Apple's Radical New Product Could Kill Nintendo and GameStop

The next version of Apple TV might pose a major challenge.

Jan 26, 2014 at 8:45AM

Apple (NASDAQ:AAPL) is preparing to launch the fourth-generation Apple TV, according to Mark Gurman at 9to5Mac. Apple's set-top box, which has exploded in popularity in recent months, is about to get a major new feature -- the ability to play video games.

Apple could, almost overnight, rise up to dominate the video-game console market -- in the process devastating both Nintendo (NASDAQOTH:NTDOY) and GameStop (NYSE:GME).

Apple's dominance has long been seen as a foregone conclusion
Industry observers have been expecting Apple to enter the video-game console market for years. Without even trying, Apple is already a major force in gaming -- last year, the company paid out $10 billion to mobile developers, of which an estimated two-thirds went to game creators.

And that's just mobile games -- simple titles such as Angry Birds and Candy Crush that are either free or inexpensive, and are limited by their touchscreen input. Allow iOS games to be played on the big screen, add in controller input (something Apple added in iOS 7), and you have a recipe for dominance.

"I think Apple rolls the console guys really easily," Gabe Newell told students at The University of Texas last year. Newell's company, Valve, is a major force in the PC gaming space. Valve's digital storefront, Steam, accounts for an estimated 70% of digital PC sales.

Valve is attempting to extend its PC dominance into the living room with its Steam Box initiative. Steam Boxes, set to go on sale later this year, will compete with traditional living-room consoles from Nintendo, Microsoft, and Sony. But when asked, Newell said he didn't fear those guys so much -- Valve's true competitor was Apple.

Similarly, Nat Brown, one of the co-creators of Microsoft's first Xbox, predicted Apple's console success last year. Brown, who has since become an independent app creator, wrote:

Apple, if it chooses to do so, will simply kill PlayStation, Wii-U, and xBox by introducing an open 30%-cut app/game ecosystem for Apple-TV. I already make a lot of money on iOS -- I will be the first to write apps for Apple-TV when I can, and I know I'll make money.

Nintendo's key market remains casual gamers
As Newell and Brown note, a video game-playing Apple TV would be a huge threat to all console vendors, but I believe Nintendo in particular is most exposed. Presumably, a $99 Apple TV wouldn't be capable of offering robust graphics on par with the PlayStation 4 or Xbox One, nor would it have the deep online community that Sony and Microsoft have developed.

But Nintendo, whose business is already on the ropes, would be hard-pressed to compete. Nintendo's core market is casual gamers and the young -- the two types of people who would find the Apple TV most enticing. The best-selling Wii games were titles such as Wii Sports, Wii Play, and Wii Fit -- not games such as Call of Duty or Grand Theft Auto. Even Nintendo's titles aimed at core gamers, such as The Legend of Zelda: Skyward Sword and Super Mario Galaxy, sold just a fraction of what Wii Sports Resort sold. Few of Nintendo's games support online play, and the marketing for the Wii's successor, the Wii U, has been aimed entirely at children and families.

When Apple unveiled the iPad in 2010, Nintendo's president, Satoura Iwata, mocked the device, calling it just a "bigger iPod Touch." That may have been the case, but in the years since its debut, the iPad has allowed Apple to become a dominant force in gaming. If Iwata hasn't already, he could come to regret those words.

GameStop depends on physical disc sales
As much as Nintendo would be challenged by an improved Apple TV, GameStop would be just as threatened. The shift toward digital distribution is already pressuring GameStop -- its primary suppliers, including Nintendo, are favoring digital games over physical copies -- but the rise of Apple would devastate the company.

The Apple TV has never had a disc drive -- even the first generation, released almost seven years ago, was completely digital. If games come to the Apple TV, they will be delivered through iTunes -- purchased over the Internet, and downloaded directly to the box.

Outside of selling iTunes gift cards, or perhaps refurbished Apple TV boxes, GameStop will have absolutely no role to play in Apple's video-game push. In short, if Apple TV captures a significant percentage of the video-game console market, GameStop's business model -- selling new and used physical game discs -- will be totally obsolete.

When will Apple release the next Apple TV?
Apple released the third-generation Apple TV almost two years ago -- at this point, the device is well due for an update. Citing sources, 9to5Mac believes Apple will unveil the next Apple TV before July.

If it does feature video-game functionality, Apple should emerge as a major force in the video game industry -- and indeed, it already is. Apple's entrance will shake up the traditional console market significantly, but Nintendo and GameStop are the most threatened.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple and owns shares of Apple, GameStop, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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