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A New Generation of Gaming Is Here

By Travis Hoium - Nov 29, 2012 at 1:07PM

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The old console business is being replaced by a more interactive and customized user experience.

For more than three decades, the console has been the center of our video game experience. Over that time we've gone from simple pixelated games to complex graphics experiences and corded controllers have been replaced by wireless versions, but the overall concept hasn't changed much.

Nintendo's ( NTDOY -2.10% ) Wii U is the latest of these consoles, and it sold out over the weekend, indicating that there's still appetite for the next generation of consoles. The device is compatible with old games and remotes, but adds the ability to access Netflix ( NFLX -2.33% ), Hulu, and cable TV on a new touchscreen controller, in an attempt to grab a bigger piece of the entertainment pie. This won't be the first such launch. Next up will be new consoles from Sony  ( SONY -0.12% ) and Microsoft  ( MSFT -1.97% ), which are both expected by next holiday season.

But I have to wonder how long consoles will be used by anyone but the most hardcore gamer. By next year we may be looking at an entirely new gaming landscape. The old model of making a new console every few years and selling $50-plus games is changing as devices with games become more ubiquitous.

Competition from everywhere
The biggest challenge to traditional gaming comes from the very devices you may be reading this article on. Smartphones and tablets are now the greatest competition to the console because computing and graphics power is quickly making complex games more viable on these smaller devices. NPD Group, which tracks video game sales, said that third-quarter physical format spending was down 16% but digital format spending was up 22%.

But simply playing games on a tablet or smartphone won't keep people from buying consoles and is only a piece of the competitive pie. The real game-changer will be when, for example, iPhones and iPads can connect to an Apple ( AAPL -1.17% ) TV through AirPlay to control games with touchscreens and motion control. Apple hasn't yet opened the Apple TV to developers in this way, but I expect it in the near future.

Google ( GOOGL -0.68% ) has also indicated it is working on an open standard similar to AirPlay for Android devices and the Google TV. So far, there's been little reason to purchase a Google TV, but this could add interesting capabilities to the platform.

Microsoft is also in an interesting position with its commonly used operating system, a new Windows Phone 8 operating system, and the Xbox console. The company has released some of these capabilities with Xbox SmartGlass, and a next-generation console could be more analogous to an Apple TV than a traditional gaming console.

Game makers are already on board
Gaming companies like Electronic Arts ( EA 2.19% ), Activision Blizzard (NASDAQ: ATVI), and Take-Two ( TTWO 2.73% ) have already made a big transition to new gaming platforms. Some of their best-selling games are now on mobile platforms. Zynga's ( ZNGA 5.89% ) entire business is built around mobile and social gaming platforms.

More open and less expensive platforms like Apple, Google, and Microsoft offer developers a new world of possibilities. Some of the capabilities that come standard on a smartphone or tablet today are still foreign to the console business.

Traditional gaming is on its last leg
Outside of a shrinking percentage of hardcore gamers, the traditional console business will slowly die. I think Apple TV, Google TV, and even your PC may soon become the center of gaming that is augmented by smartphones and tablets. Companies like Nintendo need to innovate beyond the console platform the way other game makers have before being rendered obsolete by a changing industry.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$161.84 (-1.17%) $-1.92
Zynga Inc. Stock Quote
Zynga Inc.
ZNGA
$6.11 (5.89%) $0.34
Electronic Arts Inc. Stock Quote
Electronic Arts Inc.
EA
$125.27 (2.19%) $2.68
Nintendo Co., Ltd. Stock Quote
Nintendo Co., Ltd.
NTDOY
$55.80 (-2.10%) $-1.20
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$602.13 (-2.33%) $-14.34
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$323.01 (-1.97%) $-6.48
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,840.03 (-0.68%) $-19.29
Sony Corporation Stock Quote
Sony Corporation
SONY
$120.02 (-0.12%) $0.14
Take-Two Interactive Software, Inc. Stock Quote
Take-Two Interactive Software, Inc.
TTWO
$165.78 (2.73%) $4.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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