Game Over: Why the Console Business Is Doomed

Video-game console makers apparently believe that their business is going to be saved by motion-sensing technology that could let you play Madden NFL 11 by running around your living room and hurdling the dog.

Um, right.

Based on what's happening at the huge "E3" Electronic Entertainment Expo gaming show in Los Angeles this week, it's looking like consoles have finally jumped the shark. The business model is gasping like the plot of Star Wars: The Clone Wars. For a host of reasons, the console's best days are behind it.

Total sales of consoles -- Microsoft's (MSFT) Xbox, Sony's (SNE) PS3 and Nintendo's (NTDOY) Wii -- are in decline. Overall, the U.S. games business is down 11% this year, and industry revenues shrank by 8% in 2009 to $19.7 billion, according to industry research group NPD.

Admittedly, use of existing consoles is creeping higher -- up by 10% this year, according to Nielsen. But that's because the game boxes are increasingly being used to do something other than play games, says Brad Raczka of Nielsen. People are using consoles to play DVDs, go on Facebook, download Netflix (NFLX) movies and do video chat -- all activities you can do just as well, if not better, on other kinds of hardware.

Meanwhile, forces are lining up against the console. Teens and adults who aren't hardcore gamers are shifting their time to social network games like Farmville and games on their smartphones. (I'm totally taken by Ragdoll Blaster.) Give most of that casual gaming market a choice between buying a next-generation console for $300 or an iPad for a little more than that, and many are going to pick the Apple (AAPL) product and shift their gaming to that device.

Welcome to the Cloud, Gamers

At the same time, game-streaming start-up OnLive announced at E3 that it will go live Thursday with 23 titles. OnLive and other similar ventures are threatening to prove that consoles are a 20th-century technology model up against a 21st-century trend toward cloud computing, media downloading and entertainment that follows you anywhere.

Think of how the whole console ecology works: You buy a stand-alone, powerful piece of hardware that only has one real purpose -- playing games. It's only compatible with games made for that hardware, so if you switch to a different brand, your old games won't work -- the equivalent of making you buy all new software if you switch from a Dell laptop to a Toshiba. And then, to get the content -- i.e., the games -- you have to go to a store and buy physical media at inflated prices. Consumers are already ditching music CDs in favor of music downloads. How long before they lose patience for buying hard copies of games?

These days, the cloud is all the rage. Ideally, we'd like our applications, personal files and entertainment to be stored in data centers and available on any of our devices through an Internet connection. Console games are stuck on your home TV. A cloud-based game would let you start a game on your home TV, pick it up on your iPad while you travel, and finish it on your laptop when you get to your destination.

OnLive opens that possibility. So far, the technology seems to work -- you can play graphics-rich games like Crysis over the Internet with no latency, just as if they were on a console. In fact, you can play Crysis on any computer, not just a souped-up machine with a high-end graphics card. The game sits on an OnLive server, available wherever you happen to be. Whether OnLive can find the right pricing, cost structure and marketing appeal to make its business work remains to be seen. But by making the technology work, it shows that cloud-based gaming is possible -- which in turn shows that console gaming's best days are behind it.

The Console Empire Strikes Back

At E3, the console makers are fighting back. One of the show's biggest announcements was of the Microsoft's Kinect, an add-on for the Xbox that uses cameras and motion sensors to track body movements, letting users control their games without touching a controller. It doesn't feel like the breakthrough the Wii represented when Nintendo introduced it in 2006. Kinect will have its fans, but it's not likely to reinvigorate the Xbox. Meanwhile, Sony revealed more about its new motion-sensing controller called Move, which it hopes will boost the popularity of its PlayStation 3.

But the thunder was stolen from both of those announcements when Apple unveiled the iPhone 4 last week. The new iPhone has a gyroscope that lets it detect motion and gestures, and that's expected to lead to a new round of innovative mobile games for the smart phone -- the kinds of games that are already stealing time away from consoles.