The problem with game consoles

BERKELEY, Calif. (MarketWatch) -- There is a confluence of events taking place that has the potential to ruin or radically change the game console business.

This business is dominated by Microsoft Corp. (MSFT 26.40, -0.04, -0.15%) , Sony Corp. (SNE 27.83, -0.06, -0.21%) and Nintendo Ltd. (NTDOY 39.23, +1.18, +3.10%) . These companies are adjusting their models as fast as they can, but may be doomed by the rise of the tablet computer and HDMI.

The problem for the game consoles is simple, the new machine refresh rate is too slow. In other words new game consoles that are completely backward-compatible with older game consoles seems to take an eternity to be developed when compared to the constant improvement in speed, lower cost and capabilities of computers themselves.

The problem with game consoles

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When you consider the fact that a game console is just a specialized computer, you have to wonder why these companies cannot pick up the pace.

I've often thought about this and determined that it is because these companies are not computer companies and are not used to the faster pace. But Sony is a computer company and Microsoft knows the ropes.

So what's wrong? In the process they are making their entire industry obsolete.

Take, for example, the Xbox line from Microsoft. The original console was released in 2001 and the system was upgraded and re-released in 2005. In four years one generation of console was managed. This, at the time this was considered phenomenal.

And it was phenomenal by the standards of game consoles.

Look at Sony. It showed its original Playstation console in 1992 and couldn't ship it until 1994. It was six years later in 2000 that it managed to release its upgraded and new PS2 which became a runaway best seller. Another six years passed and the PS3 was released.

If Microsoft could keep up a seemingly mild pace of upgrades every four years it would be on to new generation of machines already. We'd be waiting two more years to get anything from Sony.

Microsoft is following the slow pace of Sony.

This would all be fine if nothing else in the universe was going on. Enter the iPad (AAPL 273.96, -0.11, -0.04%) .

The iPad was never designed to be a replacement for a game console, but it is already showing signs of being a replacement for the Nintendo DS-type of handheld gaming device.

Computers show generational shifts every 18 months, not every six years. Within the next two years the iPad-type device using a modern HDMI connector will be shown with game controllers and games that will easily top the capability of the game console. If they just get close, add another 18 months to the timeline and the consoles will be toast for sure.

And what you are going to see is another trend, the universality of top games. During the console wars, certain games could only be played on certain consoles. These exclusive deals are falling by the wayside because the market is so large that exclusive deals cannot make up for lost sales on competing platforms.

This marketing math will worsen when the iPad, Android Pad and others reach a critical mass of users. This will mean selling pads at a 5-million-per quarter rate, about the same sales as consoles. This sales rate could be achieved by this time next year.

It will take another year before the potential for these devices is fully realized.

This can all be thwarted by a concerted effort by Sony, Microsoft and Nintendo to up the ante and pick up the pace of new console releases.

Because the entire industry is perceived as a razor-blade business whereby you lose money on the consoles and make money on proprietary games, picking up the pace is an expensive proposition that these companies will not do.

That model will be the end of them eventually.