This Disruptive Threat to Console Gaming Is Gaining Momentum


Among the many markets ripe for disruption, console gaming is in dire need. The current landscape remains dominated by the big three: Microsoft , Sony, and Nintendo. The economics of the industry are misaligned though, with the console makers selling hardware near cost and relying on upfront licensing fees from game developers.

That structure inherently favors the bigger players and those high barriers to entry make it increasingly difficult for smaller and more innovative developers. That's where Ouya comes in.

Oh yeah
Last summer, Ouya started as a Kickstarter project seeking $950,000 in funding in order to create a lightweight gaming console that offered free-to-try games. The start-up garnered incredible interest and raised $8.6 million in the process -- over nine times its goal. That's definitive evidence that gamers are indeed quite interested in what Ouya has to offer.

Source: Ouya.

The platform will be based on Google Android Jelly Bean and piggybacks on mobile trends in more ways than one. The $99 console is powered by an NVIDIA Tegra 3 processor that's frequently found in smartphones and tablets. The business model is also similar to what's commonly found in mobile app stores nowadays, where the platform operator takes a 30% cut of sales.

At $99, the console is likely selling at or near cost, with the company making money off its cut. All games are required to include a free-to-try mode, which can also include entirely free-to-play games. That also takes cues from patterns in the mobile space, where upfront costs have been eschewed in favor of in-app purchasing, which has become the favorite monetization tool of most of the highest-grossing titles.

In an interview with GamesBeat, Ouya CEO Julie Uhrman said the company's momentum continues to grow, and it recently began shipping out the first batch of consoles to developers for testing. The console's full launch is slated for March, and Uhrman said she's excited with how much interest Ouya is forming ahead of launch.

Mr. Softy plays defense
For what it's worth, Microsoft is rumored to be considering a move into more casual gaming with an Xbox TV set-top box. The software giant already has a large presence in the living room thanks to the current installed based of Xbox 360 consoles, and the Xbox 720 is expected to be detailed officially later this year.

So far, the company has sold a cumulative total of 70 million units, including 1.7 million during the third quarter. Still, Microsoft's entertainment and devices division that includes the Xbox business has a big red hole to dig itself out of, although the good news is that it now consistently generates operating profits.

If Ouya is able to make a big dent in the console gaming market by tempting gamers into the lower-end casual segment, that could hurt Xbox unit sales.

NVIDIA wants to play
NVIDIA also recently surprised investors with its Project Shield, a misguided move into portable console gaming. One of Project Shield's fatal flaws is that NVIDIA is planning on profiting up front, which limits its disruptive potential and renders it merely another "me, too" offering in a crowded space.

The company has yet to announce official pricing or availability, but has said it will be comparable to current handheld consoles. That means it will likely end up costing between $200 and $300, or two to three times what Ouya costs.

Both Project Shield and Ouya will run Android-based games and be powered by NVIDIA mobile processors, but one notable difference is that Project Shield will run on a newer Tegra 4 processor. Still, it's hard for the average gamer to justify that price differential.

The good news
Heading into launch, Ouya is still finalizing some of the details and tweaking its controller design. This is the most promising threat to the traditional licensing model backed by larger console makers -- and that's good news for consumers.

It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

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Fool contributor Evan Niu, CFA, has no position in any stocks mentioned. The Motley Fool recommends Google and NVIDIA. The Motley Fool owns shares of Google and Microsoft. The Motley Fool is short Sony. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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