Topic: Interesting article about Steam Machines and Nintendo's place

The author is certainly painting a gloomy picture for Sony if Valve can really knock these Steam Machines out of the park with the help of Half-Life 3

http://seekingalpha.com/article/2985066-steam-machines-a-seri...

< won't register just for reading that article

All of a sudden, there is a 900 pound Gorilla in the room.

Sony's (NYSE:SNE) Playstation 4 and Microsoft's (NASDAQ:MSFT) Xbox One have a serious problem on the horizon, and right now, it doesn't look like either of them can do anything about it at all.

The problem I'm talking about are Valve's (a privately held company) new consolized PCs, which are known as "Steam Machines." They're named after Valve's extremely popular instant-demand online games and matchmaking service called Steam. Steam machines use powerful processors and graphics hardware and a custom operating system designed with playing on HDTVs in mind:

This is the perfect time for a new hardware maker to jump in.

Valve is looking to strike while the iron is hot, before the PS4 and Xbox One really have a chance to hit critical mass. Valve is not new to the games industry. Along with Steam, Valve has made several of the world's most popular first-person shooters, the "Half-Life", "Portal," and "Counter-Strike" series, among its more well-known titles, as well as the newer but very popular role-playing game "Dota 2."

While they are, however, relatively new to the hardware industry, they have licensed out the manufacture of the Steam Machines to third-parties that do have experience with assembling computers. All of the Steam Machines are essentially built using off-the-shelf parts that enthusiast gamers have been buying for ages. The hardware that Valve has licensed also is specified to be more compact and heat efficient so as to lower noise levels and shrink the overall footprint of the console.

And because the Steam software can be configured to use standardized parts available to anyone, then any user can assemble their own Steam Machine. Or they can use the computer they already have and switch between Microsoft Windows and the custom Steam OS.

This is not the first time that a third party hardware/first party software arrangement has been attempted. The long-since gone 3DO model was a similar venture between a new start-up created by the founder of Electronic Arts (NASDAQ:EA) and Panasonic (OTCPK:PCRFF). Ultimately, it was overpriced, underpowered and had an unimpressive games library.

Valve has learned from the mistakes of 3DO.

Valve does not have the same weaknesses. As of right now, there are already more than 125 million users registered to the service. For them, it's just a matter of marketing a product to replace the current generation of set-top boxes. Sony and Microsoft should be very concerned about this, because many companies that develop games for the PS4 and Xbox have been releasing the exact same games on PC/Steam.

Sony is in an especially dangerous place right now. One of the things that the designer of the PS4 was most proud of was the fact that it was designed on PC/x86 architecture, so it was familiar and relatively easy to program compared to the PS3. But that strength created an entirely new problem for Sony because it allowed game creators to more or less have a fully functioning version of their games immediately available to publish for PCs.

Things look good now, but the future is suddenly in doubt.

There has been a recent rise in Sony's stock price due to the market's perception that Microsoft is losing the war on this console generation, as the PS4 has now surpassed 20 million units sold, while the Xbox One has sold only about half that many.

However, the reason that both of these companies are in serious trouble right now is that there are very few compelling first party titles. Most of the very high profile games that are out are coming out on third party software and available on multiple platforms. For example, Playstation held a gamers day recently where Capcom (OTC:CCOEF) announced "Street Fighter V" would be a console exclusive to the PS4, but will have a PC version, which really means a Steam version, as Capcom has been publishing there for years now.

And games that are already out on PS4, such as Rockstar/Take Two Interactive's (NASDAQ:TTWO) "Grand Theft Auto V," are getting new life breathed into them from the more powerful PC hardware available. The Steam version will support 4K HDTV resolutions and a new first-person mode.

Nintendo (OTCPK:NTDOY) by contrast is not really facing these same kinds of struggles. The company's first party titles are the primary reason that people buy their hardware, and their quirky, unique gaming hardware is a strength for them as well. Even though the other console makers have copied Nintendo products in the past, they haven't had the software to make those devices compelling.

Additionally, Nintendo is still the No. 1 portable dedicated games hardware maker, as I covered here. Steam will not be a threat to them in the portable market. Nintendo also has not ruled out the possibility that they might start to do development for mobile phones and tablets. But just like Valve, nobody is forcing them to do anything, and they can take their time and do whatever works best for them.

While Sony and Microsoft are in trouble here, Sony has it much worse.

Sony as an electronics business is really struggling right now to make money. They have already exited the computer business, and are looking to exit several other markets where they are losing money, especially HDTVs. Apple (NASDAQ:AAPL) has eaten the Walkman lunch with their iPod, and is overtaking Sony's place in home stereo accessories with Beats by Dr. Dre headphones and other small speakers as well.

If Steam supplants itself as a strong alternative to the Playstation hardware, that will leave Sony with no strong brands. Since Steam gets all of its content through downloads, there won't even be sales of Blu-Ray discs. It could send Sony toward bankruptcy, and that's not just me trying to be dramatic. The company has already seen some very large losses over the last few years:

2014 2013 2012
Sales $75,421,000 $72,158,000 $78,900,000
Net Income (-$1,246,000) $441,000 (-$5,529,000)

The balance sheet is deteriorating as well. Sales and cash levels are stagnant. When a technology becomes obsolete, there's no market for the factories that make it. You're forced to take a hit on the value of that real estate because the machinery in there will have to be completely replaced. That's happening to Sony and is evident here in the Property, Plant and Equipment line:

2014 2013 2012
Cash $10,162,000 $8,775,000 $10,870,000
Property, Plant and Equipment $7,283,000 $9,148,000 $11,313,000
Net Tangible Assets $8,649,000 $9,073,000 $11,525,000

Microsoft has a stronger outlook. Valve has a killer app.

