Revolt of the Game Machines at CES

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The big news at this year's Consumer Electronics Show (CES) may be the effort to raise an old technology niche from the dead. 

For many years, the game console market was dominated by three names – Nintendo, Sony (SNE) and Microsoft (NASDAQ: MSFT). But for the last few years, consoles have been losing out: to Internet-based games, to mobile games, to social games.

The last time the market was in this kind of turmoil, a decade ago, new interfaces pulled it out of the spin. Nintendo brought out the Wii, a dedicated gaming system with a unique interface that captured players' motions, whie Microsoft eventually brought out the Kinect, a completely wireless interface that it is now bringing, in fits and starts, to both the PC and robotics markets.

But the Kinect came out several years ago, and the market has stagnated. Many wonder whether dedicated game consoles have a future. Now the companies that supplied these console makers with hardware and software, tired of waiting for a turnaround, are taking matters into their own hands. Two were at CES making debuts of their own machines. In addition to wondering whether they can get traction in a crowded market, analysts were left scratching their heads over whether the console market will survive at all.

Valve Bites Microsoft

Privately held Valve Software is the more intriguing launch, one Microsoft has to watch closely. Valve's Steam distribution system holds a virtual lock on games sold to Microsoft PC users. But with Microsoft opening its own app store with Windows 8, and seeking to get the same 30% cut of revenues Apple demands on its app store, managing director Gabe Newell felt he had to go into another direction, and take the future of the company into his own hands.

The result is a Steam Box, a Linux-based system that connects Steam to your TV.  PC OEM Xi3 is working on the hardware under the code name Piston.  It opens up HD TVs to gaming, and of course all games sold through Steam run on it, so it has a lot of software and a large audience ready for it.

If the Steam Box is a success, it will provide enormous pressure on Microsoft, which is planning a new entry in its Xbox line for a June announcement.  Microsoft is suffering from the same problem Sony created for itself with the PS/2 – trying to do too much from a single device. In this case, Microsoft thinks it can control the living room with the Xbox, and add home automation tools to it to control your whole house. Valve's games-only approach, at a lower price point, may prove appealing.

nVidia SHIELD and GRID

While Valve is taking a software and distribution approach to the gaming problem. NVIDIA (NASDAQ: NVDA) is taking a hardware approach. Its new console is dubbed the SHIELD, and it's designed to stream games wirelessly from your PC to your TV, then play them there. It comes with a streaming platform called GRID for distribution of games and other files, supporting the company's graphics chips and delivering to PCs and Android devices, not just SHIELD.

Nvidia, however, is best known as a graphics chip company. It has gained some traction with add-in GeForce cards supporting its graphics, but with the demise of that market it badly needs another way into consumer wallets. SHIELD and GRID look like a bet-the-company play, an integrated gaming system CEO Jen-Hsun Hwang demonstrated personally at the Palm Hotel. 

Until this show some analysts had been wondering whether the game universe was about do dissolve into the general Internet marketplace, and whether dedicated gaming hardware had a place in the market. Now, suddenly, instead of three flailing entries in this market we have five, each with a different approach.

None of these companies are setting the world on fire. NVDA is down almost 50% from its 2011 high of $25/share. MSFT is in a mid-20s holding pattern awaiting news on the success of its Windows launch, which is now due near the end of the month.

Software Sells Hardware

Usually skepticism is limited to whether one product or the other will dominate a market. This time, there is skepticism about whether the market still exists at all. Will players respond to graphics, to distribution, to interfaces, or will they respond at all?

My guess is they won't respond to anything until there's a hot new game requiring one of these platforms. What we have here are a bunch of movie houses waiting for someone to produce a hit. Software sells hardware.


DanaFBlankenhorn owns shares of Microsoft. The Motley Fool recommends NVIDIA. The Motley Fool owns shares of Microsoft. The Motley Fool is short Sony Corp (ADR). 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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