Apple Needs to Get Serious About This Major Disruption

The video game market is a sector that Apple (NAS: AAPL) more or less backed into. I find it unlikely that Steve Jobs saw it as an industry ripe for Apple to step into as the biggest, baddest disruptor around, but it was inevitable once Jobs gave in and decided to open up iOS to third-party developers in 2008.

He was initially against the idea of third-party apps on the iPhone, but he eventually caved to pressure from the board and other execs. Apple's decision to open the iOS App Store has been one of the best moat-building moves in the biggest growth markets in generations, and it created a vibrant content platform that became a digital gold rush for developers.

iOS has inadvertently transformed into a major gaming platform, with games currently comprising more than 17% of all available iOS apps.

Video-gaming stalwarts such as Activision Blizzard and Electronic Arts, among others, have brought over many of their respective hit franchises to tap into the explosive growth. Social gamer Zynga (NAS: ZNGA) is using it as a method to diversify away from Facebook's gaming platform, even if that means buying its way to the top, as evidenced by its recent purchase app-maker OMGPOP for an astounding $200 million.

Apple embraced its growing mobile gamer base by launching Game Center in September 2010, adding in integrated social functions for gamers. At the iPhone 4S unveiling last October, iOS chief Scott Forstall mentioned that Game Center had grown to 67 million registered users in its year of existence.

With Apple's full-size TV likely in the pipeline, I'm expecting the device to be another game changer and threaten console gaming with beefy hardware and Game Center directly embedded.

You want in?
The console gaming sector is already difficult, even for longtime incumbents. Sony (NYS: SNE) launched the PlayStation 3 in 2006 and was initially losing tons of money on every unit sold. Initial estimates from iSuppli pegged the loss on the entry-level model at more than $300 -- almost a negative 40% gross margin. At the time, Microsoft's (NAS: MSFT) Xbox 360 was estimated to carry a positive 24% gross margin.

It took almost four years for Sony to get the PS3 to break even on costs. No wonder Sony's most profitable segment is financial services.

Instead of going after dedicated hardware, Apple would probably characteristically integrate gaming functionalities directly into its TV, which would pose a major threat to consoles like the PS3 and Xbox 360. iDevices are already decimating the handheld-gaming-device market, including products such as Sony's PlayStation Vita, so consoles are the next obvious progression.

However, there's always been one major hurdle holding back Apple from seriously disrupting the video-game market that ties back into hardware.

A controller.

Can one size really fit all?
When Jobs introduced the original iPhone, he outlined that one of the biggest benefits of focusing on touchscreen controls was the flexibility that it gave developers. Instead of being constrained to a fixed set of physical buttons, the device was a blank canvas for them.

This has worked out quite well for some gaming titles, such as Angry Birds,Plants Vs. Zombies, or Draw Something (which Zynga now owns), but touchscreen controls simply don't cut it for certain gaming genres. For example, first-person shooters are incredibly difficult to play with a touchscreen.

Google (NAS: GOOG) has recognized this and started including external controller support in Android Honeycomb, giving it a serious advantage with hardcore gamers. For example, Shadowgun on Android can be played with an external controller, while the iOS version is relegated to touchscreen controls.

If Apple's current threat level to consoles is a light shade of orange, then coming out with a controller would turn it to a deep hue of red.

Think Different
The idea that Apple would come out with a hardware controller seems rather un-Apple, considering Cupertino's aversion to physical buttons and heavy emphasis on touch input. However, Anandtech claims to "know of an internal Apple project to bring a physical controller to market."

It's entirely believable that Apple is aware of this conundrum and has a stealth initiative to consider addressing it (especially considering Android's competitive threat), but certainly no one knows whether mere mortals will ever actually lay eyes on such an offering.

At a minimum, Apple should consider adding in third-party controller support into iOS as a compromise to address hardcore gamers. Apple already works with other accessory makers, many of which would undoubtedly be happy to oblige.

If iOS wants to get serious in the video-game market, then Apple needs to clear the controller hurdle.

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At the time thisarticle was published Fool contributorEvan Niuowns shares of Apple, but he holds no other position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Google, Microsoft, Apple, and Activision Blizzard and has written calls on Activision Blizzard.Motley Fool newsletter serviceshave recommended buying shares of Activision Blizzard, Apple, Microsoft, and Google, creating bull call spread positions in Apple and Microsoft, and creating a synthetic long position in Activision Blizzard. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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