As I stated, while both companies will be affected, Microsoft will not take the same kind of hit as they will still have their home PC and server side operations.

Of note, Microsoft, Sony and Valve as well all have Virtual Reality headsets coming to market. I'm certain that there are a lot of people who also are interested in hearing more news about these devices, but it seems too early in the product cycle to really discuss the pros and cons, but I do want to speculate on something for a moment.

There has been a recent bit of interesting activity on the Steam client for Windows. Valve has been offering discounts on games that currently run on Windows but are specifically optimized to run on SteamOS and consequently Steam Machines. I think that there is a very strong possibility that as soon as SteamOS has a solid base of users, that Valve will announce the much rumored "Half-Life 3" exclusively for SteamOS, and that will really anchor them as a competitor against the other consoles.

I think that's why Valve made it a point to get the news out about their new "Source 2" graphics engine at the Game Developer's Conference this year. I think that they weren't in an extreme hurry to talk about it, but saw Epic Games' new "Unreal" Engine as a possible roadblock to the Steam Machine's success. I believe that making the announcement was an effort to make sure those lanes were all clear.

The new hardware is an attractive upgrade over both systems for only a small difference in cost. Entry-level machines can be purchased for $479.99. It also will hit several years before either of those companies can get new hardware of their own to market. And if Valve can get Half-Life 3 out, or at least news about it out this year, I think they have a very good chance of making this strategy work.

At today's prices, I could see Microsoft drop by 25% or so. I'm giving them a 12-month price target of $30/share. Sony could fall by far more. I'm giving them a target of just $15/share.

Good article ! This strategy with HL3 being on SteamOS only tough is good ... but at the same time risky... Despite the fact that this game is very (I mean VERY)popular, it mignt not be enough for people to switch to SteamOs. Don't get me wrong, SteamOS is awesome but it's also based on Linux and there are not that many games on Linux right now. I'm not sure that many gamer would quit windows for SteamOs just for one game. Still this article really express what I think now more than ever. The best combination right now is a good PC + Nintendo !

First off, Valve has said that they are not making any games exclusively for Valve OS and have encouraged other developers not to do so either.

I doubt that the Steam Machines are going to impact the console market very much. They're tailored more towards PC gamers in the first place. If you're not into PC gaming, then a $400 dollar PS4 probably looks a lot more appealing than a $1000 Steam Machine.

I frankly don't buy it. As far as I've seen, Steam machines will be extremely expensive if you're looking to be able to play all of the most graphically-demanding games. I don't see PS4 sales slowing down anytime soon, since those have been coming more out of powerful brand hype and marketing than actual blockbuster exclusives released for the platform.

He's right about Nintendo, though, as I believe their market share will be even less threatened by Valve.

Sorry Sony, but when most shows are still released as DVD's here and when you make me pretty certain a high number of the flicks just rerereleased as BluRays will be rererereleased as 4K discs soon that only leaves a few interesting 3D and music ones for me.

Depends how much you spend on games. If the average game is 20$ less then when is the break even point that determines whether it is worth it.

People still just don't get it.

Exclusives don't have that much significance, not on their lonesome.

Well they are the only reason for me to have a Wii U (And a pretty good one as far as I am concerned).

Good reason? Sure. 9 million Wii Us in 2+ yrs versus PS4 & X1 20m & 10m 1+ yr, it's not a good enough one in the grand scheme of things.

The steam machines are pretty much pointless though.

At least the more popular ones will end up as a tested hardware spec. (That is one of the main problems with PC Gaming. The other one has been fixed by gsync/freesync).

Ironically, most PC gamers I know would rather build a PC than buy one prebuilt. Since there's nothing really exclusive to a Steam Machine (the OS can be downloaded onto any machine iirc) you are better off simply building your own machine and cutting out the cost of assembly.

I think the Steam Machines will have a bigger impact on the Developer side of the Industry and less on the Consumer side of the Industry.

To me the Steam Machines are a very strange concept simply because their function is already achieved through Big Picture mode and the new Steam Link. If you already have a good PC then you can stream to your TV no problem, so the machines are in a tough spot. They're trying to appeal to the console crowd but I'm just not sure how effective it is going to be.

There is no market for these.

• Console gamers are not going to bite on an $800 Linux box.
• Casuals will also opt for the cheaper, easier consoles, if anything.
• PC gamers will build their own machine for less money, and probably with a more useful Windows license.
• People who buy pre-built PCs will continue not buying these, because that market is seriously shrinking.

I think the price is the biggest thing standing in the way of the Steam machines. Once they figure out pricing (and if they can still make profit) then we will see Steam Machines start making a move. The price (cheapest being around $480) will play the biggest role.

Well, you can save a lot of money, skipping that buggy OS. And the performance, with Windows you can't ever dream about good performance.

I've been using Windows PCs for my high-end multiplatform titles for quite a while, and this is simply false.