Did This Chip Maker Bet on the Wrong Horse?

Following a series of big quarterly losses driven by long-term weakness in the PC market, Advanced Micro Devices (NYSE: AMD  ) CEO Rory Read decided to implement a new strategy. AMD's turnaround plan involves not only cutting costs, but also reducing AMD's reliance on the PC market by diversifying into adjacent markets.

Of particular interest to AMD are the "embedded" and "semi-custom" chip markets, because it expects those markets to continue growing (offsetting declines in the PC market), and a single design win can lead to a long revenue stream. AMD hopes to eventually derive 40% to 50% of its revenue from embedded and semi-custom chips. One of the biggest early targets for AMD in this respect was the game console market. Indeed, AMD won the designs for all three next-generation game consoles: Nintendo's Wii U, Sony's (NYSE: SNE  ) PlayStation 4, and Microsoft's (NASDAQ: MSFT  ) Xbox One.

Even AMD bears have praised the company for its success in the game console market. However, I am skeptical that this will prove to be a growth market as AMD anticipates. While the outgoing generation of game consoles sold more than 250 million units combined, a growing trend toward mobile and cloud-based gaming could mean that the game console market is ripe for disruption. In other words, AMD may have bet on the wrong horse.

Consumer unrest rising?
Nintendo was the first company to bring a new console to market for this generation, releasing its Wii U console last year. Sales fell flat, totaling just 3.45 million units in the first two quarters after launch. Slow console sales have led to weak developer support, which could make it even harder to boost sales going forward.

Still, AMD bulls and game console fans had high hopes for Sony's PlayStation 4, which was revealed back in February, and Microsoft's new Xbox console, which was unveiled just last month. AMD stated on its Q1 earnings call in April that Nintendo, Microsoft, and Sony were likely to ship more than 40 million game consoles combined in 2013, with that number expected to grow going forward.

However, rather than creating a wave of enthusiasm, Microsoft's Xbox One launch spawned protests among gaming enthusiasts who are worried about the use of digital rights management technology on Xbox One games. The games will need to be activated online, which would make it harder to trade games with friends and would give Microsoft and game publishers control of the massive used games market. Gamers are also worried about the possibility that PlayStation 4 will include some type of DRM, as details on PS4 have been very spotty so far.

Disruption in the console market
Obviously, some gamers will buy next-generation consoles regardless of whether or not they incorporate DRM. Plenty of other people will buy the new consoles primarily for their non-gaming features, such as Xbox One's interactive NFL content offering. However, selling more than 250 million units like the current generation of consoles will mean convincing a lot of people to shell out hundreds of dollars for a console, and then hundreds of dollars more for games. If Microsoft and Sony decide to go ahead with DRM, they could lose a lot of sales, which would directly impact AMD.

Moreover, consumers looking for a good gaming experience have more alternatives than ever before. First of all, the strong success of the Wii, PS3, and Xbox 360 means that plenty of households already have a gaming console. Many people may decide not to upgrade if they don't like the current alternatives. Second, PC gaming continues to offer an alternative to console gaming. Third, the widespread adoption of tablets and smartphones provides casual gamers with a more convenient alternative to game consoles.

Another long-term threat comes from NVIDIA (NASDAQ: NVDA  ) , which has developed a cloud-based GPU platform that will enable developers to offer "gaming as a service." This business model could become very popular with consumers, as it would eliminate the upfront cost of consoles and games, and allow users to stream games to any Internet-connected device. It could also prove to be much more customer-friendly, as people could try a game out before committing to subscribe and getting full access.

Foolish wrap-up
While the game console market is in flux, it should be clear by now that Nintendo, Microsoft, and Sony could have trouble convincing customers that they need to upgrade, given the ready availability of alternatives like mobile gaming and cloud-based gaming. If Microsoft and Sony don't placate fans quickly, the entire console market could stagnate or decline.

AMD is counting on game consoles becoming a long-term growth market, offsetting declines in the PC market. However, the game console market may be ripe for disruption, and the recent DRM controversy could be the catalyst for a shift toward newer gaming technologies. AMD has barely survived the disruption of the PC market. If the company has tied its fortunes to a declining industry yet again, it may not be so lucky in the future.

