Apple TV and the Coming Death of Video Game Consoles

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

“It’s a market we have intense interest in,” Apple’s (NASDAQ: AAPL) CEO Tim Cook told NBC’s Brian Williams back in December. "And it’s a market that we see as having been left behind.” What market was Tim Cook talking about? None other than the TV.

Many analysts have been quick to point out how an Apple TV could challenge the standard cable paradigm -- like the iPod did to the music business more than a decade ago. But cable isn't the only business an Apple TV could shake up. Its potential ramifications for the estimated $65 billion video game industry are enormous.

For years, pundits have speculated that an Apple TV is in the works. Noted Apple analyst Gene Munster has been proclaiming that an Apple TV was “just a couple of years away” since 2009.

Now, four years later, consumers are still stuck with just the $99 Apple TV set top box -- nothing but a glorified way to get iTunes onto a big screen. Apple has characterized the device as more of “hobby” than a real product.

But at any rate, given Cook’s statements, and the fact that Munster predicted the iPad before it was unveiled, it seems likely that consumers won’t have to wait long for a bona fide actual Apple TV.

An Apple TV will likely run some form of iOS
At this point, it’s all speculation, but it seems likely that any TV from Apple would run some form of the iOS operating system. The success of Apple’s other iDevices -- the iPhone and iPad -- has been, in large part, built on the vast and growing library of available apps.

Why would Apple not leverage those apps? Simply put, they would be crazy not to.

Besides the obvious like Netflix and Hulu, among the list of available apps would no doubt be the popular games Angry Birds, Fruit Ninja, and any of the dozen or so made by Zynga like Draw Something or the iconic Farmville.

Apple clearly has an interest in the video game market

When Apple unveiled the new iPad (commonly referred to as the iPad 3) nearly a year ago, the company emphasized the device’s ability to play games. During its introduction, Apple demonstrated the iPad’s video game playing abilities right on stage, playing a version of the graphics-intensive action game Infinity Blade.

Perhaps Apple was only interested in showing off the game-playing abilities as a way to demonstrate the iPad 3’s high-definition retina display. Or perhaps the company has its sights set on the video game market.

Activision-Blizzard’s (NASDAQ: ATVI) Bobby Kotick is concerned
Activision-Blizzard, the second largest video game company on the planet, reported earnings after the bell Thursday. The quarter was solid, and shares had a nice rally in the after-hours session.

But more interesting was a comment the company’s CEO, Bobby Kotick, made on the earnings call.

“I would say, another thing that we are concerned about is, as you start to see Internet-enabled televisions and the App Store reach the television with more -- with a much larger base, it's very hard for us to compete against free. I think there are challenges even at the $0.99. And so to the extent that you see a lot more Internet-enabled televisions, we're going to have the start thinking differently about the content that we would deliver to those Internet-enabled televisions.”

Kotick runs one of the most powerful video game companies on the planet. Activison makes mega hits like Call of Duty and World of Warcraft. If he is concerned by the coming threat of smart TVs, perhaps investors should be as well.

Electronic Arts (NASDAQ: EA) has spent over $1 billion in prepartion for the video game shift
Activison's largest competitor, EA, is also concerned about the shift in the industry. But rather than just make off-the-cuff comments on an earnings call, EA has spent big bucks.

EA acquired PopCap Games in the summer of 2011 for about $750 million -- a figure that could swell to over $1 billion if the company hits certain milestones. PopCap isn't a direct competitor to social game giant Zynga per-se, since the majority of its games are not given away for free. Yet most of PopCap's games, including its mega-hits Bejeweled and Plants vs Zombies, are availble for Apple's iOS. Thus, should an Apple TV pressure the video game industry, EA will have a major subsidy devoted to producing games for that platform.

Prior its acquistion of PopCap, EA did acquire a Zynga competitor in the form of U.K.-based Playfish for $400 million in the fall of 2009. Playfish is known for its free-to-play games The Sims Social and SimCity Social, both of which are played directly through Facebook.

The bottom line
As an avid video gamer, I don’t think an Apple TV is a direct threat to the video game market as it currently stands -- at least, not anytime soon. Cheap games like Angry Birds may be fun to pass the time, but they simply don’t stack up to the full entertainment experience delivered by the major AAA titles -- titles that can only be found on the most advanced video game consoles and most powerful personal computers.

But the continued evolution of the TV -- particularly when Apple finally unveils the real Apple TV -- will present a remarkable challenge to the video game industry's established players.

Should the practice of playing games on smart TVs actually emerge as a solid consumer trend, investors will have to consider how the changing medium will affect individual video game stocks. Games distributed and played on smart TVs -- as Kotick noted -- will challenge the classic video game industry's pricing model.

Some companies (like EA) appear to expect the shift, and have made significant investments to deal with an evolving industry. Others, like Activision, seem to be aware of the coming threat, but have made little substantive adjustments. Of course, it isn't all doom and gloom: A smart TV could give younger companies (like Zynga) a chance to grow.

Ultimately, video game investors seem poised to focus on the industry's new generation of consoles in 2013. Yet this could be a mistake. The biggest challenge to the industry might just be an Apple TV.

joekurtz is short shares of Netflix. The Motley Fool recommends Activision Blizzard and Apple. The Motley Fool owns shares of Activision Blizzard and Apple. 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!

blog comments powered by Disqus