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Nintendo Is Releasing a New Console; Microsoft and Sony Should Too

Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nintendo is planning to launch its next-generation console, the Wii U, in November. Nintendo’s previous console, the Wii, was released six years ago in 2006. Similarly, Microsoft’s (NASDAQ: MSFT) Xbox 360 and Sony’s (NYSE: SNE) PlayStation 3 were released in 2005 and 2006, respectively. The consoles are old and the gaming industry would benefit from a new generation.

Currently, the U.S. gaming industry is on a big decline. In August, video game sales were down 20% year over year. Additionally, console sales declined by 39% year over year (pcmag).  While there are many factors that affect console sales (e.g., bad economy), old hardware is probably one of the biggest reasons.

Looking at the Xbox 360, it comes with a Xenos GPU, which was designed by Advanced Micro Devices (NYSE: AMD). The GPU has a total of 337 million transistors. The PS3 comes with an Nvidia (NASDAQ: NVDA) RSX GPU, which has over 300 million transistors. Today, the most powerful GPU, the GTX 680 has 3.54 billion transistors. Also, the Xenos and RSX only support DirectX 9, while modern cards support DirectX 11. The CPUs in the Xbox 360 and PS3 are just as outdated. Additionally, the consoles only have 512 MB of RAM. Today, cheap laptops commonly come with 2 to 4 GB of RAM.

Since the release of the Wii, Xbox 360, and PS3, GPU and CPU power have advanced at the rate of Moore’s law. The only reason the hardware in the Xbox 360 and the PS3 are still able to play modern games is that game developers focus on the common denominator, consoles. Developers squeeze every drop of power out of the Xbox 360 and PS3. However, as shown by sales and by the quality of recent games, the current consoles are at or near the end of their life cycles. New consoles would benefit hardware manufacturers, game developers, and consumers.

Hardware manufacturers would benefit from a refresh because the current consoles are lowering the demand for high-end hardware. Modern games are commonly designed to run on consoles first. As consoles age, PC gamers are able to play ports of console games on older hardware. There is no need to upgrade to the newest card when the current one is able to handle it.

As a result, GPU makers Nvidia and AMD face lower demand for dedicated GPUs. While the next generation of consoles will most likely not use the most powerful GPU and CPU available, consoles are optimized for gaming. Thus, next-generation consoles should result in more graphics-intensive games and as a result spur PC gamers (casual PC gamers included) to buy more powerful hardware.

Additionally, Microsoft and Sony would also benefit. While consoles are usually sold at a loss in the early stages (hardware is not cheap), Microsoft and Sony eventually break even and make a profit by taking a cut of the sales from games sold. In the case of Microsoft, it also makes money from Xbox Live. While Microsoft and Sony will likely still sell the consoles at a loss, current console sales are declining. Thus, Microsoft and Sony need a refresh to revive sales. Additionally, the difference in quality of games between smartphones and consoles could spur casual gamers to buy consoles.

Game developers will also benefit from a refresh. Anyone who owns a console has probably noticed that new games look the same as their predecessors. Activision Blizzard’s (NASDAQ: ATVI) Call of Duty: Modern Warfare 3 looks the same as Modern Warfare 2. The game play is basically the same as well except for some added perks. While game development depends on much more than just hardware (e.g. storyline, characters, etc.), the outdated hardware limits creativity. New consoles will have more capability and as a result allow more creativity from game developers.

Finally, new consoles will benefit consumers. Obviously, consumers will get the benefit of more powerful hardware. In addition, consumers should get better games as well. As previously mentioned, game developers will have more room for creativity with newer hardware. With the exception of Skyrim, which provides big improvements in graphics over Oblivion, recent iterations of games are pretty much the same as their predecessors. 

Overall, the Xbox 360 and PS3 are old and outdated and everyone in the gaming industry would benefit from a refresh. For investors looking for companies that would benefit from the next generation of consoles, Nvidia, AMD, Microsoft, Sony, Nintendo, and video game design companies are all worth a look.

Alvin owns shares of Microsoft. The Motley Fool owns shares of Activision Blizzard and Microsoft and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend Activision Blizzard and NVIDIA. 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. If you have questions about this post or the Fool’s blog network, click here for information.

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