3 Video Game Mainstays Set to Disappear After CES

PORTLAND, Ore. (TheStreet) -- The video game industry as you know it is coming to an end with a bit of help from the Consumer Electronics Show.

Yes, Nintendo already released its next-generation Wii U console. No, Sony (:SNE) and Microsoft (:MSFT) aren't going to announce successors to the PlayStation 3 and Xbox 360 until the Electronics Entertainment Expo at the earliest. No, Microsoft isn't even going to deliver a keynote at this year's event, and Nintendo isn't even attending.

That said, things are happening on the edges of CES that should give gamers a clue about where the industry is headed within the next few years. Consider it a welcome change, as everything in gaming that isn't playable on a smartphone or downloaded from an online store has been headed nowhere for at least the past year.

Despite the release of the Wii U and the $1 billion generated by Activision's (:ATVI) Call of Duty: Black Ops II in its first 15 days of release, NPD Group says video game sales are still in decline. Total industry sales in November -- the last month for which data were available -- fell 11% from November 2011. New game sales also fell 11%, while console sales dropped 13% as the Wii U ate into other consoles' numbers and the lame-duck Wii quickened its slide into history.

That was the 12th-straight month of industry declines. While industry insiders note that November's drop was the smallest monthly decline during that span and that the industry's numbers are still double what they were the last time a generation of consoles was released in 2005, things admittedly don't look great.

Sales of consoles, physical games and accessories dropped 16% during the past quarter from the same period in 2011, according to NPD Group numbers. Meanwhile, sales of digital content such as downloaded game apps and add-ons jumped 22% over the same span. NPD Group research also finds that smartphones and their apps now account for roughly half of all game downloads. Last year the number of gamers playing on mobile devices just surpassed the number playing on dedicated consoles.

Looking into CES and beyond, here are a few pillars of the video game industry that should come crashing down after CES:

1. Handheld consoles

Why someone at Nvidia (:NVDA) thought it would be a great idea to release not only a handheld console, but one dedicated to personal computer games is beyond us. The chipmaker already announced its Project Shield device that looks like a Microsoft Xbox 360 controller with a screen and streams PC games through services such as Steam, but there's still little indication of why.

The handheld market and mobile gaming in general is dominated by the casual gamer. These people typically aren't the kind to sit in front of their dual monitors with a case of Mountain Dew and lead raiding parties until sunrise. More importantly, they're not the type of folks who support frivolous little trifles such as handheld consoles in the least.

Nintendo's DS and 3DS portables built an empire on the thumbs of casual gamers who also embraced the company's Wii home console. That said, the 3DS is the best-selling handheld in America and is still getting its lunch handed to it by smartphones and mobile apps. Just a few months after its launch in 2011, Nintendo had to knock down its price from $250 to $170 just to get people to choose it and its $40 game over a $199 iPhone and its $1 (or free) apps.

Though Nintendo has sold more than 25 million 3DS consoles worldwide since 2011, Apple (:AAPL) sold 26.9 million iPhones last quarter alone. As a result, Flurry Analytics estimates that Nintendo's share of the handheld gaming market decreased from 70% in 2009 to just 36% in 2011 as smartphones' share ballooned to 58% from 19% during the same period.

Think hard-core gamers are the answer to those mobile woes? Ask Sony, which debuted $250 and $280 versions of its PlayStation Vita handheld last year with those gamers in mind, only to watch its global sales come in at less than a quarter of those posted by the 3DS and scarcely inch by those of the original DS. In the U.S., it's the second-least-popular console ahed of only its 8-year-old PlayStation Portable, which made a nasty habit of outselling the Vita during February and December of last year in Japan.

Handhelds are fairly one-dimensional, they're expensive and, even for Nintendo, they're costly to produce and aren't subsidized through subscription services like smartphones. Expect Nvidia's Project Shield to be the last such offering for a good, long time ... or ever.

2. The directional control pad

The Wiimote still had one attached to it, but signaled its impending doom. The PlayStation Move motion controller did away with it all together, while the Xbox Kinect saw no reason to make a player hold something at all.

The Wii U's GamePad put more emphasis on its touchscreen, motion control and analog sticks than the pad. With technology such as Intel's (:INTC) Wireless Display making it theoretically possible to turn your smartphone into a console controller, the beloved D-pad could become as much of a retro gaming fossil as Atari and arcade joysticks.

If Microsoft has its way, you can count on it. Its Xbox Smartglass app already allows users to navigate through the Xbox's dashboard without a game controller, access information about shows streaming through its entertainment service or check out maps and stats on games such as Forza Horizon or Halo 4 from their tablets and smartphones. Users can turn their smartphone into a controller for Home Run Stars or a playlist manager for Dance Central 3.

It's not a fully portable controller yet, but it gives smart devices far more functions than up, up, down, down, left, right, left, right, B, A, Start.

3. Physical games

As we mentioned earlier, downloaded game sales are soaring while physical game sales are way off.

That means discs and game cards are dying, but it doesn't mean that every digital game sold is some app that costs less than $5. While Project Shield may have a tough road ahead as a handheld, its basic function of giving users a way to play full, engrossing games from cloud-based services such as Valve's Steam without using a full-fledged PC or a clunky console stuffed with an unnecessary optic drive.

The folks at Engadget were on the lookout for "Steam Box" systems (once rumored to be in the works from Valve itself) that would capitalize on Steam's Linux version to bring great downloaded games into living rooms at low cost. Nvidia didn't provide a price for Project Shield, but it's likely the first in a line of devices with similar function. Keeping the hardware to a minimum will cut costs in a way the big console makers can't, while processors such as the Tegra 4 provide much-needed gamer brawn without a whole lot of bulk.

Nvidia just gave console makers a road map for ditching discs altogether. If Sony's purchase of game streaming service Gaikai last summer was any indication, the big boys just might follow it.

-- Written by Jason Notte in Portland, Ore.

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