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Advanced Micro Devices, Inc. (AMD), Sony Corporation (ADR) (SNE): Did This Chipmaker Bet on the Wrong Horse?

Disruption in the console market
Obviously, some gamers will buy next-generation consoles regardless of whether or not they incorporate DRM. Plenty of other people will buy the new consoles primarily for their non-gaming features, such as Xbox One’s interactive NFL content offering. However, selling more than 250 million units like the current generation of consoles will mean convincing a lot of people to shell out hundreds of dollars for a console, and then hundreds of dollars more for games. If Microsoft Corporation (NASDAQ:MSFT) and Sony Corporation (ADR) (NYSE:SNE) decide to go ahead with DRM, they could lose a lot of sales, which would directly impact AMD.

Moreover, consumers looking for a good gaming experience have more alternatives than ever before. First of all, the strong success of the Wii, PS3, and Xbox 360 means that plenty of households already have a gaming console. Many people may decide not to upgrade if they don’t like the current alternatives. Second, PC gaming continues to offer an alternative to console gaming. Third, the widespread adoption of tablets and smartphones provides casual gamers with a more convenient alternative to game consoles.

Another long-term threat comes from NVIDIA Corporation (NASDAQ:NVDA), which has developed a cloud-based GPU platform that will enable developers to offer “gaming as a service.” This business model could become very popular with consumers, as it would eliminate the upfront cost of consoles and games, and allow users to stream games to any Internet-connected device. It could also prove to be much more customer-friendly, as people could try a game out before committing to subscribe and getting full access.

Foolish wrap-up
While the game console market is in flux, it should be clear by now that Nintendo, Microsoft Corporation (NASDAQ:MSFT), and Sony Corporation (ADR) (NYSE:SNE) could have trouble convincing customers that they need to upgrade, given the ready availability of alternatives like mobile gaming and cloud-based gaming. If Microsoft and Sony Corporation (ADR) (NYSE:SNE) don’t placate fans quickly, the entire console market could stagnate or decline.

AMD is counting on game consoles becoming a long-term growth market, offsetting declines in the PC market. However, the game console market may be ripe for disruption, and the recent DRM controversy could be the catalyst for a shift toward newer gaming technologies. AMD has barely survived the disruption of the PC market. If the company has tied its fortunes to a declining industry yet again, it may not be so lucky in the future.

The article Did This Chipmaker Bet on the Wrong Horse? originally appeared on Fool.com is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of NVIDIA. The Motley Fool recommends NVIDIA and owns shares of Microsoft.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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