[28 March 2011]
SAN FRANCISCO — Having watched its once-mighty handheld 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 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 3-D 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 smartphones 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. was unveiling its latest product — the iPad 2.
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 3-D effects, or turn them off completely.
While 3-D 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 3-D 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 3-D 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 3-D, 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 video-game section in a pre-sale mode.
And on Thursday, game retailer GameStop Corp. 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 target with the 3DS device; 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.”
Nintendo has typically ruled the hand-held game market. Its Gameboy device pioneered the space, and its DS family has vastly outsold the PSP from Sony Corp.
But that business has slowed notably over the past year. Unit sales of the DS fell 24 percent 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 business has been “very soft” for the past few years. Sales of hand-held software declined nearly 24 percent in 2010 — a sharp contrast to the 42 percent growth rate the segment saw just five years prior, according to Cowen’s data.
Creutz said, 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 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.”