Gaming Consoles' Apocalypse: The End May Be Near

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

As Nintendo (NASDAQOTH: NTDOY.PK) gears up to release its new console, Wii U, we’ve got hardcore video gamers hoping that Sony and Microsoft will follow suit and soon announce their plans for upgraded consoles. A fellow blogger feels that now may be the right time for the two competitors to consider upgrades. He may be right in his reasoning but I beg to differ. It’s no secret that the appeal for gaming consoles is diminishing. As if smartphones and online social media gaming weren’t already big enough threat to the gaming consoles industry, now comes cloud-based gaming. 

The cloud-based gaming market is still very dilute but poses a serious long term threat to Sony’s (NYSE: SNE) PS3, Microsoft’s (NASDAQ: MSFT) Xbox 360 and Nintendo’s Wii consoles. Additionally, when you’ve got a big company like Samsung jumping into the gaming arena, you can expect some serious competition from console vendors going forward.

Samsung: The new competitor in the gaming industry

Earlier this year, we had Nvidia launch its Kepler chip, its first Graphics Processing Unit (GPU) especially designed for the cloud. In case you don’t know (which is highly doubtful), cloud-based services allow you to play games on any device connected to the internet. Following its launch, one of the first movers to use the technology to its advantage was Samsung.

Samsung practically makes everything—from washing machines to kitchen appliances, from tablets to smartphones, from televisions to home theatres, from cameras to printers, and even security systems.  During this decade its technology has outpaced many competitors and I personally use many of their products and love them.  Being a huge fan of video games, I always wished they made their own gaming consoles. However, they came out with better plans.

Instead of making an exclusive gaming console, Samsung decided to use gaming to boost sales for their Smart TVs (which, by the way, are amazing too!). Samsung partnered with Gaikai, a cloud-based video game platform provider, and launched Samsung Cloud Gaming on E3 this year. This joint venture allows users to stream games on Samsung’s LED 7 and 8 series Smart TVs. All a TV-owner needs is to get a USB universal game controller and play the game via Gaikai’s cloud app on Samsung’s internet-connected Smart TV. Gamers are able to play the trial versions of their favorite games without having to download or install the games and once they like a game they can pay to stream it for full.

Samsung Smart TV owners can find beta versions of many high-end games, including Mass Effect 3, Rayman Origins, and FIFA 2012, on their Gaikai portal. More exciting games are expected to come our way because Samsung has further rounded up more than 35 game developers/publishers for this venture. When you'd be getting all those games directly on your TV, who'd want to spend extra bucks on a console? Besides, other superior technologies in the pipeline, like using your smartphone as a joystick, are also likely to render consoles redundant. 

Problems of cloud-based gaming

Like I said earlier, the cloud-based gaming market is still dilute or, I should say, in its introduction phase. Video game streaming is not yet as common as music and movie streaming, mainly because of a more popular alternative of console-based gaming, complexity of cloud video-gaming model, and a higher bandwidth required to play high resolution games. Another problem is that games cannot be compressed into smaller files, like movies. Gaming lag can also be very annoying if the cloud platform is slow. The level of agility, quickness, and precision required in some multiplayer games cannot YET be fully replicated in cloud gaming. Since, cloud-based gaming is still in the development stage, it may initially disappoint some hardcore gamers. 

Winners of Cloud Gaming

One good news for game publishers like Electronic Arts and Activision Blizzard that will benefit them in the long run is that cloud gaming is expected to raise their margins. They won’t have to develop the same game for 3 different consoles which will help them cut down on costs. Also, cloud gaming will curb piracy. Since the game exists on a cloud server and you don’t own it, so, you can’t copy and reproduce it. 

Other winners will be internet service providers including AT&TVerizon and Time Warner Cable that are also liking this idea and planning to deliver video games directly to televisions. 

Competitors in the picture

After Samsung struck the deal with Gaikai, Sony came into the picture. Sony had indicated prior to the deal that it will be buying a cloud-based services platform but hadn’t given a name. It turned out the platform it was buying was Gaikai itself. However, post-acquisition, Sony let Gaikai continue its engagement with Samsung. So, it is critical to note here that while Sony may consider launching a new console, it also has the option of integrating cloud-based gaming to its television sets, just like Samsung. As of now, Sony limits its online videogame content to its PS3 console. But in my view, Samsung doesn’t need to worry about it much since it always has the option to switch to Gaikai’s competitor OnLive, a similar cloud-based services platform, in case things go wrong (which, to me, is unlikely). Remember, Gaikai is only powering the games. Samsung is the one getting them from publishers and running them. 

In a nut shell

While the idea/trend of cloud-based gaming is still new to consumers and will take time to formally develop into a full-fledged substitute of gaming consoles, it still looms as a noteworthy threat to consoles and their vendors. Releasing an updated console may help the vendors boost sales initially but, in the long run, other stakeholders (game publishers and internet carriers) may push for the more appealing cloud technology. Also, console manufacturers will have to see whether their new consoles will have any significant upgrades. Otherwise, the move may give a deadly blow to their balance sheets. 

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PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (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.If you have questions about this post or the Fool’s blog network, click here for information.

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