Apple’s Next Assault: Video Gaming

by Brad Moon | May 3, 2012 7:00 am

Apple’s Next Assault: Video Gaming

A few weeks ago, tech news websites were aflutter with the news that Apple (NASDAQ:AAPL[1]) CEO Tim Cook had been spotted at the headquarters of Valve[2], a publisher of popular video-game titles and operator of Steam — the dominant online video-game distribution system. This came on top of earlier rumors that Valve was working on a mysterious hardware project, possible a gaming PC[3] that could be positioned to compete with consoles from Sony (NYSE:SNE[4]), Microsoft (NASDAQ:MSFT[5]) and Nintendo (PINK:NTDOY[6]).

This story had the potential to be significant. Steam has 40 million active users (including Mac users), an estimated 70% of the market for downloadable PC games. It operates an online storefront that’s similar to Apple’s iTunes, but for video games. An Apple-Valve partnership would have spelled big trouble for console makers.

The news turned out to be rumor, at least according to Valve, which vehemently denied the visit had occurred[7]. In the two weeks since then, Apple stock has been on a roller coaster, while the company delivered Q2 results[8] that crushed analyst expectations.

Still, whether Valve is involved or not, look for video-game consoles to be in Apple’s crosshairs. After all, the total world market for video games is expected to be $81 billion[9] by 2016, with console sales are pegged at $36 billion that year. It’s estimated that the global market for connected, smart TVs will grow from 100 million today to over 500 million by 2016[10].

Here’s how the current video game console market looks. Keep in mind, video gaming in general is on a down cycle right now. Current-generation consoles are getting long in the tooth, fewer titles are being released and gamers seem to be waiting to see what will happen next.

Microsoft (Xbox 360)

Sony (Playstation 3)

Nintendo (Wii)

Apple seemingly came out of nowhere to completely disrupt the mobile gaming market that had been dominated by Nintendo and to a lesser extent Sony, for the past decade. Sales of video games through the Apple’s App Store, estimated to be in the $900 million range in 2010, surged to $2 billion in 2011. With hundreds of millions of iOS mobile devices and tens of thousands of 99-cent games, Apple has turned the mobile gaming market upside down to become a major player — if not the market leader.

What about the living room? Putting the pieces together, we have a worldwide installed base of current game consoles that’s well over 200 million units. We know that gamers have been willing to pay anywhere from $100 to $500 or more (at launch) for these systems. We know that the three current console makers are seeing declining sales (projected to become a 20% slump in 2012[14]) as consumers appear to be hunkering down and waiting for the next generation of systems. That’s 200 million or more systems that need to be replaced soon.

Another factor is the cost of console video-game titles. Popular titles like Activision’s (NASDAQ:ATVI[15]) Call of Duty: Modern Warfare can move 6.5 million copies on launch day[16] — despite a $60 price tag. One of the ways Apple has been killing traditional portable gaming systems has been its App Store’s wealth of titles and bargain-basement prices that make it tough to justify a $30 game cartridge for a Nintendo 3DS.

The Right Combination

The million (or multibillion) dollar question is, will Apple pull the trigger?

It has tried to entering the home gaming market before, with the dismally selling Pippin. That device, which Apple launched in 1995 and killed in 1997, was sold in partnership with Bandai for $600. A total of 100,000 units were produced. It holds spot No. 22 on PC World’s list of the “25 Worst Tech Products of All Time.[17]”

The company’s other foray into the living room — the Apple TV set-top streaming box — has been more successful (1.4 million of the $99 devices sold during the last holiday season), but those are pretty minuscule numbers compared to the 35 million iPhones and 12 million or so iPads Apple moved last quarter at roughly $600 and $500 a pop, respectively.

The answer may lie in a combination of the Apple TV, the App Store and the long rumored iTV[18] (or Apple TV), along with a generous dollop of Apple’s need to enter new markets.

The pieces are all there. Apple has proven that its hardware can run compelling games, it has the necessary online distribution network and a revenue model that supports selling a large library of inexpensive games. Adding these capabilities to a forthcoming TV set would be a no-brainer, especially since consumers expect so-called smart TVs to become the norm.

Another Disruption

Apple’s explosive stock price is at least partially the result of highly successful launches into new markets. It wasn’t gangbusters like this when the company was primarily a computer seller. But the iPod disrupted then ruled the portable music business, the iPhone did likewise in the mobile phone industry and the iPad is practically the only game in town in the red-hot tablet market.

To continue this growth Apple can’t coast on being great at computers, music, smartphones and tablets — it has to look to the next market it can disrupt and conquer.

A combination Apple TV and game console in the living room has the potential to upend both existing markets, with a good chunk of revenue up for grabs. As an added bonus, doing so would boost the number of living room devices pointed at Apple’s iTunes video-streaming service, pushing App Store revenues even higher.

The living room is looking like Apple’s next big, juicy target.

As of this writing, Brad Moon doesn’t own any shares mentioned here.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. at the headquarters of Valve: http://www.cultofmac.com/160760/why-apple-ceo-tim-cook-met-with-valve-exclusive/
  3. possible a gaming PC: http://investorplace.com/2012/03/should-valve-build-a-pc-gaming-console/
  4. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE
  5. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  6. NTDOY: http://studio-5.financialcontent.com/investplace/quote?Symbol=NTDOY
  7. denied the visit had occurred: http://www.cultofmac.com/161938/tim-cook-didnt-visit-valve-but-apple-is-still-working-on-gaming/
  8. Q2 results: http://investorplace.com/2012/04/once-again-apple-walks-the-walk/
  9. $81 billion: http://www.prweb.com/releases/2011/9/prweb8777406.htm
  10. 500 million by 2016: http://finance.yahoo.com/news/strategy-analytics-china-overtake-us-153800228.html
  11. Xbox division revenue down: http://investorplace.com/2012/04/tech-earnings-how-three-old-amigos-fared/
  12. horrible year.: http://investorplace.com/2012/04/whats-missing-from-sonys-turnaround-plan/
  13. Wii U console: http://investorplace.com/2012/02/how-much-is-riding-on-nintendos-wii-u-ntdoy-msft-sne-aapl/
  14. 20% slump in 2012: http://finance.yahoo.com/news/strategy-analytics-global-tv-games-181400929.html
  15. ATVI: http://studio-5.financialcontent.com/investplace/quote?Symbol=ATVI
  16. 6.5 million copies on launch day: http://www.vg247.com/2012/04/16/modern-warfare-3-sales-begin-to-lag-fall-behind-black-ops/
  17. 25 Worst Tech Products of All Time.: http://www.pcworld.com/article/125772-8/the_25_worst_tech_products_of_all_time.html
  18. iTV: http://investorplace.com/2012/02/do-rumors-of-apple-itv-testing-by-canadian-telcos-seem-credible/

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