Snuffing out disruptive microconsoles won't be so easy for the 'big three'

Kris Graft is EIC of Gamasutra

When the PS Vita TV was announced this week, the response from a lot of corners of the internet, both from video game developers and from players, was essentially "Welp, show's over for the Android microconsoles! We've got a real video game company to show everyone how it's done."

Typical, weird tech-brand loyalty aside, if you're thinking one of the big three console makers will just swoop in and snuff out an entire disruptive innovation, you're missing the big picture. And if history is any indication, you're also wrong.

More than Ouya

The nascent mobile console market is not just one startup -- it is not Ouya, it is not GameStick, GamePop, Mojo, etc. This isn't a brand vs. brand "race."  That's the small picture. This is about the old guard that will find it increasingly difficult to fend off -- and inevitably have to adapt to -- an entire disruptive innovation. This disruption is driven by mobile chips and hardware that are updated much more frequently than console hardware, by open app stores and operating systems, and by small agile companies for which it makes sense to work within lower-margin businesses.

If any of this sounds a bit familiar, it's because I'm taking a page (well, a few hundred pages) out of Clayton Christensen's book, The Innovator's Dilemma. If you read this book, the parallels between the video game console market and (other) disrupted industries are eye-opening.

Consider this: For a business that's new to an industry at the point of a given technological change (Christensen calls them "entrant firms") like Ouya, it's much easier to move upmarket (i.e. increase their product's performance and add new, fancy features; note rapidly-advancing mobile chip performance) than it is for a company like Sony to move down-market (i.e. decrease product cost and performance for a simpler experience to serve a smaller, emerging audience). Upmarket is where the high-gross margin, high-cost, high-performing products like Xbox and PlayStation reside; down-market is where there are lower margins, lower-performing products and a customer base that has yet to be defined. That's where Ouya et al are playing right now.

In the big three's race to satisfy demands of core gamers, Sony, Microsoft and even to a degree Nintendo ("established firms") are essentially held hostage by their customers, who've for years have demanded more power, more features and high-cost games. Serving this audience for the past decades has made perfect sense for the "big three": Spend the money to increase the performance of your product, continue to invest in the expertise, R&D, sales and administration that are ingrained into your current business. Outpace your competitor's tech, and move upmarket as far and as fast as you can, because that is where the best margins are.

The vacuum

But as we can see fairly easily, traditional console makers -- namely Sony and Microsoft -- have outstripped the needs of the customers they originally served -- the people who primarily want to play video games. As great as the features of Xbox One and PlayStation 4 are, we're getting to the point where we'll be able to video chat, play fantasy football, surf the internet, talk to your TV, connect to social networks, connect to your smartphone, etc. etc. etc. What this race upmarket has done is create a vacuum to be filled by new entrants who bring simpler lower-cost, and at first, lower-performing products.

It's likely that Sony sees the disruption happening, but it would make no sense for it to try to serve the mobile-based console market. The market is too small, the margins are too low. Sony has a mobile division, a game division, a mature digital distribution platform, partnerships with manufacturers and entertainment companies, and decades of experience creating electronics hardware. Sony, and Microsoft for that matter, could get into the mobile-based microconsole market if it wanted to right now, but they'll probably have to wait until other companies create a viable market first.

Meanwhile, if past examples of disrupted industries manifest in today's video game market (note: arcades were disrupted by home consoles, so disruption is nothing new for games), the microconsole sector, buoyed by the exploding mobile market, will continue to move upmarket and gain expertise in the business until, "all of a sudden," it begins to satisfactorily serve the kind of players who buy $400 or $500 game consoles, and companies like Sony, Microsoft and Nintendo are caught flat-footed. That's called disruption.

Therein lies the "Innovator's Dilemma": The "big three" console makers may know that they have to reposition in order to take advantage of emerging businesses that will inevitiably become big businesses. But they also have to stay in their current high-gross-margin business and serve their customers of today if they want to make money. For now, it makes sense to stay in the businesses that make money.

