It's Time for a New Game Console

By Demitri Kalogeropoulos - July 11, 2012 | Tickers: AAPL, GME, MSFT, NTDOY.PK, SNE | 0 Comments

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Flash memory drives, LCD screens, instant streaming video, and capacitive touch screen displays. These are just a few of the tech innovations that were not widely available when the current generation of gaming consoles launched. The seven years that have past since then have been an eternity for technology. To name just one example: in half that time, the Apple (NASDAQ: AAPL) iPad was launched, refreshed twice, and now packs a higher resolution than what Sony's (NYSE: SNE) Playstation, Microsoft's (NASDAQ: MSFT) Xbox or Nintendo's (NASDAQOTH: NTDOY.PK) Wii can deliver.

But this donkey-kong sized foot dragging on the part of console producers is more than just embarrassing. Cratering gaming sales figures are hurting profits throughout the industry. Nintendo booked a significant drop in both hardware and software sales last year. Sony, in real need of a hit that can make up for diving electronics sales, moved less units of its PS3 in 2012 than it did the year before. And Microsoft saw a 16 percent drop in revenue in its entertainment and devices division last quarter thanks to the "soft gaming console market." Downstream, Gamestop (NYSE: GME) recently saw hardware sales drop by 19%, which it attributes to the "late stages of the current console cycle."

We're almost eight years into that product cycle and -- not surprisingly -- consumers don't seem eager to spend another holiday trading consoles that were designed back when MySpace dominated the Internet. 

Don't play with me

But at least one console maker apparently doesn't think we're ready for a refresh just yet. Engaging in a bit of game play itself, Microsoft made a subtle change in its standard reporting a few years back:

From Microsoft's 2008 annual report:

"The lifecycle for video game consoles averages five to seven years."

From the company's 2009 annual report, and every report since:

"The lifecycle for video game consoles averages five to 10 years."

Seldom accused of playing fair, Microsoft moved the goalposts again, and signaled to investors that its current generation won't be replaced in just four years as the last Xbox was. Instead, the wait could be as long as a decade.

Thankfully, all indications are that we won't have to wait that long. Rumors peg the new versions of the Xbox and Playstation for 2013, and Nintendo has already announced that its new Wii will be available for this holiday season.

Keeping score

New console introductions this year and next should inject some much needed energy into the gaming industry. Sony and Microsoft, thanks to high development costs typically see only modest contribution -- or even losses -- from hardware sales so a refresh won't immediately juice profits. But higher margin hardware and accessory sales are sure to boost Gamestop's bottom and top lines, perhaps even staunching those double digit negative sales comps. 

If Gamestop stands to gain the most from a console refresh, though, Nintendo has the most to lose. The company lives and dies by the success of its flagship hardware. Its strategy also differs from the other console makers in that it usually insists on profiting from both hardware and software sales. A strong console launch, not only boosts hardware profits but also lifts sales of Nintendo's vast catalog of proprietary software titles with it. This can lead to massive revenue and profit acceleration, as it did in 2007 when sales almost doubled and operating income more than doubled after the Wii became a hit.

That kind of run doesn't seem likely this time, though. The gaming industry has changed, and not in ways that the creator of the Game Boy has hoped. Social and casual gaming has stolen the thunder from much of Nintendo's "broaden the gaming industry" strategy. There are more people playing video games, just as Nintendo imagined. But they are playing them on their phones and tablets, not in their living rooms.

What's more, the mobile device boom has put powerful pieces of technology in the pockets of millions, dispersing game sales into Apple and Google app stores, and lowering the barriers to entry so that any developer can challenge console makers and pawn off hours of their customers' gaming time.

But despite the risks, the big three console makers need to bring their products back into relevance soon to have any hope of beating back their more nimble tech competitors, who aren't just waiting around for their turn to play.   

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