Amazon Marches Into the Video Game Console War

Despite crowding in the space, it's a good move for AMZN

Amazon Marches Into the Video Game Console War

Only a few months ago, the battle of the next-generation video game consoles looked like it was going to be Microsoft’s (MSFT) Xbox One against Sony’s (SNE) Playstation 4. Nintendo (NTDOY), which had last Christmas all to itself after launching the Wii U in November, failed to take advantage of the head start, and the Wii U is now being outsold by the company’s previous console, the Wii.

If there was going to be anything that might spice up the console wars this Christmas, it was the possibility that upstart Nvidia (NVDA) and its Project Shield might disrupt things a little. Then came news that Apple (AAPL) was adding external game controller support to iOS 7 (opening the doors to using its Apple TV streaming box for gaming), followed by claims that Google was working on its own Android-based video game console.

Now it appears that Amazon (AMZN) is getting in on the act too, with rumors coming fast and furious that the company intends to ship its own Android-powered video console in time for Black Friday.

So the battle for the living room has suddenly morphed from a Sony vs. Microsoft duel to an all-out rumble, with major players across the consumer technology industry preparing to wade into battle. But why would Amazon get involved? Why go up against established console makers and a pair of technology giants whose tablets and smartphones are already credited/blamed with the decline of the handheld gaming industry?

An Amazon video game console might seem like a high-risk venture that’s outside its area of expertise, but upon further inspection, the move actually makes sense.

First, Amazon is already represented in the full spectrum of digital content for home consumption: streaming video, digital movie and TV show purchases, digital music and e-books. Video gaming via a set-top console would be a natural extension of its product lineup.

Second, Amazon already has established relationships with video game publishers. It sells video games the traditional way (physical copies) for consoles and PCs. It also operates its own app store and sells video game apps (based on its own forked version of Android) for use on Kindle tablets.

Third, the company already has everything in place in terms of infrastructure, account management and online storefront to make the move. This would just be another product, and although the sorts of casual games that tend to dominate the app-based video game market run on local machines instead of being remotely hosted, Amazon’s AWS infrastructure investment will be more than up to handling online gaming if needed.

Fourth, having its own set-top box would be a boost to Amazon’s video streaming and sales business. A video game console as a video streaming box is a no-brainer. Having its own box, Amazon would extend the closed-system approach already used on its Kindle tablets and e-readers, tying owners to its offerings. Business Insider already reported Amazon was building its own video streaming box for a fall release and making it a combo gaming/video device shouldn’t be a major engineering challenge.

Finally, there’s the money.

While Amazon is famous for looking at the long term, investing in infrastructure and selling hardware at cost in order to build market share and draw customers into its media-consuming ecosystem, an Android-based video game console could be a money maker.

Even at $99, Apple is making money on its Apple TV box. Ouya, the Kickstarted Android video game console that launched this year also sells at $99 and is presumably priced to make a profit — and that’s without the economies of scale an Amazon could command for hardware. Then there are the game apps, from which Amazon takes a 30% cut.

Microsoft puts the value of the video game industry worldwide at $65 billion, with $27 billion of that going to consoles, $10 billion to tablets and smartphones and $8 billion going to handheld gaming devices like Nintendo’s 3DS.

Hardcore gamers looking for intense multiplayer titles with 1080p graphics are never going to abandon the Xbox and Playstation for app-based gaming. But if a $100 Amazon video game console went up  against a $499 Xbox One and $399 PS4, you can bet there are some parents who would bite, and a system like this would stand a good chance of capturing a chunk of that mobile gaming dough too.

In short, Amazon could be looking at a huge source of revenue that stands to boost its video business and could also help to sell Kindle tablets (which would likely be positioned to perform double duty as a remote, optional game controller and possibly an auxiliary gaming display).

If Amazon, Apple and Google all show up with video game consoles this Christmas, who stands to get fragged? The development would take some of the shine off the Xbox One and PS4, costing some sales when it comes to price-conscious shoppers.

The real losers are bound to be Nintendo — which is already struggling to convince gamers the Wii U is anything more than a casual gaming platform — and upstarts like Ouya and Nvidia who are likely to see their new products buried under a marketing barrage and the promise of established gaming app ecosystems.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/08/why-would-amazon-wade-into-the-video-game-fracas/.

©2014 InvestorPlace Media, LLC

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