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Why Xbox Could Launch Its Own Streaming Service

(Updated from 9:49 a.m. EDT to reflect additional analyst commentaries in the third paragraph and EA's EA Access partnership announcement with Microsoft in the seventh paragraph)

NEW YORK (TheStreet) -- The prevailing impression is that as smartphones and tablets have burst onto the gaming scene, the era of console domination has become a thing of the past.

While the challenge is real, the view is exaggerated, especially for Microsoft (MSFT - Get Report) and Sony (SNE - Get Report) and their development partners.

"I disagree that the console will decline that much," says Ascendiant Capital Markets analyst Ed Woo. He predicts an uptick in overall industry sales as the launch of the next versions of the PlayStation and Xbox offset waning old-gen system sales, which started with the launch of PlayStation 4 and Xbox One in late 2013. Woo is foreseeing flat sales in five-years time, rather than a steep decline ahead of the next refresh. Even Juniper Research analyst Sam Smith estimates that PC and console games together will still account for over 50% of total game industry revenues over the next five years, despite forecasting a drop in combined annual sales to $41 billion by 2019, from $46.5 billion in 2014. "Juniper expects there will be a 9th generation of consoles," stresses Smith.

Electronic Arts (EA) recently gave a bullish outlook and strong quarterly results that Woo anticipates for other console-based video game makers such as Take-Two Interactive Software (TTWO) and Activision Blizzard (ATVI). EA also revealed today the all-new monthly or annual EA Access membership in partnership with Microsoft, which unlocks The Vault collection of EA's biggest games exclusively on the Xbox One, ready for gamers to download and play. The service, which starts at $4.99 a month, is being rolled out in beta to a limited number of players today, but will launch for everyone on the Xbox One soon.

(NTDOY) is the only exception to Woo's upbeat outlook, as the company is bearing the brunt of the shift in casual and mobile console games to phones and tablets.

On top of console innovation, companies like Microsoft (MSFT - Get Report) and Sony (SNE - Get Report) are also expected to use their vast resources to tap into video game streaming as a missing link in the defense of their entertainment ecosystems. Cloud gaming is expected to plug holes in Microsoft and Sony's entertainment portfolios as games factor more and more prominently into the revenue streams of  tech giants Apple (AAPL) and Google (GOOG).

"Two or three years ago, the hype was that cloud gaming was going to replace the console," says IHS senior games analyst Christine Arrington. "But our perspective is it's critical for the PlayStation and Xbox brands to compete." By having a streaming option, Sony and Microsoft can extend the PlayStation and Xbox environments to a variety of devices beyond the living room, helping them keep their toeholds in the market.

Gartner research director Brian Blau says once video game streaming is up and running, it will become both a "cornucopia" for gamers and a lucrative path for the big console-makers and publishers. With the service, there will be a revival of older games that sees players enjoying flexible access to "nostalgic" titles that were popular or well-rated, and underrated games that are long overdue for some recognition. Gamers will be able to play the older games not only on all-purpose devices, but also on newer consoles. The older games would be made available only after a highly-selective process funneling to users only the games that are most important to them; they would help ensure continuous, long-term monetization. The library would also gradually become more sophisticated as demand drives the publishers and their developer partners to dedicate resources to coding future games for cloud-compatibility, allowing them to avoid anything similar to the current situation where some older games are in need of recoding or can't be recoded at all for the cloud.

Blau says he believes as long as premiums are at reasonable levels, consumers would be willing to pay extra for easy access to their favorite, older games. He notes also that third-party developers have the incentive to work on streaming services with the big publishers in their search for "found money." Sony has already begun testing consumer price sensitivity through its PlayStation Now beta.

"Gamers have been waiting for something like this," says Blau.

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