the system. It even actively encourages it. But the stock hardware itself can't hold a flame to the horsepower of traditional consoles.

It will use an NVIDIA (Nasdaq: NVDA  ) quad-core Tegra 3, typically found in smartphones and tablets, while the Xbox 360 and PlayStation 3 use much beefier processors with much more powerful graphics, and that's before we even talk about the next-generation Xbox "720" or PlayStation 4 that are due out within the next few years.

Disruptive signs
The real disruptive potential lies in the model, though. The key is the open approach to the ecosystem.

Currently, consoles are sold at a loss in the early days because of hefty hardware costs, with manufacturers hoping to make up the difference later on in licensing fees from third-party developers on software titles, which can be anywhere from $3 to $10 per unit. Console makers have traditionally had stringent controls over what types of titles are available on their platforms. Eventually, component costs come down, and the vendor can potentially achieve break even or -- gasp! -- profit on each unit.

The Ouya is very much taking the mobile model, where developers simply relinquish a cut of sales instead of a direct licensing fee, and the barriers to entry are much lower, allowing a plethora of developers into the ecosystem. The "freemium" approach has also taken off in mobile, giving away the game in hopes of selling virtual goods. Interestingly, this is required in Ouya, so gamers at the very least get to try out a game before they buy in further.

By using cheaper components, like the Tegra 3 that costs about $20 to $25, it's more likely the console can be sold at or near cost. That means the graphics quality will be undoubtedly lower than beefier traditional consoles, but the real promise lies in the low-cost and prospect of being just "good enough" for the mainstream. Mobile computing performance is growing exponentially also.

Microsoft, Sony, Nintendo, and even Apple should be worried about Ouya. The device has many of the classic characteristics of a disruptor, from its low cost to the perceived underperformance relative to the mainstream market. It's like plugging mobile gaming into your TV with a controller and opening it up to any and all developers.

At $99, it's worth a shot.

Apple's expected jump into the television-based gaming market could give it even more fuel for growth, but even without it, the Mac maker has plenty of other opportunities going for it. Sign up for this new Apple research service for all the details. There's another disruptive technology threatening the manufacturing industry, and it promises to reshape how products are made. This video report will tell you all about it.

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Google, Microsoft, and Apple and has sold shares of Sony short. Motley Fool newsletter services have recommended buying shares of Microsoft, Nintendo, Apple, NVIDIA, and Google, creating bull call spread positions in Apple and Microsoft, and writing puts on NVIDIA. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

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 July 17, 2012, at 6:56 PM, Guyver wrote:

    The mainstream market has proven that they are not ready to make gaming a central part of their home entertainment experience. Many people bought a Wii strictly for Wii bowling and never really purchased much more.

    Games on this console are going to look horrible as they'll likely be blown up low resolution android mobile games. I can definitely see this box being a competitor to something like an Apple tv or Roku box. As a developer I like the open aspect of this device though.

    We'll discuss this topic again when Valve announces a Steam box.

  • Report this Comment On July 17, 2012, at 7:50 PM, matthewluke wrote:

    This Ouya isn't a disruptive threat to anything. Unless we're talking about disrupting an already dying segment of the gaming industry. Console gaming is just on the downturn.

    If someone wants to make some consoles via Kickstarter funding, that's pretty cool. I wish them good luck. But it isn't something that will disrupt Sony, Nintendo or Microsoft. Those three already have their own industry-specific issues that are disrupting their business models (as in people are just less interested in console gaming).

    Maybe those big three should be on the lookout for an actual Google gaming box (made by Google), an update to Apple TV that allows app downloads or an Amazon gaming box (since Amazon already has their own app store and games), but not this small kickstarter project. Unless we are on the lookout for these Ouya guys to end on a team developing a gaming box for a one of these bigger company.

    There are always small upstarts every console generation that release a console or a handheld to go up against the established players. Small upstarts that have far more funding than 5-million dollars.

    Also, there are iOS games and Android games that already use actual physical controllers (with games made to specifically with those physical controllers). iCade, Xperia Play, Atari Arcade, Duo Pop, etc.

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