Will Google's Nexus Android Gaming Console Flop?

Google (GOOG +2.66%) (GOOGL +2.81%) recently unveiled the Nexus Player, an Android "microconsole" for playing games and movies.

The device is equipped with a quad-core 1.8 GHz Intel Atom processor, 1GB of RAM, and an Imagination Power VR Series6 GPU. It runs on Android TV (a custom OS) and includes a custom remote for voice commands. The console and remote will cost $99, while an optional game controller will cost an additional $40. The device is expected to launch in the U.S. on November 3.

Google's Nexus Player. Source: Google

The idea of an Android microconsole isn't new. The Ouya, PlayJam's GameStick, Mad Catz's Mojo, and Amazon's (AMZN +0.13%) Fire TV were all launched with a similar goal: to reach casual gamers looking for a cheaper alternative to pricier mainstream consoles. Will the Nexus Player be a hit, or will it be lost in that crowd of similar set-top devices?

The business of Android microconsoles
Android is an appealing OS for console developers because it is an open source OS that can be easily customized. With Google Play installed, it can also access a library of 1.3 million apps. Granted, only some Android games will work properly with a controller, but an instant library of launch titles can be highly appealing to fledgling console developers.

But since smartphones and tablets still account for the majority of Android devices, there's less incentive for a developer to create controller-based games as opposed to touchscreen-based ones. There's also a lack of identity across these devices. The Ouya had a handful of exclusive games, but most of its Android games were also available for competing devices. Meanwhile, cheaper and smaller devices -- like $40 to $80 "Android Stick" PCs from China -- can easily match their performance:

Source: Company and industry websites

But even at those low prices, demand for Android consoles remains weak. The Ouya, which raised $8.6 million on Kickstarter, was widely considered dead on arrival. A month after its retail launch last June, IGN reported that the Ouya's top-selling exclusive games only sold a few thousand copies, which translated to a few thousand dollars in revenue -- not nearly enough to convince major developers to take the console seriously.

Why Google and Amazon have an advantage
Whereas Ouya and Mad Catz mainly relied on hardware sales to generate slim profits, Google and Amazon are simply planting the seeds to grow software and media sales.

A teardown of Amazon's Fire TV at Teardown.com estimates that the set-top box cost around $93 to manufacture. Since Amazon recently dropped the price to $84, it is likely taking a loss for every unit sold -- which it hopes to recoup with digital revenue.

That's the same loss-leading strategy that the company used for the Kindle. At the end of 2013, Consumer Intelligence Research Partners reported that the average Kindle owner spends $443 more per year than an Amazon customer who does not own one. Amazon hasn't announced concrete sales figures for the Fire TV, the company claimed that it "sold out" of the device shortly after its April launch.

Amazon's foundation for the Kindle, Fire TV, and Fire Phone is Prime, which gives users free two-day shipping, unlimited streaming video and music (on select content), and free monthly e-books for $99 per year. Prime is expanding quickly -- its member base more than doubled from 20 million confirmed users in January to an estimated 50 million users (RBC Capital Markets) in September. Like Google, Amazon takes a 30% cut of app store sales, which also applies to Fire TV games.

Amazon's Fire TV. Source: Amazon

By comparison, Google packages its digital services separately. It offers unlimited music streaming for $10 a month and sells or rents out videos on an a la carte basis. However, Google Play still has more apps than Amazon (1.3 million vs. 240,000 apps) and a wider selection of videos, which means the Nexus Player could be a serious threat to the Fire TV.

The Foolish bottom line
Investors should remember that Google isn't out to make a profit on the Nexus Player's hardware sales. It's selling the console to expand Google Play into living rooms for more digital revenue and to widen its defensive moat against Amazon's Prime ecosystem.

Whether or not this effort will succeed is unclear, since plenty of similar devices -- like the Roku, Apple TV, Fire TV, and Google's own Chromecast -- already exist. Meanwhile, the market for higher quality, controller-based Android games remains a niche one at best, as serious gamers opt to buy full-featured consoles while casual ones stick with mobile devices. Therefore, the device might not completely flop, but I doubt that it will be a game-changing device that redefines Android microconsoles.