Disruption can take a long period of time -- years, perhaps decades -- though in tech sectors, it happens relatively fast. You can catch hints of this disruption every time you hear a core gamer say, "Wow, I'm really surprised how good that iPad game looks" or when someone is impressed when you connect your phone to your TV to a Bluetooth controller to play a video game.

PS Vita TV: New, but the same

We saw just a hint of disruption when the Wii caught fire a few years ago. While Nintendo and others threw the term "disruption" about, the Wii did not displace other traditional consoles. It tried to do fill a vacuum in the console market that it had helped create along with Sony and Microsoft, and it did fill that void to a certain extent. But it didn't finish the job because the Wii, as different of a console as it was, was still a video game console that operated within similar value networks as consoles have since the first generation of video game consoles.

That ecosystem includes companies that design and manufacture console hardware to last for several years (typically sold at a loss), a business model and distribution method that regards games as products and not services, very closed marketplaces, and a subsystem of content creators whose fates are often determined by whether or not a company can sell a whole lot of a proprietary piece of hardware.

The PS Vita TV is the same idea. This is essentially a pretty traditional business model wrapped up in a new form factor. This is a traditional video game console that is stripped down to the bare essentials, that is partially meant to fill a vacuum in the marketplace -- a vacuum that Sony, along with Microsoft and Nintendo, created while chasing the high-end market. These companies are hitting a point where they are outstripping the needs of their audience, and the value proposition is becoming an increasingly difficult argument to make.

With that in mind, PS Vita TV is a good idea, and probably the best move -- if not the only move -- that Sony is able to make in this situation.

Let's have fun and speculate for a moment. It's not difficult to imagine that future iterations of the PS Vita line of handhelds could evolve into hardware that adopts the models and value network of mobile businesses. (Sony's Xperia line has already dabbled in this area, and Sony already has PS Mobile for Android, which works with PS Vita TV.) Then you can maybe imagine a new iteration of PS Vita TV that is based off of that mobile hardware, which can also deliver a living room experience.

It's not unheard of for an established business to weather a disruptive innovation, though many times, the incumbent is left with a smaller slice of the new market, because it waited so long to enter. The PS Vita TV announced this week is merely a stop gap that will help Sony learn a bit more about this new marketplace, and maybe get a foothold (if it's ever released in the West...).

The elephant(s) in the room

It will make sense for Sony and its current competition to invest in disruptive innovations more seriously once that market is big enough and when the audience for these devices is better defined. That brings us to the elephant in the room: Along with the early entrants like Ouya and GameStick -- neither of which is guaranteed success -- there will be major companies entering the microconsole market. Amazon and Google will get into this market, and when they do, realize that they do not rely on the same business, distribution, content creation, sales, or hardware models as the big three game companies. They own enormous app stores that feed into the most ubiquitous devices on the planet, have strong partnerships with content providers and have the visibility to promote and sell their products. If you think about those fundamental aspects, you can begin to get an idea of how these companies have big potential to upend today's video game industry.

One last thing to note: Nintendo is hard to predict. When we talk about companies like Sony and Microsoft, they are adding power and features to their products, evolving their sustaining technologies in order to serve a market that demands higher technical performance. Nintendo traditionally has chased a different kind of audience -- one that primarily is looking to play games. Nintendo, with the Wii, took a chance and moved down-market, even if just a little, and found an audience. There was a flash of disruption there. 

The mother of necessity

There's that old saying, "necessity is the mother of invention." But that's proven throughout history (not just the history of consumer tech) to be false so many times. Innovation often comes from tinkering and building upon previous innovations, with no clear idea of the innovation's application or who the audience for it might be. Who's going to want a microconsole? That's a really good question.

But what people should realize is that it's not up to the inventors or creators to define the use or the value of these innovations. It's up to the marketplace. And once a new innovation finds its application, it will find its audience, and entrant firms will continue to chase that audience until, if Christensen's observations hold true, they become established firms, and are disrupted themselves.