The new Nintendogs game from Nintendo was cheap to develop, sells with a fat margin, should appeal to nongamers and is looking like a major hit. In other words, it's the kind of product the video-game industry almost never comes up with. Nintendogs looks risky, at least at first glance. It's made solely for Nintendo's new handheld DS system, meaning that it doesn't yet have a large base of potential users like games for the PlayStation 2 or Game Boy Advance do. Further, it's the first game under that title and it doesn't have any celebrity voices or a movie tie-in. Moreover, it's not a traditional game in the sense that players can't really "win" it and there's not really an end to it. Instead, users play it by nurturing their dog, virtually petting, feeding and playing with it. They can teach it tricks and arrange play dates with other virtual dogs. Silly as all that may sound, the game is already a hit. Nintendo has sold 700,000 copies in Japan since April and another 250,000 in the U.S. in just the first week after it was released. That won't rival the sales of something like Electronic Arts' ( ERTS) Madden NFL football title, but considering that Nintendo has sold fewer than 2 million DS players so far in the U.S., it means that more than 1 in 8 DS owners here have already bought a copy of the game.
Indeed, those sales are among the best ever for a new Nintendo franchise, says company spokeswoman Beth Llewelyn. Better yet, the game seems to be encouraging new sales of the DS, she says. And anecdotal evidence suggests the game has found an audience outside the traditional gamer demographic of young males. Meanwhile, the game could prove to be a big money-maker for Nintendo. Handheld games are typically cheaper to develop than games for consoles. And publishers usually see the highest margins on games they develop in-house that don't involve expensive licenses or royalties. Nintendo's not alone in finding success with an unconventional game. Titles such as Tetris in the 1980s and Myst in the 1990s showed that off-beat games can be cross-cultural hits. But the chances of another Tetris or Myst -- or a Nintendogs -- emerging from the game industry seems to be growing increasingly slim, analysts say. "The economics
of the industry are driving the situation to where people are somewhat risk-averse. You don't see a lot of experimentation," says Van Baker, an analyst with Gartner, an industry research firm. The major game companies are all public entities whose investors have generally pushed for predictable -- and ever growing -- returns. But with each new game system, the cost of developing games has generally gone up. Some analysts, for instance, are expecting the cost of developing top titles for the next generation of consoles -- due to hit store shelves over the next year -- to rise to $20 million from about $10 million on current consoles. In the face of these twin obstacles, most publishers have turned to using franchise titles, often involving known, licensed properties. This year's version of EA's Madden, for instance, was the 16th for the title. Even when the major publishers introduce new properties, they are often simply knock-offs of existing games or genres. One of THQ's ( THQI) launch games for Microsoft's ( MSFT - Get Report) Xbox 360, for instance, is a new title called Saint's Row, which has all the feel of a Grand Theft Auto wannabe.
The thinking behind such retreads is that even if the game is a dog, as it were, it will at least draw some sales from players who bought previous versions or from those caught up in the marketing for the movie or TV show on which it is based. Indeed, the game industry increasingly resembles the Hollywood movie industry, analysts say. Studios have spent way too much time and money producing special-effects-heavy blockbusters without worrying enough about character development and telling stories. Likewise, the game industry has become overly concerned about producing games with amazing visual effects that will wow investors and enthusiast magazines alike, and not enough on making games accessible to a broader audience -- or even fun. "There's a lot of sizzle and explosions with what goes into games nowadays," says one former industry executive. "But the truth of the matter is, there's a lot of style over substance." The problem for the video-game producers is that there is at least one significant difference from the movie industry: When a movie fails at the box office, the studios can often recoup their investment with subsequent DVD or video sales. But there's no analog for the DVD market in the game industry. "Either you get it right or you don't. There's no fallback," says Gartner's Baker. "The risk is significantly higher in the gaming segment." And as predictable -- some might say boring -- as the game industry has become, the formula has been working. Game sales and company profits have grown with each new successive generation of consoles and are expected to grow again with the new console coming to the market. But not everyone has shared in that growth. Indeed, as development costs have jumped with each generation, a growing number of companies have been unable to compete. In the past several years, 3DO and Acclaim both closed shop and Eidos' assets were sold to a rival. Atari ( ATAR), Midway Games ( MWY) and Majesco ( COOL) all look like they could
suffer similar fates. "You're seeing a lot of smaller players really getting hurt," says Spiegel. "People are dying on the vine because ... they're spending a lot of money to play catch-up with me-too products." And the industry faces a bigger, if longer-term, risk that it won't be able to lure new customers -- or, worse yet, won't be able to lure back older ones -- because there's nothing new or interesting to play. "People are getting a little tired of getting sequel-ized to death," says the industry executive. Nintendogs could offer a way of preventing that fate. Just don't expect the pack to follow.