Nintendo confident of niche with 3DS

Nine-year-old Oscar Auerswald Carroll’s hazel eyes widened with bewilderment when asked which game device he preferred — his Nintendo 3DS or his mother’s iPhone 4. After a long pause, the soon-to-be fourth-grader chose his 3DS “because it has two screens.”

The Los Angeles boy’s momentary struggle highlights the pitched battle between Nintendo and a new generation of smartphones and tablets for the hearts and minds of young gamers.

For now, the 3DS is holding its own. Sixteen months after launching the device, Nintendo sold 5.14 million 3DS consoles in the U.S. by the end of June, fueled in part by a 33 percent price cut in August.

The console, which features a three-dimensional screen that doesn’t require players to wear special glasses, is outpacing Nintendo’s previous best-selling handheld device, the DS, which sold 4.15 million units in 16 months after its launch in 2004.

The sales surge of 3DS has disproved critics, who pronounced it a dud after a lackluster launch.

But it’s not game over. Some question whether Nintendo can keep up the momentum amid a changing market.

“Nintendo’s price cut clearly had a positive impact on retail sales and prevented a repeat of the declines we saw last summer,” said Mitch Lasky, a partner at Benchmark Capital who has invested in a number of game companies. “But I don’t believe it will be sufficient to reverse the larger trends.”

Those trends include a shift in the way parents buy such games.

“Everyone is used to paying $1.99 for ‘Angry Birds’ now,” said Rebecca Levey, co-founder of KidzVuz.com, a site featuring thousands of game and toy review videos posted by kids under age 13. “Asking parents to pay $30 for a DS game that their kids may get bored with after a week has become a really hard sell. But for $1.99, you’re more willing to take that risk.”

As a result, Nintendo’s share of the U.S. portable games software market shrank to an estimated 36 percent in 2011 from 70 percent in 2009, said Peter Farago, an analyst with Flurry Analytics in San Francisco.

Meanwhile, revenue from games sold on Apple’s App Store and Google’s Android Marketplace exploded to 58 percent of the $3.3 billion market last year from 19 percent of the $2.7 billion market in 2009.

Online store

Scott Moffitt, Nintendo’s executive vice president of sales in the U.S., said Flurry’s figures don’t include purchases that 3DS owners make from the company’s eShop, an online store that bypasses traditional retailers and sells games for $2 to $9.

“We can say, however, that people who have gone on to buy a game from our eShop have bought an average of 4.7 games per person,” Moffitt said. “We continue to see momentum for the 3DS, and we’re excited about the upcoming holiday, when we’ll have one of our busiest game launch schedules ever.”

Titles lined up for the fall include “Paper Mario Sticker Star,” “Luigi’s Mansion: Dark Moon” and “New Super Mario Bros. 2.”

Moffitt’s emphasis on games reflects a painful lesson Nintendo learned last year when its relatively shallow selection of games kept players from buying the 3DS when it launched.

Prices slashed

Alarmed, Nintendo’s chief executive, Satoru Iwata, slashed the 3DS price by more than a third to $169.99 and beefed up the game lineup. The stimulus plan worked.

Sales of the 3DS in the U.S. surged to 1.3 million from September to December from 470,000 units from June to August.

The move, however, cost Nintendo dearly, plunging the Japanese game company to its first annual loss in at least three decades.

But the bitter side effects are supposed to be temporary. Nintendo in April said it expects to “cease selling (the 3DS) below cost by” this fall.

“There will always be room for Nintendo in the handheld market,” said Edward Williams, an analyst with BMO Capital Markets. “The reason they’ve had so much success is not so much because of their hardware. It’s because of the strength of their game franchises, and they have a whole stable of them.”

Golden titles

Nintendo’s Mario, Donkey Kong and Zelda remain powerful assets — adored by children and trusted by parents, Williams said.

The longer-term question is whether Nintendo will stop making hardware and instead unleash its highly profitable games on a broader range of devices, such as Apple’s iPhones or iPads.

“Investors don’t think there’s much opportunity in hardware in the future,” said Evan Wilson, an analyst at Pacific Crest Securities. “The thinking is that there are 250 million iPhones out there versus 5 million 3DSes. It’s a huge revenue opportunity that they’re missing out on.”

Games and consoles

Nintendo has repeatedly brushed off such speculation over the years, insisting that its games shine only if they are played on its consoles.

Nintendo is launching a supersized version of the 3DS on Aug. 19 — the 3DS XL, priced at $199.99. The device boasts larger screens and a longer battery life.

So far, demand for the new handheld model, as measured by those who paid a deposit to reserve a console, appears “strong,” said Bob McKenzie, senior vice president of merchandising at GameStop, which operates more than 6,600 retail stores. He declined to say how many reserved a 3DS XL.

“The reality is that a lot of kids still yearn for a 3DS,” said Michael Cai, a game-industry analyst at Interpret. “They see their friends at school with them. Peer impact is still a key driver for Nintendo. That said, I don’t think the 3DS will be as successful as the DS.”

Not doomed

Nintendo’s Moffitt acknowledged that games on smartphones and tablets are increasingly popular, but said that doesn’t necessarily spell doom for his company.

“All the evidence we see suggests that this is not a zero-sum game,” Moffitt said. “As long as we continue to publish the best content, there will be a large portion of the market that will prefer to play those games on a dedicated gaming system like the 3DS.”

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