Will Handheld Gaming become a Thing?

We have been thinking a lot about the market for handheld gaming recently. In part because we have seen briefings from a number of companies looking at the space. And then we read Konvoy Ventures post of the space, which led us to think more deeply about what this emerging category will mean for the silicon vendors.

Poke around the semiconductor space a bit and you will find there is growing interest in Handheld Gaming. This is rooted in the ‘success’ of the Steam Deck and the success of the Nintendo Switch. We are not talking about mobile gaming on phones, but a new category of devices that are bigger than phones but smaller than laptops. Readers, we are not judging you, but our guess is that you are of a generation that may not quite appreciate this category, but it is real and likely to become more interesting soon. We are already seeing signs of many companies talking about this space, and we expect a harder push in coming months as new devices and new chips to power them start to come to market, and we imagine a lot of companies will be talking about the category at CES in January.

Interest in this category is not exactly new. From the early days of smartphones, everyone quickly realized that games were a big part of the consumer use case. Mobile gaming has taken off and is now an immense category in its own right. So the smartphone makers have long dabbled in increasing the appeal of their devices to gamers. However, they came across two limitations – device capabilities and software libraries. Mobile devices could not handle graphics at the cutting edge available on PCs and consoles, and thus did not appeal to ‘hard core’ gamers. Set aside the fact that there is an order of magnitude more casual gamers than hard core gamers, those hard core gamers are good customers, willing to spend a lot on games. But because of the device limitations no smartphone vendor could really crack into the base of console gaming, and so no developers wrote that kind of game for phones.

Over the years, several companies tried to bridge this gap, with Apple adding multiple features to make gameplay more user friendly as a leading example. Looming in the background, Nintendo surprised many by building their handheld Switch into a formidable force in the market. But Nintendo is something of a special case. They develop many of their own games (or own the IP behind them) notably including the Mario and Zelda franchises. For a long time, the Switch was seen as an exception. From a competitive landscape viewpoint this was true, but the Switch provided an important change to the market in the form of teaching a generation of consumers that this was their preferred way to play games. For many children too young to own a smartphone, the Switch was their favorite gaming platform.

Most recently, privately-held Valve launched the Steam Deck, and this seems to have really set things in motion. The Steam Deck has laptop quality graphics, but in a form factor familiar to all those Switch gamers. The Steam Deck has sold better than most people expected which appears to have catalyzed the broader market.

Which brings us back to those two limitations we mentioend above. The good news is that the device makers seem to have closed the gap. Apple claims the latest iPhone 15 Pro is capable of handling graphics for ‘AAA’ rated (i.e. console grade) games. We have not seen any benchmarks that really prove that yet, but our guess is they will be close, maybe even ‘close enough’. And Apple is not alone, there are other semis designers with very promising offerings in the space, coming to many devices. Which brings us to the big question of software.

There is still a strong divide between mobile and PC/console games, both in terms of development but also critically around distribution. There are strong platform effects at work in both sides of the market. The mobile side is controlled by Apple’s App Store and the Google Play Store; consoles are controlled by Sony and Microsoft, and for PCs Valve’s Steam store is not exactly dominant but it is very powerful. Of the many past attempts to pry open this market, the availability of software has proved the critical hurdle to adoption.

We think it will be very difficult for any new device maker to crack open this market, but that does not mean it can not be a meaningful category. First, building devices that tap into the existing platforms is perfectly viable. Does Valve really want to be in the hardware business or could they license access to the Steam store to companies who already make laptops? We are going to find out soon. iOS and Sony are going to be off limits, because those companies want to sell their own hardware, but Microsoft certainly has aspirations to become a bigger gaming destination, and they know a few things about building hardware ecosystems around their software. We will also likely see a number of devices which run Android. This has the advantage of being fairly easy to license from Google, but will be dependent on developers being will to port games to some version of upgraded Android. (Again, it would help a lot if someone could fix Android.) Not least, are the various attempt to build ‘Cloud Gaming’ services – Netflix and Amazon both have aspirations here, and maybe Google will launch a cloud gaming service, again. And of course there is Tencent, which already has a serious cloud gaming effort, and ownership of more games than most people realize. None of this screams “New Platform”, but in aggregate there is probably enough software out there to build a viable market.

In all of this, it is important to keep things in perspective. The Steam Deck has done better than expectations, but has sold somewhere between 1 million and 2 million units. Great for Valve, but still small. Over its entire six year life the Nintendo Switch has sold something like 130 million units. By contrast, the PC market is about 250 million-ish units a year, and mobile phones are 1.5 billion-ish units a year.

All of which is to say that Handheld gaming will not be a third consumer revenue leg to rival PCs or smartphones, but it could be a decent segment for a few hardware companies and a reasonable earner for the semis suppliers.

Photo Credit: Wired

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