Why Apple TV is so dangerous to Sony and Microsoft

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Last week, Dean Takahashi of Venturebeat wrote a post on the threat posed by Apple TV to the existing console manufacturers. He said:

“Apple has the premium brand name and the huge momentum of iTunes, an established store with millions of pieces of content. There are marquee games on the App Store, such as Angry Birds and Doodle Jump. Those games aren’t the equivalent of console hardcore games such as Gears of War. But they are keeping addicted fans occupied for many hours. It would take work to reformat games for the high-definition resolution TVs. But creating apps that run on connected TVs won’t be that difficult, particularly if developers are convinced there is a market for such apps…

Everyone can see this coming. If Apple moves in slow motion and the console makers respond, then they can escape the fate that the portable game devices are facing. But if Apple moves fast and the console makers move slow, then it will be a bloodbath in consoles.”

(For the full argument, go read Dean’s full piece).

Stuart Dredge of the excellent iPhone Games Bulletin picked up on the piece and had this to say:

“I’m not so sure it’ll be direct cannibalisation, at least not of all consoles. The potential of apps on TVs is less about tempting hardcore gamers away from console, and more about reaching a much wider audience of non-console owners, surely?”

I am more inclined to agree with Dean than Stuart, and this is why.

Nibbling around the edges

The console manufacturers run a razor-and-razor-blades business model. As I argued in Death of the Console, Microsoft and Sony offer high-specification technologically-sophisticated pieces of hardware for subsidised (yet still expensive) prices. They then charge publishers around $7 per disc sold as a royalty/tax for publishing on their hardware. (Nintendo, in contrast, makes a profit on every single Wii sold AND charges the royalty/tax).

Hardcore gamers would like to think that they were the people who sustain the games industry. That their money, spent on high-budget titles like Modern Warfare 2 and Red Dead Redemption, is what makes the games industry go round.

Unfortunately, that’s not true.

To make their money back, Sony and Microsoft need lots of consumers buying lots of titles. They need the casual consumers who buy a bunch of Singstars or also-ran titles. They need the mass-market consumers that propelled the PS2 to an installed base of over 140 million.

But here is the terrible truth. I’m not sure that the hardcore audience is growing. I think it’s been stable at the core of people who have bought the Xbox 360 (41.7 million units shipped) and the PS3 (38.1 million units sold). The mass-market that took the PS2 to 140 million bought the Wii instead.

And now Apple is about to offer the mass-market a cheaper, easier-to-use home entertainment box with familiar brands (assuming titles like Doodlejump and Angry Birds and Pocket God make the leap).

They won’t be buying games that give publishers a $7 royalty. Sony and Microsoft will have much less money to spend on developing and marketing new consoles. Meanwhile, the hardcore gamer will demand consoles with more horsepower and games with more assets and explosions, and hence bigger budgets.

The long and the short of it is this: Apple TV won’t suck hardcore gamers away from consoles (not many of them). But it might suck the mass-market gamers who previously subsidised the hobby of the hardcore with their purchases.

If enough of the mass-market moves to Apple TV, the hardcore may not be enough to support Sony and Microsoft’s business model.

And the console dies.

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