How Apple will disrupt the game console market

I have read of rumors of Apple entering the video game console market this year but I don’t really believe any of them. The financial details of the business are not something that Apple likes and it is hard to enter an existing market unless the current players are not serving a market need. Mac sales took off after the Vista OS caused an unprecedented level of hysteria about rolling back to an older operating system. The original iPhone had a killer web browser and GUI for interacting with the device.

Then I read this article this morning and it got me thinking. The current game console business involves years of R&D, the release of a powerful system that is initially sold at a loss which is then made up by a tax on game sales. Historically the average time between console releases has been 5 years with the older model selling for another year or two after the release of a new model. The X-Box 360 and PS 3 may buck this trend due to the release of the PS Move and Kinect which are killer products for interacting with a game console. In the past the standard for measurement of a new console has been graphical horsepower, the new fad is how you interact with the product as well as content consumption.

From a technical standpoint a traditional game console is a box with a powerful processor and dumb controllers to send commands to the box. If you want to play at your friends’ homes you have to take some storage with you for the game data, controllers and the game.

But what if someone were to change this? What if someone were to make a small and cheap box to receive the data from the processors and display them on the TV and the console along with the controller will always be with you? And instead of a 5-10 year life cycle what if the devices not only had a 2-3 year life cycle but each year the processing power of this handheld console increased by a factor of 5, 7 or 10 as new models are released. And what if the games for this console cost $10 or less compared to $60 for the traditional console.

Yes, i’m talking about the Iphone, the iPod Touch and the iPad along with the Apple TV being used to display the picture. The current theory is that these devices compete with the handheld gaming devices sold by Sony and Nintendo, but I don’t agree. I think that Apple has a clear plan and road map to disrupt the home entertainment landscape as we know it. The Apple TV is the current dumb terminal in the Apple ecosystem. It displays 720p which is the current standard for console games. The Iphone, IPod Touch and Ipad are the handheld game consoles. The cost ranges from $199 to $829 with a cell phone contract being required in some cases. The current CPU power of the A5 may not be as powerful as the X-Box 360 but the power of ARM CPU’s as well the GPU’s that Apple ships with their products is increasing every year with 2012 being the year where ARM is supposed to reach parity with the current generation of consoles. There are also the issues of depth, replay ability and multiplayer with the game consoles winning on all counts.

But what if you look out 3-5 years? Flash storage is becoming cheaper every year and soon we will be carrying over 128GB of flash everywhere we go. Samsung and other companies are building new factories to produce Flash storage with ever small circuits. This will enable iOS games to become longer with deeper story lines as well as give people the ability to carry their games with them everywhere. Wifi and cellular networking in your gaming device will bring new dimensions to multi-player games. People will be able to play a game during lunch break at work or on the train back home. There will no longer be a need to schedule a multi player session since everyone will have their console with them and the network infrastructure is everywhere. Apple’s Game Center will also grow and mature to become an X-Box Live competitor.

I think that in the coming years we will see Apple disrupt the game console business as they have disrupted other businesses. I don’t even think that Apple has to reach processing power parity with the current game console players to disrupt their businesses, just the perceived value of the products in the eyes of consumers. At some point in the near future the processing power and storage of these devices will be so great that most people will not buy multiple consoles and some will not buy any. As the installed base of iOS devices grows into the hundreds of millions publishers will be able to sell games at cheaper prices than traditional consoles.

Just think about this for a minute, if you buy a Playstation 4 or X-box 720 for the $399 price what do you get? You get a box that can play games that cost $60 each. Since the games are so expensive you spend a lot of time reading the reviews to only buy the better games and keep your purchases confined to holidays and special occasions. You also get the ability to watch DVD/Blu-Ray, listen to music, and stream some TV and movies depending on which product you buy. If you buy a $199 iPod Touch for your kids you get a device that can play games that range from free to $15 anywhere, surf the internet, receive email, help with home repairs, help your child in school with tens of thousands of educational apps, read books, listen to music, play movies, monitor health statistics, text via imessage, sext with friends, and look cool in front of other people. And what if this device was 50% to 80% as powerful as the traditional game console with cheap games?

My prediction that the lower cost of Apple devices combined with the lower cost of content and shorter release cycles will disrupt the game console industry and cause the weaker companies to exit the market. My prediction is that Sony and Nintendo will exit the hardware console business just as Sega did so many years ago. Microsoft’s plan to make the X-Box into a complete home entertainment system with the ability to stream live TV is what I believe will allow them to stay in the living room. I believe that over the next few years the history of the last few decades will repeat itself. Cheaper mobile devices that offer more value than stationary devices will gain market share and the market for stationary legacy products will decline.

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