Having watched its once-mighty handheld-gaming business come
under attack by touch-screen smartphones sporting $1 game apps,
Nintendo Co. is betting big that it can keep gamers paying for what
it considers a premium experience.
This weekend, the Japanese videogame giant (NTDOY) will launch
the 3DS as its latest entry into a fast-changing market. Modeled
after its hugely popular DS console, the latest gizmo is the first
gaming console dedicated to playing 3D games -- without requiring
the user to wear special glasses. The device carries a price tag of
$250, and games for the system have been priced at $40 apiece.
It's a big bet considering that the mobile-gaming industry has
shifted the other way of late, away from dedicated consoles and
expensive game cartridges and disks, and toward cellphones loaded
with games that typically cost $1 -- or nothing.
"Is maintaining high-value games a top priority, or not?" asked
Nintendo Chief Executive Satoru Iwata in his keynote address at the
Game Developers Conference in San Francisco earlier this month.
Describing what he termed as "two distinct sides" of the gaming
business, Iwata contrasted the approach of Nintendo to that of
companies who make smartphone devices and platforms that have "tens
of thousands" of games available at little to no cost to
consumers.
"These platforms have no motivation to maintain the high value
of videogame software," Iwata said. "For them, content is something
created by someone else. Their goal is to get as much software as
possible, because quantity is how the money flows."
Ironically, Iwata was delivering his speech right across the
street from where Apple Inc. (AAPL) was unveiling its latest
product -- the iPad 2.
Expectations
Like the company's DS console, the 3DS features two screens in a
fold-up clam-shell design. The bottom is a touch screen that helps
the user control the game; the top is a viewing screen with a
slider switch that can adjust the 3D effects, or turn them off
completely.
While 3D movies have become popular for Hollywood movie studios,
the videogame industry has not made widespread use of the
technology, citing the limited sales and high costs of 3D
television sets and the special glasses needed to view them. The
3DS uses something known as parallax barrier to deliver images that
a user can see in 3D without using those glasses.
The technology is new enough that Nintendo even issued a warning
to gamers last year to limit playing time on the device to 30
minutes per session, and to avoid letting children under the age of
6 play games using 3D, on the risk that it might impair eye
development.
Analysts are still expecting a strong opening for the 3DS. The
device first went on sale in Japan on Feb. 26 and sold out all of
its initial production run of 400,000 units, according to Japanese
media reports.
As for the U.S. launch, Nintendo would not say how many units
are slated for the market, but some early signs are pointing to
strong demand. The device has been a top seller on Amazon.com
Inc.'s (AMZN) videogame section in a pre-sale mode.
And on Thursday, game retailer GameStop Corp. (GME) told
investors that the company has received an increased allotment from
Nintendo based on strong preorders for the device.
"Consumer demand for this product has been immense," GameStop
president Tony Bartel said in an interview. The retailer will have
about 1,400 of its stores offering live demos of the device on
Saturday before the official sale starts.
Nintendo is gearing up for its biggest launch since the Wii
console hit the market in late 2006. The console remained sold out
at retailers for nearly two years as the company rushed to keep up
with demand.
Reggie Fils-Aime, president of Nintendo of America, said the
company's experience with the Wii taught it some lessons about
maintaining a better supply base with retailers in order to avoid
frustrating potential customers over the long term.
"In the end, if we end up catching lightning in a bottle again,
we could still end up chasing demand," he said in an interview.
Nintendo has a large base of established fans to sell the 3DS
device into; the company has sold nearly 150 million units of the
previous DS versions globally.
"Anything new from Nintendo will be popular for a time. But the
reality is that the market for high-end portable game devices is
smaller than it used to be," said Colin Sebastian of Lazard Capital
Markets.
He added, "That doesn't mean it won't be a good business for
Nintendo."
Industry watching
Nintendo has typically ruled the handheld game market. It's
Gameboy device pioneered the space, and its DS family has vastly
outsold the PSP from Sony Corp. (SNE).
But that business has slowed notably over the past year. Unit
sales of the DS fell 24% in 2010 in the U.S. compared to the
previous year, according to data from NPD Group. The line might get
a boost in March as Nintendo launched a new version of its
"Pokemon" games for the platform earlier this month.
But many eyes will be on the launch of the 3DS as a potential
indicator of whether consumers will still be willing to pay a
premium for a gaming experience.
"We think the 3DS launch is going to produce stronger sales than
the DS did in its first year," said Jesse Divnich, analyst with
EEDAR, a videogame market research firm. "At the end of the day,
Nintendo offers premium entertainment. IPhone games offer
snack-sized entertainment."
Doug Creutz of Cowen & Co. says the handheld gaming business
has been "very soft" for the past few years. Sales of handheld
software declined nearly 24% in 2010 -- a sharp contrast to the 42%
growth rate the segment saw just five years prior, according to
Cowen's data.
Creutz added, however, that Nintendo likely has more riding on
the 3DS launch than other players in the game space, given that no
one else has as much exposure to the handheld market. He added that
games from third-party publishers tend not to do as well on
Nintendo's platforms as its own properties, which include popular
franchise characters such as Mario, Donkey Kong, Zelda and
Pokemon.
"The handheld business is a win-or-lose for Nintendo. I don't
think it means much for anyone else," Creutz said.
Michael Pachter of Wedbush Morgan said the new device will
likely help Nintendo rejuvenate its handheld gaming business, but
that business is still going to face intense competition going
forward.
"The onslaught of $1 games is going to continue. That's going to
cut into their market, though it's not going to destroy it,"
Pachter said. "Point is, they are going to have to share the market
with Apple and Android. I don't think there is anything else they
can do about it."
Nintendo shares were recently down 0.8% at $34.34 in the
U.S.
-Dan Gallagher; 415-439-6400; AskNewswires@dowjones.com
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