Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE) have an opportunity to extend into customers’ living rooms with updated game consoles. However, there are some big risks that go along with that opportunity.
Hard Core
Hard core gamers need high-powered video game consoles and computers to run the often immersive games they play. The graphics are intense, fast moving, and require a lot a math to display properly. However, dedicated gamers are more than willing to pay up for such high-tech systems. Microsoft Corporation (NASDAQ:MSFT)’s Xbox, Sony Corporation (ADR) (NYSE:SNE)’s PlayStation, and high-powered personal computers are the general preference.
Casual
Nintendo shook up the gaming world to some degree with its innovative Wii system. The Wii incorporated motion into game controls and focused more on casual games. That broadened the reach of game systems and games and led to a huge sales surge at Nintendo. However, the Wii isn’t really a serious gamer machine.
What the Wii did was bring video games to the masses. Social games, however, quickly spread to the Internet on social network platforms and mobile devices. That’s been a serious drag on Nintendo’s customer base. The top line has fallen in each of the last three years and now sits at about a third of the 2009 peak.
A Problem
The emergence of the casual market, however, is also part of the problem that Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE) face. The hard-core gamer market is pretty much mature. While the business is still a good one, it will be slow growth at best. To find new customers, Xbox and PlayStation need to go mainstream. That means attracting more casual gamers.
At the same time, televisions are getting more and more sophisticated. It might not be too long before the ability to play games is just another feature on a TV. In fact, iPad and Galaxy games are getting increasingly engaging and complex. However, these little devices also offer up video streaming and web surfing.
To remain competitive, both companies need to go from game console to family media center. And they need to do it fast, before upgraded TVs and new tech gadgets takes their market away. That gives them a short window of opportunity.
The New Devices
Sony Corporation (ADR) (NYSE:SNE) unveiled its PlayStation 4 not too long ago, showing off a few neat features. For example, some games will be created so they can be played while the downloading process is still taking place. The company has been making a point to stress that it wants to be true to its core market. It appears to be trying to establish the console with gamers before trying to broaden out into other areas.
Microsoft Corporation (NASDAQ:MSFT), however, has taken a decidedly different approach with its launch of Xbox One. The company has stressed the console’s entertainment features ahead of its gaming chops. While Microsoft swears that it hasn’t forgotten about the gamers, if it loses that core market, Xbox One could face an uphill battle.
Two to Avoid
Unlike Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE) which have large and diversified businesses, Nintendo is primarily a video game company. Nintendo’s updated Wii game console hasn’t gone over particularly well and the shares remain well off their highs. Investors are better off staying away from this company unless it brings out a revolutionary new product and sales start to head higher.
Sony is currently the subject of hot debate, as a hedge fund manager is pushing for its media business to be split off. Unfortunately, that’s the business that’s keeping the lights on right now, as the company’s device group has struggled. News is going to be the biggest driver here for a little while at least. If there is a split, however, PlayStation would likely stay with the struggling device group. It’s probably best to avoid the drama.
The Best Option
Microsoft, meanwhile, has been trying to break into the mobile space. The Xbox business is a cash cow helping to fund that effort. So getting Xbox right is very important. However, the company’s sales appear to be back in growth mode and despite some recent margin compression, it makes plenty of money. Even if the new Xbox is a rough launch, it has the money to fix any mistakes it makes.
The shares yield around 2.7% and the dividend has been increased annually for more than a decade. Despite the recent share price run up, this is probably the best video game console maker option right now. And if it can get into the living room before the TV gets into the game space, the Xbox could grab another generation of players and broaden its appeal. That would be a huge win.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Nintendo. The Motley Fool owns shares of Microsoft.
The article Into The Living Room originally appeared on Fool.com and is written by Reuben Brewer.
Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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