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  • Report this Comment On June 08, 2013, at 1:26 PM, bugmenot wrote:

    This is a useless fluff piece of an article. AMD didn't "bet" on the wrong horse by supplying its chips to Microsoft, Sony and Nintendo. All AMD did was take an existing SOC that they've been working on for several years now for their PCs and slightly repackaged it for the game consoles. That's about as efficient utilization of resources as you can get! AMD has changed trajectory and understands that the mobile space is where it's at which is why they've worked so hard to integrate their CPU and GPU into a SOC and reduce power consumption as much as possible. AMD is the underdog right now and they're pulling out all of the stops to survive. I think they've got a great product on their hands as I recently purchase an AMD Trinity laptop and are impressed with its performance for the price.

  • Report this Comment On June 08, 2013, at 1:32 PM, techy46 wrote:

    AMD's new strategy may be too little too late but it's worth a try. The procesor chip market is going to see a real shake out in the next 18-36 months.

  • Report this Comment On June 08, 2013, at 1:37 PM, theonlypro4U wrote:

    Instead of your pontificating about the demand for the X-box and PS4... why NOT look at the PRE ORDERS that BLOCKBUSTER in UK already announced?

    UK BLOCKBUSTER announced that the PRE ORDERS for the X-Box One are greater than ANY other product in their 24 year history.

    So, who is an investor to trust?

    So FOOL?

    Or

    The largest PRE order book in the 24 year history of UK Blockbuster ?

    The people of the UK have spoken... But some FOOL was not paying attention.

    The population of the UK are a good representation of the desires of "middle class" people all over the world.

    CLUE IN...

    OR

    FOREVER be a FOOL!!!

  • Report this Comment On June 08, 2013, at 1:59 PM, JoeLemon wrote:

    These articles are getting more annoying. The desktop CPU is going away. All Apple computer use nothing but laptop parts. The new windows 8 are moving to all in one as well that also only use laptop parts. Someone writing an article should know this. Tablets are also slowing moving from ARM processors to laptop processors. The desktop CPU will only be for system builders.

    Cloud based gaming? You mean another version of Steam. Steam has been around what 15 years. People write articles about cloud and don't even understand what it is. Plus people are buying ipad, iphone, etc games because they are $2 or free. The $10 games on an ipad never sell.

    Try before you buy? Seriously you think that is a new thing? Demos use to come in magazines before the internet existed. After the internet you could download game demos. Seriously did this person do 0 research at all?

  • Report this Comment On June 08, 2013, at 2:33 PM, TMFGemHunter wrote:

    @JoeLemon: Steam just saves data in the cloud; your computer or other device needs to do the processing work for the game. GRID is completely different; all the processing work happens in the cloud, so all you need is a TV or tablet and a controller. No need for a PC or console standing by.

    I never said that try before you buy is brand new, but most demos don't offer full features. Since GRID would be a streaming service, companies would be able to offer the full gaming experience for a limited time (say, 48 hours or 7 days) as opposed to offering a limited experience for unlimited time.

    @theonlypro4U: GameStop announced huge "pre-order" numbers for the Wii U, and then sold a small fraction of that number over the whole holiday period. Moreover, consoles have a long life cycle. A record breaking launch is quite possible, but meaningless if sales don't hold up over the next 5-6 years.

    @bugmenot: AMD has been cutting staff left and right over the last couple of years. That's included some development/engineering muscle. Essentially, they're betting that they can make enough money in game consoles and other embedded products to make up for a dearth of investment in mobile.

    Adam

  • Report this Comment On June 08, 2013, at 2:38 PM, TMFGemHunter wrote:

    @theonlypro4U: to put a finer point on it, Microsoft is believed to have sold around 2.5 million Xbox 360 units in the first 90 days after its release (when it was the only new console on the block). Today, total Xbox 360 sales are closing in on 80 million. Even if MSFT has double the launch volume (5 million units in the first 90 days), if Xbox One sales rapidly taper off after that, the console could still produce lifetime sales well below that of Xbox 360. Hope that makes sense.

