With Microsoft (NASDAQ:MSFT) now defining itself as a "devices and services" company, it seems likely that the Surface and Surface Pro won't be the last hardware Microsoft makes. But will the next Microsoft-made PC be dedicated to gaming?
According to Kara Swisher at AllThingsD, Microsoft CEO Steve Ballmer has floated the idea. With Ballmer set to retire, he probably won't be there to see the project through (assuming, of course, that it makes it past the planning stages) but the very fact that it's being discussed suggests that Valve's Steam Machine project has caught Microsoft's attention.
If Microsoft plans to take PC gaming more seriously, it could have an immense impact on how PC games are currently distributed -- in particular, Electronic Arts (NASDAQ:EA) and GameStop (NYSE:GME) could be affected.
Valve's Steam Machine project
This week, PC gaming giant Valve hit a major milestone in its ongoing Steam Machine initiative, shipping 300 test units to a select group of users. Some have characterized Valve's Steam Machine as a rival to Microsoft's Xbox One -- indeed, it's Valve's attempt at bringing PC gaming to the living room.
However, from a hardware standpoint, the Steam Machine is largely indistinguishable from any other gaming-class PC. In fact, in the future, anyone will be able to make their own Steam Machines just by plugging their gaming PC into their HDTV. Where the Steam Machine differs from a traditional desktop PC is the operating system. Rather than run Microsoft's Windows, Steam Machines are powered by Valve's upstart, open-source, Linux-based SteamOS.
Valve's decision to create a rival operating system only makes sense in light of Microsoft's move to introduce its own competing app store in Windows 8. Valve's Steam is perhaps the largest "app store" in the PC universe, doing hundreds of million of dollars in annual revenue.
Although the Windows Store might best be characterized as a barren wasteland, it still poses a significant threat to Valve should it ever catch on. As with other app store models (including Valve's with Steam) Microsoft takes a cut of developer revenue. As Microsoft owns the Windows platform, it could, in theory, force (or highly encourage) developers to use its app store for software distribution in future versions of Windows.
In short, the Steam Machine project is Valve's attempt at heading off competition from the company that owns the very platform it depends on.
Is Microsoft going to take PC gaming seriously?
Microsoft has long been criticized in the gaming community for failing to take PC gaming seriously. Its "Games for Windows" project was discontinued in 2012, after six years of largely being ignored by Microsoft.
But as Microsoft embraces its new strategy, it may be viewing PC gaming in a new light. Earlier this year, it hired one of Valve's top employees to lead a renewed push into PC gaming, and has planned on bringing some of the Xbox's most promising exclusive titles, including Project Spark to the PC.
The focus of that push will probably be centered around getting more PC games into Microsoft's Windows Store. Microsoft's recently released Halo: Spartan Assault must be purchased through the Windows Store, for example; future Microsoft PC games would almost assuredly be handled through the Windows Store as well.
Rival digital distribution platforms could struggle
This emergence of a dueling PC app store landscape could pose a threat to other companies that run rival distribution platforms (Valve's Steam may be the largest, but it is not alone). In particular, Electronic Arts' Origin and GameStop's Impulse could be threatened.
Electronic Arts owns a number of popular PC franchise, including SimCity and Battlefield. Most of EA's older PC games are available on Steam, but new titles, including Battlefield 4 and the SimCity reboot, are not. Instead, they're available on EA's own rival app store Origin. EA has said this is due to technical limitations more than competition concerns, but I think it's clear that EA has an obvious incentive to restrict its PC games to its own distribution network.
EA is more a video game publisher than a seller of games, so even if Origin were to be marginalized by the rise of SteamOS and a greater focus around Microsoft's Window store, the company could still thrive. However, given all the resources EA has poured into Origin, it certainly wouldn't be a positive development.
GameStop, too, could suffer from a more restricted gaming distribution system. GameStop acquired Impulse in 2011 as a way to keep it business relevant in an era where videogames are increasingly moving toward digital distribution. Its digital sales aren't a major part of GameStop's business -- last quarter, digital sales accounted for about $138 million of GameStop's $2.1 billion net sales -- but it is growing (up 8.6% from last year).
Is PC gaming becoming more console like?
In contrast to consoles, PC gaming has always had an air of the Wild West to it. With such an open platform, all manner of different distribution systems flourished.
But as Microsoft is now taking greater control of Windows (in particular, Windows software distribution), Valve has responded with its own Steam-centered operating system. If Microsoft comes to see gaming as strategically important to Windows -- something that would be confirmed by a Microsoft-built gaming PC -- PC gaming distribution could become far more centralized, becoming more console-like in the process. Investors in companies that run their own PC gaming distribution networks (GameStop and Electronic Arts) should keep a close eye on how Microsoft treats PC gaming in the coming months.
Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of GameStop 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.
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