Nintendo Joins the Long List of Apple Victims

By Michael Comeau  JUL 28, 2011 10:30 AM

The 3DS handheld's steep price cut, just four months after release, is another sign that smartphones like the iPhone are taking over gaming.


Stick a fork in the Nintendo 3DS, because it’s done.

In conjunction with an altogether dismal earnings report, Nintendo announced that it is significantly cutting the price of its latest portable gaming machine just four months after release.

On August 12, you’ll be able to pick up a 3DS here in America for $170, or $80 off the launch price.

Nintendo also will give away 20 free games to early adopters who splurged for a 3DS at original cost.

Unlike Microsoft (MSFT) and Sony (SNE), Nintendo usually has turned a profit on its hardware. This is because Nintendo has never tried to compete in the realm of graphical firepower, which entails the use of fancy processors and other expensive components.

Therefore, unless Nintendo stumbled onto some manufacturing breakthrough, it’s going to be losing a lot of money on each 3DS unit it can sell.

This, my friends, is what you call a sign of the times.

The 3DS’s predecessor, the DS, was the best-selling handheld gaming device ever made, moving over 146 million units.

So what happened in just one generation that has Nintendo scrambling in a way it never has before?

The answer that that question is right in your pocket. The flop of the 3DS stems from the emergence of smartphone mania, kicked off in 2007 by the first Apple (AAPL) iPhone.

According to Gartner, 452 million smartphones were sold in 2010, up 72% from the year before. And that growth accelerated in the first quarter of this year to 85%.

Given advances in touchscreen interfaces and graphical capabilities, the average modern smartphone offers a decent gaming experience -- something that couldn’t be said in 2004 when the DS first hit the market.

Last September, I highlighted what was happening on the New York City subway system (see Smartphone Games Likely to Hinder Nintendo 3DS Success):

Believe it or not, investors would do well to watch what subway riders are wearing and doing.

I saw the iPod (and later iPhone), Pokemon, Crocs (CROX), True Religion (TRLG), and Whole Foods (WFMI) booms, among many others, materialize right in front of my eyes.

Now when a person has a long commute on a crowded, stuffy train, they’re going to pick their time-killers wisely -- especially when it comes to video games.

But one thing is abundantly clear to me: The smartphone has replaced the Nintendo DS and Sony PSP as the subway traveler’s gaming device of choice.

If I had to guess, I’d say that I easily see 20 people playing games on smartphones for every one I see with a traditional handheld.

I followed up with this prediction:

I believe the Nintendo 3DS will perform extremely well out of the gate on the back of a highly enthusiastic Nintendo fan base. In fact, there’s little risk in buying one because you can probably flip it for a higher price if you don’t like it.

However, the chances of the 3DS ultimately becoming a mass-market monster like the DS are pretty slim.

So I was sorta right. The Nintendo 3DS certainly has no chance of outshining the DS. In hindsight, that wasn’t an especially bold prediction.

Nonetheless, the 3DS is weakening faster than I expected, and this is a reminder that we are seeing a major shift in the video-game industry

There’s always going to be a hardcore audience for stuff like Activision’s (ATVI) Call of Duty and Take-Two Interactive’s (TTWO) Grand Theft Auto.

But for a lot of people, especially those who just need the occasional time-killer when on the go, a 99-cent game like Angry Birds will do the trick just fine.

The best 3DS games will always be vastly more impressive than the best of what can be had for the iPhone, iPad, or Google (GOOG) Android.

But the fact of the matter is that most people don’t care, so why would they spend more than a buck or two on a game?

And why drop a couple hundred bucks on a new gadget like the 3DS when they just spent the same amount of money on their gaming-enabled phone?

Remember, I’m not talking about hardcore gamers -- I’m talking about the masses for whom gaming isn’t a serious passion.

It’s not like Nintendo’s going out of business.

But remember where Nintendo was just three or four years ago. It was completely dominating the industry with the Wii and 3DS, and now it’s regularly reporting horrible quarters and cutting guidance.

So we can now add Nintendo to Apple’s growing list of victims -- Nokia (NOK), Research In Motion (RIMM), pre-Android Motorola (MMI), Palm, and Cisco’s (CSCO) Flip-camera unit.

As far as stocks go, I regard the 3DS price cut as somewhat bearish for GameStop (GME), simply because the free game downloads given to existing 3DS owners could be a drag on near-term software sales.

I will say this though: Electronic Arts’s (ERTS) bid for casual-gaming juggernaut PopCap is looking very, very smart right now. The price tag on that deal is as high as $1.3 billion, and given what happened to the 3DS, that might be a bargain. I’m still not a fan of that stock, but it's on the right track.

Follow Michael Comeau on Twitter @MichaelComeau.
Position in AAPL

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