    Adam

  • Report this Comment On June 08, 2013, at 4:07 PM, josh995 wrote:

    The Wii U had a poor launch for 3 reasons. 1) HORRIBLE advertising. Almost non-existant. 2) Not a good launch library. And 3, which I think is the biggest reason, but also goes hand in hand with 1 - People don't realize Wii U is a whole new product. I do retail marketing and when I visit stores, associates working in the department tell me that people think the Wii U is just a small update to the Wii. Nintendo should have come up with a completely different name than Wii U.

    Sony and Microsoft are not going to have this problem. Just because a lot of people are gaming on mobile devices now, doesn't mean the console market is in jeopardy. I'm a console gamer, but also have games on my phone that I do play. But it is absolutely NO substitute for a big screen shoot-em-up game.

    All these mobile games weren't around when xbox 360 and PS3 came out. Now, everyone has a phone. It's kind of obvious that mobile gaming is going to be a big market. But so is console gaming. Console gaming and mobile gaming are 2 completely different markets with 2 completely different types of players.

    I think AMD made a great choice making chips for all 3 new-gen consoles.

  • Report this Comment On June 08, 2013, at 4:20 PM, placy wrote:

    I've tried the cloud gaming via ONLIVE, and it's okay. Citrix has a cloud "MS Office Suite and ACAD free demo", which is fairly nice; populates your start menu with the software.

  • Report this Comment On June 08, 2013, at 4:40 PM, Zoolotry wrote:

    Obviously you are writing a article w/o knowing what gaming is. These 2.00-4.00 app games are not what us "Gamers" live and die for. We are gamers for the games like Halo, WoW, COD, Gears of War, Forza, metal Gear Solid..the app games are for the general masses that are the casual users and they dont drive the gaming market on the consoles. Now that doesn't mean that Sony or Microsoft won't try to encorporate some market app store to capture these because let's face it...money is money, but tablet and phone gaming is no way COMPARABLE to console gaming.

  • Report this Comment On June 08, 2013, at 4:57 PM, Ryld wrote:

    Net Congestion, Hacking, Government spying, Identity theft, Rising costs, and more all make for this consumers 4 computer, 8 gaming system, 2 net lines in, 2 movie system, Direct TV household saying NO MORE...DRM is the straw that breaks the back.

    I won't buy another system period. The mere discussion of it has totally turned me and mine off to MS and Sony systems as the front for the main culprits. Game theft sucks but I am not paying for the Gaming Industries protection by donating even one minute of inconvenience.

    More Board game nights with family and friends, Card games with real laughter, real faces, and real smiles sounds pretty good for a change.

  • Report this Comment On June 08, 2013, at 5:03 PM, JoeLemon wrote:

    "GRID" isn't new either. There was one for PC games and it had lag. They don't work with fast action games.

    Demos usually let you play the first level. If this gives you full access for 48 hours then no need to ever buy a game. Most games can be beat in 10 hours. Can do that in a weekend when not busy.

  • Report this Comment On June 08, 2013, at 5:17 PM, roberttorsdale wrote:

    I've never, in all my life, seen such irresponsible reporting as the Motley Fool. I wish Yahoo would dump them.

  • Report this Comment On June 08, 2013, at 5:22 PM, cdkeli wrote:

    What's so puzzling is why would these 3 cut-throat console competitors rely on a single company to design their hardware? Surely they'd learned something from the sorry debacle at IBM? Sony appeared to finance the development of Microsoft's console despite despite a divergent architecture and IBM's goofy efforts to keep the teams separate - despite relying on the same people for key solutions,,,or doesn't it matter?! Was AMD the low bidder on the project or appeared to simply offer more than Intel, which couldn't be bothered despite the apparent demise of the desktop?? So many questions,,,

  • Report this Comment On June 08, 2013, at 5:57 PM, TMFGemHunter wrote:

    @JoeLemon: NVIDIA has stated that the lag for GRID games over a normal broadband connection would be comparable to the lag using a console. Obviously, it hasn't been put to the real-world test yet, so it's possible that GRID falls short. But the idea is to provide a console or PC quality gaming experience without needing a console or a PC.

    @Zoolotry: I never said they were the same markets. But the last generation of consoles has sold over 250 million units; that goes well behind hardcore gamers (many of whom prefer PCs anyway). There are a lot of casual gamers, kids, etc. who would have used a console 5 or 10 years ago but will be perfectly happy with tablet-based games today.

