This Christmas, Pay Attention to Sony (NYSE: SNE)

It was a frosty November midnight, and the stale city air had an uncharacteristic crispness about it.

I’d bundled up in my warmest gear and tucked a thermos of coffee under my arm, prepared to wait all night for Wal-Mart to open.

Despite the many Apple product launches I’d covered as a tech reporter, this was the only time I’d ever stood in a line for a new product myself. It was 2006, and the product was the Nintendo Wii.

I knew a lot of people who wanted one of these video game consoles, so I thought I’d do a Christmas service for one of them by picking it up on launch day.

The line behind me grew as the night wore on, and by the time the store opened, there were more than a hundred people waiting to pick up a Wii for Christmas.

After more than a year of being sold out across the globe and years of high demand, the Wii became Nintendo’s best-selling standalone video game console.

The last generation of video game consoles, which included the Nintendo Wii, Microsoft Xbox 360, and Sony PlayStation 3, ended up being something of a last hurrah for the old style of gaming console.

Things are very different now.

Generational Growing Pains

Nintendo’s follow-up to the Wii launched in 2012, and though it maintained the aesthetic of its predecessor, it did not keep up its momentum.

In each generational upgrade to video game consoles, the principal competitors go through a period of adjustment before they fall into their stride. Based upon factors such as the strength of the games launched with the system, strength of third-party software developer support, cost, and hardware specs, the public eventually figures out which video game console is going to be the best-seller for the generation.

We are currently in the eighth generation, and as we pull up to the holiday shopping season, both Microsoft (NASDAQ: MSFT) and Nintendo (TYO: 7974) — the leaders of the previous generation — have fallen behind Sony in sales.

According to market research firm NPD, video game hardware sales were weak through the summer, but Sony (NYSE: SNE) managed to increase its numbers by 80% over the last generation. Its PS4 has been the top-selling video game console in the U.S. for most of 2014.

Sony hasn’t had this strong of a lead since the PlayStation 2, which first hit the market at the turn of the millennium and wrote the script for how to market video games for the next decade.

Now, Sony appears to have a strong grasp on the broader conditions that have reshaped the video game market.

What Sony is Doing Right

Video game consoles have become general entertainment tools, sort of like computers, tablets, and smartphones. Sure, they can play games, but they can also stream movies and television and serve as a communications medium between individuals.

Children, it seems, are more likely to pick up an iPad or Android phone than a portable video game system if they want their fix.

But there’s something new going on: it’s become extremely popular to simply watch other people playing games.

The popularity of “eSports” has exploded.

There have been lots of video game competitions over the years, and some even enjoyed significant television airtime on subscription cable television channels. But these events were typically infrequent.

Lately, however, these organized team video game competitions have been regular events that garner tons of views.

Riot Games’ League of Legends Championship Series, for example, has more than 100,000 live streaming viewers every week.

League of Legends commands a massive audience

When Sony launched its PS4 console, it built in the ability for users to live stream their gameplay on Twitch or Ustream. Microsoft’s Xbox One didn’t receive this feature until earlier this year, and even then, it’s only limited to streaming service Twitch.

This functionality has proven to highlight a key feature in video gaming that has never been officially recognized: the ability for video games to create entertainment that can be passively consumed.

Not everyone delights in the cutthroat world of competitive gaming, where anonymous heavy-breathers talk trash about you, your mother, and your dog while banging away at a multiplayer game.

Yet people still might enjoy the experience of the game and even want to root for certain players. That’s why live streaming has become so popular.

The same has become true for the game Minecraft. While not competitive, YouTube videos of crazy constructions and weird tricks have become very popular among a certain age group.

Sony will take it even further with a feature known as Share Play. This feature will allow friends to jump into each other’s games even if they haven’t bought the game itself or even if they have a copy locally.

This is because the game — and not just video of the game — is streaming.

Just like how Netflix, Amazon, Hulu, and HBO have thoroughly disrupted the old broadcast model with their streaming videos, streaming video games will disrupt the old pay-to-own gaming model.

While this type of gaming is still very expensive to run at an infrastructural level (it bankrupted streaming game service OnLive), it’s the next frontier for social gameplay and game-watching as entertainment.

Sony understands this.

Good Investing,

Tim Conneally

 @TimConneally on Twitter

For the last seven years, Tim Conneally has covered the world of mobile and wireless technology, enterprise software, network hardware, and next generation consumer technology. Tim has previously written for long-running software news outlet Betanews and for financial media powerhouse Forbes.