Hand-held video game consoles
Just two years ago, Nintendo had a firmer grip on the portable video game market than a gamer has on a controller after 12 hours of a Zelda game and a 12-pack of Mountain Dew. Eventually that sugar crash sets in, though, and last year Nintendo's DS saw its 70% market share dwindle to 57% as iOS and Android phone and tablet apps picked up steam.

Nintendo's 3DS, launched earlier this year, was supposed to stop the bleeding a bit, but the initial $250 price made consumers used to $200 smartphones feel like they were the ones being bled. Nintendo dropped the price to $169 this summer, but that and 3-D graphics may not be enough to keep $1 or free smartphone apps from jumping all over Mario and company.

"Three years ago the dedicated portable gaming devices had an active user base of over 90 million consumers worldwide," says Jesse Divnich, vice president of capital research and communications for video game market research firm Eedar. "In 2011, due to the increase in converging media devices such as the iPad and iPhone, we believe the total market active market for dedicated portable gaming devices has shrunk to 60 million consumers."

That shrinking market somehow makes masochistic gaming companies only more inclined to jump into the fray. Sony's PlayStation Portable dominated portable gaming in the mid 2000s, but saw its market share dwindle from 11% in 2009 (compared to 19% for iOS) to a barely there 9% last year. Nonetheless, it introduced its new portable PlayStation Vita console at the Electronic Entertainment Expo this summer and showed off its motion control, touchscreen, GPS and Wi-Fi, 3G and Bluetooth connectivity.

"The Sony device is likely not going to make it," Entner says. "A couple hundred dollars for that thing? Why? Because we're not that far yet down the curve as we are here in Japan."

The Vita's games aren't delivered in downloadable apps, but on a hard format that looks like an SD card, yet Sony promises to make Facebook, Twitter and Foursquare apps available and says it will partner with AT&T for 3G access. Is this really what gaming companies should be doing right now?

"Market share losses to smartphones will probably grow to 30% or more, but not to 100%, so the market will still be quite large for portable gaming devices," says Michael Pachter, video game analyst and managing director of equity research at Wedbush Securities. "At 70% of their peak, we'll still see 20 million to 25 million portable devices sold annually, so Nintendo and Sony will stay in the business."

The software will also go a long way in keeping them around. Nintendo's in no mood to license out Mario, Link, Samus from Metroid, Kirby or any of its other holdings to a smartphone app. Sony, meanwhile, already tried its hand at the smartphone market with the Sony Ericsson Xperia Play and $10 versions of old Sony games such as Little Big Planet, S.O.C.O.M. and God of War, to little fanfare.

New games from each will be enough to drive demand, but Divinich suggests that Sony and Nintendo continue building around their core gaming element with features such as the augmented reality games, front- and rear-facing cameras, Internet browsers, Netflix streaming and other video content. If not, Entner says users are better off ditching Mario and Sackboy for a smartphone that performs all those tasks and lets users share games and talk to their friends as well.

"While the market for dedicated portable gaming devices have shrunk, the total size is still able to support a healthy market for dedicated portable gaming devices; however, the profit potential is certainly not as lucrative as we've seen in years past," Divnich says. "The idea of a dedicated portable gaming device is slowly becoming obsolete, but this doesn't mean the death of Nintendo or Sony, as both of their new portable gaming devices are now able to offer a robust multimedia experience including taking photos, digital app downloads, watching movies and listening to music."

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