    I see GRID as the biggest disruptive force for hardcore gamers (if the technology works as advertised). Mobile gaming is a more important disruptive force for casual gamers. And beyond that you could have some hardcore gamers sticking with PCs or even their current-generation consoles if they don't want a system with DRM.

    Adam

  • Report this Comment On June 08, 2013, at 7:18 PM, hump8389 wrote:

    Someone earlier stated that casual gamers do not drive the gaming market. What do you think the Wii was all about? The Wii was carried on the backs of casual gamers. Hardcore gamers will not keep consoles going as well as they have been. It is the casual gamers that really make the difference. Moblie gaming is eating away at console gaming and no one can deny that. Once these cloud based services get better and better then it will really be a challenge for consoles. I always figured that internet speeds is what stood in the way of cloud-based gaming, but now the consoles will be relying on the internet as well. Now there is no reason to have actual consoles.

  • Report this Comment On June 08, 2013, at 9:46 PM, TEBuddy wrote:

    Nvidia offers something called GRID, doesnt mean AMD doesnt already offer the same thing, and in fact already sells GPUs just for that already employed in such a system, which is likely to grow more than Nvidia's. It will still never have the same potential as hardware in your home.

    AMD's GPU business has actually been profitting over the last several years, and with their new release this year, you should see a huge upset in performance from AMD. And they have a huge resurrgence in CPUs, and are releasing and leading probably the most significant processing evolution since they released the first dual core CPU.

  • Report this Comment On June 08, 2013, at 10:00 PM, lordraptor1 wrote:

    @ theonlypro4u

    the xbox one has a large number of people on the xbox forums that have already decided to switch to sony so if your bb in uk has had a ton of pre-orders great but wait to see how many follow through with the purchase. the way the x one is NOT an all in one unit because the hard drive is NOT user replaceable it is in fact set up just like the original xbox console was and you will need external hard drives ( if that's possible) for use to keep saving games and dlc after you have filled up the 500 gig drive with updates and games.

    the xbox one is a huge disappointment for me as I was looking to own one but after everything I have read online so far I am no longer all that excited and am waiting for E3 to see how bad the console manufacturers screw the pooch.

    however with what I know the ps4 is now my primary choice, followed by the wii u and the xbox one dead last, Microsoft is basically slapping their customer base in the face and gearing more towards those casual gamers and housewives that watch Netflix all the time which is a TINY number compared to hardcore gamers which will yield smaller sales numbers.

    pc gaming is actually on the rise as is those who build their own computers because they know the APU based units are crap ( don't flame cause I know I had one that wouldn't even play wow and it was a new one less than a month old that I ended up trading it off).

    game companies are gonna lose sales due to DRM, and basically telling the customers how and what they can do with a game they purchase ( in essence basically telling the customers that they are long term leasing and really don't own the game).

    so to sumerize, its moves like these drm practices ( which are actually promoting piracy) that get people hacking and cracking games and uploading them to the net.

    when its all said and done if the direction stays the same console gaming is already dead and buried, these companies might consider leaving the game consoles alone for the hard core gamer and make something else for the casual gamer, housewife, movie watcher this would in turn not upset the core gamer base, and create another revenue source for those casual people

  • Report this Comment On June 09, 2013, at 12:47 AM, Plus64 wrote:

    Yet another article from motley fool forecasting AMD's demise.

    I'm shocked! lol

  • Report this Comment On June 09, 2013, at 2:26 AM, spinod wrote:

    So tired of the WiiU being used as an excuse for why the console market is "failing" to the phone market. ITS THE WII. It was a fad to begin with, people are done with it, they didn't want the U. Combine that with the game makers saying it doesn't even compete with PS4 and One makes it worse. Its NOT next generation, its Nintendo finally catching up to THIS generation.

    People are also mad at Microsoft, yes, but are they going "screw it, I'm going to play crap games on my phone!" No, they are going "PS4 IT IS!!!"

    Lastly, tablets and phones have a LONG way to go before even catching up to current consoles, let alone next generation. And it might not make it. Those are dying out too. Apple took its expected numbers back over three times now, and others are not selling well.

  • Report this Comment On June 09, 2013, at 2:27 AM, Changnoi32 wrote:

    At least that silly 'Death of the PC' crap is gone.

