So far, 2013 has been a terrible year for the traditional, Windows-based PC. As consumers embrace mobile devices, PC shipments have slowed, dropping 11% in the second quarter after falling 14% in the first quarter -- the worst decline on record.
Yet, despite the fall of the platform, PC gaming has proven itself to be immune. According to Valve, a major PC gaming company, that market is actually growing significantly. Its digital distribution platform, Steam, grew 76% year-over-year.
But Microsoft (NASDAQ:MSFT) could soon lose out on this key demographic of PC buyers. Angered with Windows 8, Valve is planning to enter the console market, introducing an alternative, gaming-centered operating system that could challenge Microsoft's Windows.
SteamOS will power the gaming PCs of the future
Valve has announced that it will turn Steam into a full-fledged operating system; freely available, and based on Linux. In conjuction with a controller, and a lineup of third party-built Steam Machines, Valve plans to bring PC gaming to the living room.
That poses an obvious threat to traditional consoles, like Microsoft's own Xbox, but it could also weigh on sales of Windows. Many PC gamers (including myself) have dedicated gaming rigs, custom-built desktop computers designed specifically for gaming.
Right now, these rigs run Windows, largely because there isn't any other alternative. But as Microsoft charges for Windows, and Valve plans to give SteamOS away for free, the ability for SteamOS to takeover the PC gaming market hardly seems far-fetched -- should it emerge as a viable alternative, gamers will simply decide to install SteamOS and save themselves the cost of a Windows license.
NVIDIA and AMD could gain from the Steam Machine
If Valve's platform catches on, it could set up an interesting dynamic, where PC hardware manufacturers decouple from Microsoft -- the Windows-maker's loss wouldn't necessarily affect them, and vice versa. Specifically, companies like NVIDIA (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) could be uniquely poised to benefit.
NVIDIA has diversified away from the PC, moving into mobile processors and cloud computing solutions, but much of its business is still tied to the traditional desktop. In order to run graphically intense games, gamers must purchase dedicated GPUs -- a market that NVIDIA dominates.
But Advanced Micro Devices, or AMD, gets any sale NVIDIA loses. Together, the two companies form a duopoly in the space, with about 62% of the market going to NVIDIA and the other 38% going to AMD, according to John Peddie Research.
Shipments of desktop GPUs have been falling, no doubt affected by the PC's decline. NVIDIA's management admits that a weak PC market could weigh on its earnings, but here, the Steam Machine presents a unique opportunity.
Valve has promised that Steam Machines will come equipped with multiple hardware configurations -- gamers can even build their own. With its leading market share, many of them will likely opt for NVIDIA. And if Valve's push into the living room is successful in converting some traditional console gamers to PCs, that could mean more consumers for NVIDIA's products.
Those that don't run NVIDIA GPUs will use AMD products, and they may even go with an AMD processor. AMD's share of the desktop market lags far behind Intel, but AMD processors are popular with gamers. Moreover, both Sony and Microsoft have chosen to go with AMD for their next generation consoles, further strengthening the link between AMD technology and gaming.
Valve stealing Microsoft's dedicated customers
PC gamers may not represent a huge percentage of the total market, but they're one group of buyers that's been loyal to Microsoft. Still, it's hard to compete with free, and should Valve's SteamOS catch on, even PC gamers will abandon Windows.
But some companies could benefit from the rise of the Steam Machine, like NVIDIA and AMD: Valve's success could turn the desktop GPU business from a laggard to an area of growth.
Ultimately, PC gaming doesn't look like it's dying -- even if the Windows PC is.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel 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.