Unless they evolve, video game consoles may go extinct. (Christopher Serra, For…)
At the video game industry's first Electronic Entertainment Expo 16 years ago, Sony Corp.'s PlayStation and Sega's Saturn dazzled attendees and defined the cutting edge of coolness with their CD drives and three-dimensional graphics.
This week, as the industry gathers in downtown Los Angeles for its annual E3 extravaganza, some experts are questioning how significant those boxes of electronics really are in a rapidly changing video game business.
After dominating the market for decades and making their way into 1 out of every 2 U.S. homes, consoles are beginning to face serious competition as teenagers and adults increasingly play games designed for smartphones, tablets and online social networks.
"Consoles are now only a segment of the video game industry," said Kevin Bachus, a former Microsoft Corp. executive who helped launch the original Xbox and is now chief product officer for social network Bebo. "The rest of the industry is growing faster and outpacing consoles."
A recent report from Deutsche Bank Securities Inc. projected that through 2014, spending on "social games" on networks like Facebook would grow 46% annually, other online games 23%, and mobile games 19%.
Meanwhile, spending on console-game discs is projected to drop 6% a year.
Overall game sales in the U.S. are expected to mushroom to nearly $30 billion over that time period from about $20 billion last year.
The trend is already evident in the market for portable consoles made to play on the go. Nintendo Co. once ruled the roost with its Game Boy, selling more than 100 million units since 1989. But the company recently acknowledged that sales of its new 3DS device were "not what we had expected."
Many in the industry attribute the Nintendo 3DS' disappointing launch to the popularity of iPhones and Android phones. Although most consumers buy smartphones to talk and email, they discover they can also use the phones to play games that typically cost less than $5, as opposed to $40 for 3DS titles.
Consoles are far from dead, however. Nintendo's announcement next Tuesday debuting its next console, code named Project Cafe, is expected to generate headlines around the world. And through Internet connections, consoles such as the one Nintendo is slated to unveil will share in some of the growth in online gaming.
But if current trends continue, consoles may become niche products for hard-core gamers, digital media hubs for which games are just one function, or historical curios like Pong arcade machines.
"It used to be that if you wanted to play an interactive game, you could only do it with a console made by one of the big three manufacturers," said J.T. Taylor, an analyst and managing partner with Arcadia Investment Corp. "The traditional video game guys have lost market share, wallet share, eyeball share and coolness share."
The video game console business began in the 1970s, first gaining prominence with Atari's 2600 system. But it wasn't until the Nintendo Entertainment System hit the U.S. in 1985 that consoles became the industry's driving force. They have since been updated every five to seven years with new generations of competing devices that offer jumps in processing power.
Nintendo has remained a mainstay of the industry since the mid-'80s, while former rivals such as Atari and Sega have faded and been replaced by Sony and Microsoft.
Over the last two generations, launching a new console has required an investment of more than $1 billion in research and development, manufacturing, marketing and developer support. The makers earned that money back, however, because they once had a lock on the video game industry and collected royalties on every title sold.
Today the market is more diffuse. More than 85,000 games are available for Apple Inc.'s iPhone and iPad alone. And although their production values aren't nearly as good as those of top console titles like Halo, many players find that they're good enough.
"In the past few years a whole new area of gaming has opened up in which the power of consoles really doesn't matter," said Feargus Urquhart, chief executive of Irvine game developer Obsidian Entertainment Inc.
There's still a segment of the video game market, of course, for whom only the best will do. The avid gamers who bought more than 20 million copies of last November's Call of Duty: Black Ops are unlikely to abandon their favorite military shooter game for an iPad app.
"Fortunately, we still have a very concentrated audience for our games," said Ted Price, CEO of Insomniac Games Inc., a big-budget console game developer in Burbank.
But if consoles cater only to young male devotees of action games, they may alienate a broad demographic of potential customers. Women accounted for 46% of all game purchases last year, according to the Entertainment Software Assn., the trade group that stages E3. However, most Xbox 360 and PlayStation 3 owners are men.