  • Report this Comment On June 09, 2013, at 8:28 AM, jwtrotter wrote:

    To answer the title/question: Yes. But AMD really doesn't have a choice to 'not' pursue the consoles. They have to do everything they can to survive . . literally. As it can be seen with the posters who put so much hope into the effect of these 'wins' which really aren't going to help long-term as the article's author points out, many of the posters here cling to ideas that are getting outdated. An example is the idea about lag for any cloud based gaming. The demonstrations by Nvidia with the GRID product show that won't be the case anymore. The lag is based on ecosystems that are being replaced and reconfigured to account for the lag to make the high performance gaming in cloud a real option for hardcore gamers.

    I understand the ardent devotion of AMD investors and speculative investors but it's going to be apparent soon that their hopes are fleeting.

  • Report this Comment On June 09, 2013, at 10:08 AM, josh995 wrote:

    Yeah, mobile gaming is not going to hurt console gaming. The reason mobile gaming is so big is because everyone and their mother has a phone. It's inevitable that it's going to be a big market. And the mobile industry turns over MUCH faster than the console industry. Every year vs every 5-6-7 years. I completely disagree that mobile gaming is going to eat away at console gaming. I believe they will continue to live on side by side, with 2 different types of gamers. Playing Angry Birds on a phone is NO SUBSTITUTE for a fast moving, hardcore, shoot-em-up game except maybe when you're sitting in a doctors office.

  • Report this Comment On June 09, 2013, at 2:10 PM, PoisonControl wrote:

    What I've noticed is constantly missing is any discussion of HSA. HSA will allow for easier programming of both CPU and GPU as a whole (the APU, in other words). And it will likely be an integral part of both Sony and Microsoft's consoles.

    With two major consoles in AMD's corner, this makes it likely that HSA will be a standard. Now think about how programmers will be more likely to port games from consoles to PCs and vice-versa thanks to this standard. AMD will be in the unique position to deliver on APUs that take advantage of HSA.

    Remember how AMD gained marketshare with PCs thanks to x86-64? HSA looks like be the next standard to bring AMD back.

  • Report this Comment On June 09, 2013, at 3:18 PM, JoeLemon wrote:

    The only way the cloud gaming wouldn't have lag is if someone had a very fast internet. Cloud gaming requires you to download pics and send input back. How exactly are you going to download hi res pics that would be 5-6 megs each 60 times a sec? Now you are going to say they will compress then. That means lower quality. How are they going to send over high quality sound to go along with those pics. Lets also not forget that internet providers are putting caps now.

    Cloud gaming will be for low end games only. The PS3 was out for 7 years. You realize in the long run the cloud based gaming would cost more for less.

    This is like all the articles saying everyone want to stream and blu ray is dead. But every time I go to the store the red box is packed. The store went from 1 to 5 in a matter of 6 months.

  • Report this Comment On June 10, 2013, at 12:42 AM, thecrud wrote:

    They bet right, wII fell flat because we got burnt on the first wII and are not biting again.

    The one and PS4 will sell even more than the 360 and PS3. You read it here first.

  • Report this Comment On June 10, 2013, at 8:45 AM, TMFGemHunter wrote:

    @JoeLemon: you're basically saying that it's not possible to stream HD video. There are already plenty of people doing that with Netflix, and internet connections will only get faster. I don't think bandwidth will be a major issue for most people, especially if Google Fiber continues to expand.

    @PoisonControl: Thanks for bringing this up. Maybe you're right, but it seems like a long shot that this will save AMD: most serious gamers that I've talked to are beyond skeptical about APUs. It will be easier to port between consoles and PCs for sure, but I don't think that a large game library will be enough to overcome the current threats to the console industry.

    Adam

  • Report this Comment On June 10, 2013, at 6:33 PM, TMFGemHunter wrote:

    Another potential problem for AMD could be the high price tag (at least the high initial price tag) on the new Xbox One: $499. We'll see what Sony's plans are for PS4, which sort of seems like AMD's last hope for a big winner.

  • Report this Comment On June 17, 2013, at 7:22 PM, GetMeTheBigKnife wrote:

    The author is invested in NVIDIA while the Motley Fool is heavily invested in Intel and NVIDIA.... LOL! That explains the slant on this and so many Fool articles.

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