When it comes to designing video game gear, the team at one San Francisco industrial design firm has some serious street cred.

Astro Studios helped design the Xbox 360 and gave it its signature, iconic look of a box “inhaling” and about to explode with energy. Because Astro had rich experience designing hot products such as Alienware’s gaming PCs, Microsoft chose Astro to co-design the Xbox 360 with a Japanese design firm, Hers Experimental Design, after a months-long bake-off. The game system debuted in 2005 and has sold almost 20 million units. Astro Studios is also the unknown name behind products such as Microsoft’s Scene It game controller, the Ooma Internet phone, Ugobe’s Pleo robot dinosaur, and the Zounds hearing aid.

It was the fame that came with that Xbox 360 job that led Astro to its new calling. Astro founder, Brett Lovelady, enjoyed the world of hard games so much that he decided to spin off a separate company, Astro Gaming, to design and sell its own professional gaming gear. The company raised $2 million in August 2006, from Seraphim Investments and hired Jordan Reiss, former vice president of Timbuk2, a web sales company that let consumers build their own bags. Reiss now heads a team of five designers.

That such a small team could design and launch a product on its own is a statement of our high-tech age. The flattening of the world, with contract manufacturing in China and technical support in India, gives even tiny industrial design firms like Astro Gaming the ability to conceive, design, engineer, ship and sell their own products.

Lovelady realized that the value of many tech products lies not in their electronics or manufacturing. It’s the design.

Gaming peripherals are a $7 billion industry worldwide, and gamers themselves are heavily influenced by the hardest core players. Lovelady and Reiss followed around the pro gamers on their Major League Gaming tournament circuit to get a sense for what they wanted. Companies such as Turtle Beach had given headsets to some teams, but the move backfired when the teams didn’t like them. Astro Gaming created a headset with multiple functions designed for gamers.

The headset came with interchangeable cover plates so that the gamers could customize them with their own team names. The gamers could also connect their headsets to those of their team mates and easily talk to them above the din of the tournament noise. The first to adopt it was Str8 Rippin in 2005. In the next season, the headsets spread. The league told everyone that everybody had to use the same Astro Gaming headsets because they gave an unfair advantage to teams that needed to coordinate.

During the fall of 2007, Astro had finally tweaked the headsets enough to launch them in the commercial market. The $250 headsets now have features for all consumers, such as the ability to answer a cell phone while listening to the headset or the ability to hear a baby monitor while playing a game. The idea has always been to capture the high end of the gaming market and then cascade down to regular gamers.

There are expansion possibilities, such as making a wireless version of the headsets. But Astro Gaming will face competition from established players such as Turtle Beach, Sennheiser, and Triton. That’s where reviews from sites such as PC Gamer and Game Informer come in handy.

Lovelady views the industry like the action sports market, where pro athletes love to customize their gear. The company started with gamer headsets because they felt that wouldn’t pigeonhole them as designers. Over time, they would love to design more controllers and even take on the design of a game console once again. Lovelady is excited about the newest 3-D input technology that could be used for game controllers to do much more than the Wii. Companies such as 3DV Systems and PrimeSense in Israel are designing the fundamental technologies that can locate a gamer and track movements through cameras or wireless sensors. Those technologies could be tools designers such as Astro use to create the gaming interfaces of the future.

“We’re more like the racing team for the industry,” said Reiss. “That’s part of our long-term brand-building strategy.”

Trend: Could small industrial design teams be tomorrow’s hardware companies?

Astro isn’t the only industrial design company jumping into the hardware design game. Instead, the company appears to be part of a trend.

Robert Brunner, a longtime designer at Pentagram design studio in San Francisco, broke off last year to create his own design firm, Ammunition.

Brunner said he wanted a chance to design his own products, rather than always work at the behest of someone else. On top of that, he could take a much larger ownership and share of the royalties if he designed the product himself. His team created the Fuego barbeque and also designed a headset with Dr. Dre and Interscope Music chairman Jimmy Iovine. The “Beats by Dr. Dre” headset was an attempt to cash in on Dr. Dre’s brand name when the traditional music industry itself was suffering from piracy on the internet.

Another product that came from the labors of just a few people was HangTimer, made by Seattle-based DropZone. Led by former Microsoft designer Jeff Alexander, DropZone created a line of $99 devices favored by snowboarders. The HangTimer uses an accelerometer, the same motion sensor in the Nintendo Wii’s controller, to measure how long someone stays in the air after they jump.

The irony is that hardware was considered a category that was done. It’s supposed to be the province of big companies like Dell. But these tiny firms led by industrial designers are proving that small companies can tap the internet and the infrastructure of contract manufacturing to compete with the biggest companies.

Don’t expect a fleet of designs to hit the market with brand names such as Ideo and Frog Design, two of the leading industrial design firms. Those companies remain rooted in their business of working for other brands. But where an industrial design firm develops expertise, such as in gaming with Astro, the expansion into self-branded products makes sense.

“If you get the right partners together, you can do it with the smallest teams,” Lovelady said. “We think of this as a new business model. In the past, we made a lot of money for other people. But royalty deals tended to be small. Given where China was with manufacturing, we couldn’t have done this six years ago.”

And if the new model works, then investors might want to think about courting industrial designers to start new hardware companies.