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Smartphone Games Likely to Hinder Nintendo 3DS Success

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Why spend hundreds for the device then $30 to $40 per game when Apple's iPhone and other smartphones offer popular games for $0.99?

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I've been taking the New York City subway system just about every day since I started high school in 1993.

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

I saw the Apple (AAPL) 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 (SNE) 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.

All the recent data supports my anecdotal observations:

1. IDC recently raised its 2010 smartphone unit sales growth forecast to 55% from 45%.
2. Gartner says that up to 80% of mobile app downloads are for games -- and app downloads are skyrocketing.
3. ComScore numbers indicate that smartphone gaming is growing like a weed while traditional mobile gaming is declining.

And just yesterday, Nintendo cut its profit forecast due to the impact of a strong Japanese yen, lower demand for the Wii console and DS handheld, and the delay of its new 3DS handheld until February 2011.

So the question becomes: Can the 3DS succeed in an environment when smartphone gaming is starting to rule the roost?

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.

For one, millions upon millions of people are carrying around smartphones, for which most games cost somewhere in the neighborhood of free to $4.99. As of the time I'm writing this, nine of the top 10 selling games in Apple's app store cost just $0.99.

See also The Future of Software Is Here, And It's Freemium.

So I can't see the average person (as in not a hardcore gamer) getting excited about ponying up $200 to $300 for a 3DS and $30 to $40 for a game when they already own a gaming device.

Consumers are also rapidly embracing tablet computers like the Apple iPad, which provide a better gaming experience than smartphones -- and another excuse not to carry a separate gaming device like a 3DS around.

Think of it this way, there's almost zero chance that an iPad owner doesn't own a smartphone as well. And if that person's already carrying an iPad and a smartphone, they're not going to want to drag around a 3DS.

Now it's obvious that there's a major difference in the kind of gaming one can do on an iPhone versus a real handheld like the DS or PSP. The smartphone gaming experience will never match that of a dedicated device. But it doesn't have to because it's so cheap.

The reality is that casual gaming -- and that includes smartphone gaming -- is taking over. The hot gaming company of today isn't Electronic Arts (ERTS) or Activision (ATVI), it's Zynga, maker of FarmVille and Mafia Wars.

And if people are spending a lot of time playing free and $0.99 games today, then they're most certainly not going to be buying many $30 to $40 3DS games tomorrow.

Again, I'm talking about the mass market, not the hardcore gamers. The serious gaming set isn't going anywhere, and they'll be there to pick up a 3DS on day one.

But without those mass-market buyers, there's no chance that the 3DS will outsell the DS, which moved 132 million units and counting.

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