Sony's (NYSE:SNE) PS4, Nintendo's (NASDAQOTH:NTDOY) Wii U, and Microsoft's (NASDAQ:MSFT) Xbox One have been locked in a closely watched battle for supremacy in home gaming consoles. Sony is currently in the lead, Nintendo is in second, and Microsoft is in last place -- but all three companies face problems in different areas.
Sony has underperformed Nintendo in its home market of Japan, Nintendo is struggling to sell the Wii U in Western markets, and low demand for Microsoft's Xbox One forced the company to match the PS4's price of $399.
The problem with falling console prices
But a more pressing, less frequently discussed issue is that gamers' price expectations have not kept pace with inflation.
The PS4, at $399, is actually the cheapest console in Sony's history, according to IGN. The first PlayStation, which debuted at $299, would cost $460 in today's dollars. The PS2, which also launched at $299, would cost $407. The PS3, which launched at $599, would cost a whopping $695 today.
Since Microsoft unbundled the Kinect to reduce the price of the Xbox One to $399, it's clear that it represents a sweet price point for most consumers. However, Microsoft and Sony are already working with very thin margins -- the Xbox One minus the Kinect costs $396 to manufacture, while the PS4 costs $381, according to research firm IHS.
This means that when the next ninth generation of home consoles arrives, inflation will make it tough to launch a similarly feature-packed system for the same price. Therefore, let's look at three ways Sony, Nintendo, and Microsoft can learn from their mistakes in the eighth generation to cut costs in future console generations.
1. Stop focusing on media consumption
There are already plenty of products -- including Google's Chromecast, Roku, and Apple TV -- that allow consumers to stream media from a home network or the Internet. These devices generally cost between $35 and $100, and stream popular services like Netflix and Hulu without any issues. The market hasn't stopped growing yet -- research firms Parks Associates estimates that worldwide streaming device sales will double between 2013 and 2017 to annual sales of 330 million units.
It's not expensive to add these services to the operating systems in a PS4, Xbox One, and Wii U, but it can be costly to bundle additional hardware, such as cameras, motion sensors, and microphones to manage the systems. Meanwhile, both Microsoft and Sony are launching original streaming content for their consoles -- further raising the costs of supporting the Xbox One and PS4.
Simply put, customers who want a media streaming accessory can simply buy a device far cheaper than the PS4, Xbox One, or Wii U. Consumers buy pricier gaming consoles for a simple reason -- to play games. There's no need to take over the entire living room.
2. Stripped down, cloud-based systems
Meanwhile, console manufacturers should remember that consoles typically offer a comparable experience to PCs for a lower price. However, the price gap is narrowing these days -- Valve's Steam machines, which are aimed at living rooms, can cost as little as $560.
To remain cheaper than PCs, the next generation of consoles will likely ship in spartan models without optical disk drives or other bells and whistles. Peripherals -- like the Kinect, cameras, and other external devices -- will be sold separately or bundled with the games that require them. Consoles will also likely be much smaller and become mostly dependent on the cloud for downloading and streaming games.
In other words, gaming consoles should ideally return to their roots as stripped down, gaming-only PCs, rather than aspiring to become all-in-one media "supersystems."
3. Experimenting with modular designs
Last but not least, modular computing could offer a flexible solution to cost management.
Modular computing splits computers into easily replaceable components, such as its CPU, GPU, and RAM, instead of combining those functions on a single board. But unlike the idea of building a desktop computer from scratch, modular computing is based on components that can be easily swapped out like Lego blocks by the average consumer.
For example, if Sony builds its next PlayStation with modular technology, consumers could buy a cheap base system with a CPU, GPU, basic memory, a Wi-Fi module, and a hard drive -- everything a gamer needs to start playing games. Consumers can then choose to purchase additional features to plug in, such as a camera, motion sensors, an optical disc drive, and additional controller ports based on their personal needs. Those extra modules could also be manufactured by third-party companies.
Modular designs would be smarter for home consoles because companies would no longer need to cram as many features as possible into a single console for the lowest possible price.
The Foolish takeaway
In conclusion, investors in gaming companies today should remember two key things -- the launch costs of consoles have not kept pace with inflation, and consoles are now packed with features that many consumers never asked for.
In my opinion, eliminating the focus on media consumption, removing unnecessary hardware components, and experimenting with modular designs could help console makers produce cheaper home consoles in future generations.
What do you think, fellow gamers and investors -- are my three predictions accurate or off the mark? Please share your thoughts in the comments section below!
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Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of 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.