Who Will Win the Console Wars?

NEW YORK ( TheStreet) -- It could well be no one will win the console wars, a conclusion that should scare investors in both Sony ( SNE) and Microsoft ( MSFT).

My source on this is my college-age son John, a long-time gamer who has been regaling us at dinner for a year on the machinations of the gaming industry. He has graduated from pure gaming to watching others play games on "Let's Play" and reading the industry's blogs.

His take is that neither Sony nor Microsoft may succeed with hardcore gamers because their new consoles are trying to be "all-in-one" entertainment centers and because they require online access, along with online permissions, for gamers to access their own games.

Before putting out $300 for a new console, he says, gamers need a compelling reason to do so. The Sony PS4 and Microsoft XBOne both have more graphics capability, but neither is backward-compatible with previous boxes, there's no new compelling interface and they're both heavily focused on Digital Rights Management.

This means that players have to sign-in to an online screen in order to play games they thought they bought at a store. It's a trend that open-source legend Eric Raymond called "cloud cuckoo land" at his own blog when done in office products, and it's the same here.

There is an open-source gaming platform being built called Ouya that doesn't have all these "features" designed to turn consoles into something more like credit card-operated arcade games. But Ouya lacks software, interfaces or anything resembling measurable market reality. My son laughs each time he mentions it.

The arcade features are necessary because new games are just so expensive to produce. M2 Research told TechNewsDaily recently the 2010 cost of producing a quality video game was $28 million, with a "franchise" title like "Call of Duty" costing $50 million. It's only going up from here.

This means that a game that sells 3.5 million copies, like "Hitman" or "Tomb Raider," may not be meeting expectations. This is why their publisher, Yoichi Wada of Square Enix, resigned in March, citing financial losses. He detailed the firm's problems in a presentation posted on the company Web site.

"Even though net sales did not wane considerably, we saw a significant decline in profits, and this variance comes mostly from the Digital Entertainment segment," the presentation states.

So gaming is hitting three ceilings. There's a ceiling of development costs, a ceiling of game system design and a ceiling of what gamers will tolerate.

Gaming started as something kids did, but the kids grew up. Some are willing to spend big for high-end gaming but it's a smaller-and-smaller market, one that may not sustain the industry's costs.

So who will win the gaming wars? My son may not be representative, but he's been using emulators lately to play older games, strategy games that are 10 to 15 years old. He gets a nostalgic kick out of them, and it's costing him nearly nothing. His birthday is next week, and in the past he always hit me up for $100 or more in new game purchases. This year he hasn't mentioned wanting anything in particular.

All of which could take the gaming wars online in a big way. Facebook ( FB) is just one of many companies improving its gaming platform, hoping to win higher-end gamers. Games are increasingly going to exist in the cloud, not in the home, and all the console makers may lose control of the mass market they have been building for 30 years.

At the time of publication, the author had no investments in companies mentioned here.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.