Will Smart TVs End the Game Console Business?

by Anthony John Agnello | February 9, 2012 12:15 pm

Will Smart TVs End the Game Console Business?

Time was, a video game console had five years on shelves before getting put out to pasture to make way for the latest, greatest technology. Those days are over.

Today’s devices, like Nintendo‘s (PINK:NTDOY[1]) Wii, are past their expiration dates. While that company is preparing to release a new living room machine this year, and even though its competitors are rumored to be preparing their own releases for 2013, the age of the gaming console as a viable business may be over. Televisions, strangely enough, will be the death of them.

Considering the frequency with which other tech toys are upgraded, it’s shocking how slowly each generation of video game consoles gets pushed into obsolescence. Apple (NASDAQ:AAPL[2]) puts out a moderately improved iPad and iPhone every year. Sony (NYSE:SNE[3]) puts out in excess of nine new HD television models once the calendar turns around.

By those standards, today’s living room gaming machines are antiques. Sony’s PlayStation 3 and the Wii will turn 6 years old this year. Microsoft‘s (NASDAQ:MSFT[4]) Xbox 360 will be 7 come November. Contributing to these relatively long lifespans: the prohibitively high cost of developing high-definition video games. (In the case of Wii, a device that can’t output HD graphics, these long product cycles helped enable that console’s creation).

The TV as gaming conduit

In fact it has only been in the past two years that consumers have fully embraced high-definition gaming consoles—the Xbox 360 saw its best sales in 2010-11. But slow and costly HD game development is having another effect on the market other than extending product lifecycles: consumers are increasingly gravitating to lower-cost games on mobile devices and social networks, with companies like Apple and Farmville creator Zynga (NASDAQ:ZNGA[5]) reaping the benefits. How is the living room market changing though? While the current crop of game machines have embraced digital distribution, with Sony, Nintendo, and Microsoft all opening stores for low-cost downloadable games, television makers may be negating the need for game consoles at all.

Take, for example, LG‘s (NYSE:LGEAF[6]) new line of Smart TVs. The company announced a partnership with Unity Technologies on Tuesday that will allow games built using Unity’s tools to be played directly on LG’s televisions. Unity itself offers a set of tools used by developers to make games for multiple devices, including both mobile devices, like the iPhone and Google (NASDAQ:GOOG[7]) Android phones, as well as the Xbox 360 and PlayStation 3. LG’s TVs will skip the middleman entirely, by shipping with a built-in gaming controller, negating the need for an additional gaming device.

LG is hardly alone. Samsung‘s (PINK:SSNLF[8]) ES8000 line of Smart TVs can also download games from the Web, like Rovio’s ubiquitous Angry Birds. Apple, of course, is rumored to be preparing its own line of HDTVs for release this year. The so-called iTV will run on the same iOS operating system as the iPhone and iPad and will support motion controls a la Microsoft’s Kinect, meaning that games that use touch controls on handhelds could be adapted for hands-free play by people sitting on the couch at home.

The fate of the Xbox

Speaking of Microsoft, some believe that Microsoft will have to embrace this shift away from game consoles sooner rather than later; the next Xbox may very well be a Smart TV. Speaking with website CVG, David Perry of cloud-based gaming service Gaikai said, “My prediction is that Microsoft will have to make a TV. What choice do they have? There have been lots of reports that Apple has bought out a large LCD panel-making company. It’s pretty obvious that they’re on the trail too.”

Now privately held, Gaikai is one of the companies investors should keep an eye on as this new market emerges. That company is one of a growing number of services that offer cloud-based streaming of games. Think of it like Netflix (NASDAQ:NFLX[9]): consumers access the service via a Web-connected device, like a Smart TV, and a video game is streamed over the Internet and played online, without running off a separate gaming device in the consumer’s home. Gaikai competes with companies like OnLive and even retailer GameStop (NYSE:GME[10]), which is building a similar streaming service that is expected to open this year.

The PlayStation 3, Xbox 360, and Wii may have successors, but the age that brought them to popularity is certainly over.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello[11] and become a fan of InvestorPlace on Facebook.

Endnotes:
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  5. ZNGA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZNGA
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  7. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  8. SSNLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=SSNLF
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  11. @ajohnagnello: https://twitter.com/#%21/ajohnagnello

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