Google (NASDAQ:GOOG) (NASDAQ:GOOGL) recently unveiled a partnership at I/O 2014 with Razer, a maker of high-end gaming PCs and laptops, to develop an Android-based home gaming micro-console capable of playing games, videos, music, and more.
The concept isn't new. Last year, Ouya and Mad Catz launched two lackluster Android micro-consoles, the Ouya and the MOJO. Nvidia (NASDAQ: NVDA) launched SHIELD, a dedicated handheld for Android games, which also fared poorly. Earlier this year, Amazon (NASDAQ:AMZN) released Fire TV, a micro-console running on a forked version of Android.
But Google was not actively involved in the development of any of those systems. With Razer's micro-console, Google will take a hands-on approach similar to its efforts with LG in the development of its Nexus smartphones. With that kind of backing, Razer's consoles have a higher chance of succeeding in the living room where Ouya and MOJO failed.
Why Android micro-consoles flopped in the past
The Ouya was one of the most disappointing products of 2013. The $99 console initially sold out at Amazon and GameStop, but mediocre hardware, a cheap controller, and a lack of killer games quickly sunk the system.
Mad Catz's MOJO -- nicknamed "Ouya 2.0" by many gamers -- had a more powerful system-on-chip (Nvidia's Tegra 4 vs Tegra 3), double the RAM (2 GiB vs 1 GiB), and twice the amount of storage (16GB vs 8GB) as the Ouya. Unfortunately, it was also twice as expensive, with a launch price of $200. Amazon's Fire TV, which is slightly less powerful than the MOJO, only costs $99. For $270, gamers could simply buy Nintendo's Wii U instead.
There also weren't enough controller-based Android games to justify the purchase of an Ouya or MOJO. There are certainly some impressive looking controller-based titles, like Asphalt 8, Deus Ex: The Fall, and Shadowgun, but those games still pale in comparison to mainstream console titles in terms of graphics, gameplay, and longevity. Moreover, most Android developers still develop touchscreen-only titles for a simple reason -- smartphones and tablets still account for the vast majority of Android devices.
An unprofitable business model
But the fatal flaw in the Android micro-console business model is that the manufacturers had to rely heavily on hardware sales instead of software sales. For example, Sony (NYSE:SNE), Microsoft (NASDAQ: MSFT), and Nintendo are willing to sell their consoles at a thin margin or a loss because they recoup those costs through sales of games, which cost $40 to $60 each. They also take a cut of sales of third-party titles.
Android games are free or cost a few dollars each. Yet even at those low prices, Android users aren't willing to pay up -- a recent study from Andreessen Horowitz revealed that the revenue generated per Android user was roughly a quarter generated per Apple (NASDAQ: AAPL) iOS user. Furthermore, if games are purchased from the Google Play Store, Google takes a 30% cut of the sales, with only a small percentage going back toward a distribution partner like a handset, tablet, or console manufacturer. That's the reason Amazon replaced Google Play with its own Appstore on its Fire OS devices.
To retain more software revenues on an Android micro-console, companies have to develop their own Android storefronts with exclusive games. That's the path Ouya took, with mediocre results. The Ouya's top-selling exclusive launch game, Towerfall, has only sold 7,000 copies. At $15 apiece, that translates to $105,000 in sales, of which Ouya retained 30%, or $31,500. That's not bad for a tiny company like Ouya, but it would be disastrous by mainstream standards.
How Google could make Android micro-consoles a reality
Together, Google and Razer's console could address those weaknesses.
Based on its gaming PCs, Razer will likely launch a higher-end machine -- a departure from the low to mid-end performance of the Ouya, Fire TV, and MOJO. This could make it the Android equivalent of Valve's Steam Machines. If Google can court developers as Valve did and secure triple-A titles for the console, it could gain legitimacy as a viable alternative to the PS4, Xbox One, or Wii U. Ideally, Android gamers could get Mass Effect 4 instead of Mass Effect: Infiltration, and Dragon Age: Inquisition instead of Heroes of Dragon Age.
That might actually be quite easy, considering that Sony reportedly charges developers $2,500 per development kit to make PS4 games. The Xbox One functions as its own development kit, and Android and Linux (which Steam Machines run on) development kits have always been free. If Google and Razer follow in Valve's footsteps and convinces developers to sign on, Android could be reborn as a platform for triple-A titles, as opposed to a platform for $1 games that few people want to buy.
Last year, Google launched Google Play Games, a gaming hub similar to Apple's Game Center and Amazon's GameCircle. The service already has 100 million users, making it bigger than Steam and Xbox Live. This means that the pieces of a gaming network are there, but Google and Razer need to figure out how to convert those members into paying gamers.
The Foolish takeaway
In conclusion, we've seen that people generally don't care about mid-tier Android gaming consoles aimed at the niche $100 to $200 market between the Chromecast and the PS4.
Therefore, if Google is serious about gaming, it needs to strike hard at the high end of the market instead. If Google and Razer can produce an attractive console that can deliver triple-A games to the living room, it could unite the Android and PC gaming ecosystems while disrupting sales of higher-end consoles and all-in-one boxes like Amazon's Fire TV.
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Leo Sun owns shares of Apple and Google (C shares). The Motley Fool recommends Amazon.com, Apple, Google (A shares), Google (C shares), and Nvidia. The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), Google (C shares), and 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.