Nintendo 3DS Faces Handful of Obstacles

NEW YORK (TheStreet) -- The Nintendo 3DS (NTDOY.PK) is no Game Boy, and the hand-held market it's entering isn't all fun and games.

While the latest offering in Nintendo's DS hand-held gaming line promises gamers a glasses-free view of three-dimensional gaming, it'll be fighting off an increasingly strong field of competitors on multiple fronts. Since the first touchscreen DS appeared in 2004, the line has sold 47.4 million units in the U.S. alone -- more than 10 times the sales tally for Sony's ( SNE) competing PSP and more than 28% more than the 34 million units Nintendo's flagship Wii console has sold since launch, according to the NPD Group. Globally, it has more than doubled the unit sales of Sony's PlayStation 3 and Microsoft's ( MSFT) Xbox 360 and unmercifully pummeled its most recent hand-held competitor, the disc-free, download-only PSP Go (for which Sony has never released sales figures).

The hand-held market, however, is a lot more complex than the two-dimensional world the DS dominated when the PSP Go was released two years ago. From October through December of that year, ComScore ( SCOR) says 21.6% of mobile-phone users played games on their phone, though only 17.8% downloaded them as apps. Last year, from September through November, 22.6% of mobile phone users played games on their devices, while 33.4% picked them up as apps. Gartner ( IT), meanwhile, believes last year's more than 4.5 billion mobile app downloads worldwide will jump Mario-style to 21.6 billion in 2013. Unlike Nintendo's old Game Boy, which only had to deal with Sega's unpopular Game Gear hand-held, the DS has the misfortune of squaring off with the smartphone.

"Sales of Nintendo DS hardware have continued to remain strong, but I do think that competition from smartphone game apps is cutting into the dedicated hand-held gaming market," says Anita Frazier, video game industry analyst for NPD Group. "A lot of mobile apps are free or very inexpensive, and for 'snack-sized' gaming, they can fit the bill for a lot of consumers."

The lure of Angry Birds and other free fun is already doing damage to hand-held consoles' life meters. A report released by Flurry Analytics last year revealed that the second-largest seller of portable game software in 2009 wasn't Sony, but Apple ( AAPL) -- whose share of the market grew from 5% in 2008 to 19% a year later. Meanwhile, the DS saw its sizable 75% stake of the market shrink to 70%, while Sony's 20% share was stomped to 11%. Flurry and NPD surmised that Apple's game revenue jumped to $500 million from $115 million in that span as the IPhone and iPod Touch gave gamers smarter consoles. The iPad's release last year only compounded the problem, as Flurry said 44% of all applications tested before its release were games.

That pressure is a big part of the reason Nintendo made the jump to the glasses-free 3-D Frazier believes will revolutionize the market. Nintendo of America President Reggie Fils-Amie made a point of reminding the crowd at the 3DS launch that Nintendo introduced touchscreen gaming in 2004 and motion-control gaming in 2006 -- long before Apple, Sony and Microsoft had their own fun with those game functions. Nintendo's may just need its newest proprietary technology, such as the new hand-held's 3-D screen, "augmented reality" cards, Internet browser, Virtual Console Game Boy and Game Boy Color retro library, Wii-style Wii avatar creator and 3-D cameras to distance the 3DS from encroaching competition.

It's be a tough task -- the $249 3DS is already more expensive than most existing consoles and smartphones, and Sony's been hinting at a new PSP and a potential Sony Ericsson PlayStation phone by month's end -- but Mario's been saving the princess for more than 25 years. Adversity's nothing new for Nintendo and won't be for the DS.

"It is a higher price point than the dedicated hand-held gaming market has been accustomed to, but I think the technology and the experience it provides is so compelling that it's not going to impact sales," Frazier says. "You really have to see it to believe just how amazing it looks and how real it feels. It can deliver an emotional impact that is hard to replicate in other environments."

-- Written by Jason Notte in Boston.

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Jason Notte is a reporter for TheStreet.com. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, Time Out New York, the Boston Herald, The Boston Phoenix, Metro newspaper and the Colorado Springs Independent.

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