Mortal Kombat time for the video console game industry

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One of the more interesting debates in consumer tech is whether the console game market is heading for the junk heap. Gaming on smartphones and tablets is taking off and game developers are starting to shift their budgets away from $200-plus consoles like the Sony (SNE) PlayStation, Microsoft’s (MSFT) Xbox and Nintendo’s Wii to these mobile gadgets.

Sales of consoles in the U.S. dropped 21% in 2012 to just over $4 billion and Microsoft surprised some analysts when it reported a 29% revenue drop at its Xbox unit. Meanwhile, games sales fell from $11 billion in 2011 to about $9 billion in last year, data from research firm NPD Group show.

Some big game developers are having trouble making the transition. THQ filed for bankruptcy and Electronic Arts (EA), the No. 2 U.S. video game maker, recently fired its CEO John Riccitiello as the company has struggled to adjust to new platforms. JP Mangalindan at Fortune thinks Electronic Arts not only needs a new CEO, but also should spend more to develop innovative games.

Investors have grown disenchanted with Electronic Arts, Activision Blizzard (ATVI) and Take-Two Interactive (TTWO). Check out this five-year chart of their stock price performance.

EA Chart

EA data by YCharts

As they try to shift to mobile platforms, these large game studios with high fixed costs now face competition from a legion of smaller players. As Bloomberg noted in a recent piece, “mobile games are most created by teams of 10 or less, and can be funded out-of-pocket for as little as $100.”

Disruption is the name of the game when it comes to the $67 billion video game industry. Digital Trends has an excellent post highlighting the other trends—digital downloads, crowdfunding and so on—reshaping the industry in a hurry.

If you are interested in smart tech investing ideas, check out Covestor manager Barry Randall’s Crabtree Technology model.

The investments discussed are held in client accounts as of February 28, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.