Apple's Stealth Assault on the Video Game Market

Apple TVBy now you probably know that the surprise hit of Apple's (AAPL) latest earnings call was the hockey-puck-size AppleTV device. But a stealth upside for Apple from the new AppleTV could be a backdoor entry into the video-game console market.

Steve Jobs & Co. sold a quarter-million of the $99 video-management and TV program and movie download devices in roughly two months. These numbers simply blew the doors off previous sales numbers for earlier generations of the stylish but slow-selling and far more costly AppleTV. While some analysts panned the new version as not offering enough selection, the early adopters I've spoken to just love it.

They love the new 99-cent rental price on TV shows -- a pittance for an hour's worth of entertainment. They love the device's size and its extreme portability and ease-of-use. The price is nice, too. One hundred dollars is about what it costs to take a family of four to the movies and a fast-food dinner.

The Key Is AirPlay

But what these folks really dug was a little feature that essentially turns the AppleTV into a gaming console that can compete with the Sony (SNE) PS3, the Microsoft (MSFT) XBox and the Nintendo (NTDOY) Wii, among others.

That feature is called AirPlay. It's around for a while as a mechanism for Apple owners to stream music from iPods or computers to stereos and TVs. AirPlay has recently been a popular topic on Apple discussion boards primarily because it allows iPads to stream Netflix (NFLX) videos.

AirPlay is an Apple-centric standard that allows devices (iPhones, iPads) that use Apple's iOS mobile operating system to easily broadcast Web content to a high-definition TV. In fact, AirPlay and the insatiable demand for iPads are likely a good part of the reason why the stock market has sent Netflix shares soaring. The bet is that tablet devices playing videos will significantly increase demand for video-on-demand services.

No Longer Trapped on the Phone

So what's the difference between streaming videos and video-game content? Essentially zero at this point, due to the graphical richness of video-game apps. Naturally, any iOS device can also stream a video game to an AppleTV. So a game being played on an iPhone 4 is no longer trapped on the phone. With a single click, a gamer can push content from an iPhone or iPad to an AppleTV device, which then beams it directly onto any connected HDTV. This also works, from what I understand, for multiplayer games on iOS devices.

The upshot? AppleTV provides the essential link that allows game-sharing and multiplayer play, a critical component of the experience for many gamers.

And the console? Well, it's all on the handset. Users can download games from the iTunes store. The iPhone has all the critical things required for a handset, namely, powerful silicon, an accurate accelerometer and the capability to support other input devices (think joysticks or peripherals). The combination of AppleTV plus iPhone/iPad plus HDTV equals all the key pieces of a full-on rich, multiplayer game system, minus the actual console.

A Model That May Be Dying

This is interesting because, to date, Apple has had a fairly minimal impact on the game business. Yes, lots of games sell through the iTunes store, and all the big game companies make titles for iOS systems. But even the iPhone game best-sellers, like TapTapRevenge, have tallied sales in the scant millions or tens of millions of dollars. Those numbers are dwarfed by the first weekend's sales for fresh releases of massive blockbuster console hits like Call of Duty.

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That said, video-game console makers have struggled lately due to the down economy and increased competition from social-network game-makers like Zynga and from mobile games. In fact, the whole model of releasing a new console every four or five years and forcing users to buy it may be dying as more and more game functionality moves to the Internet and away from the hardware in your living room. In that world, it's all about adding incremental functionality.

Witness Sony's impressive reports of selling 2.5 million Move controllers in less than 30 days. So, in a sense, Apple is taking a stealth, bottoms-up approach to attacking a massive market that's in a state of enormous flux. With video games moving to the cloud, Apple is also beautifully positioned with its enormous download distribution capabilities courtesy of the iTunes store and spanking new data centers designed to handle a deluge of requests.

Game on, video-game giants. Apple is taking aim at your stronghold.

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