In 1989, Nintendo launched a small handheld gaming system that, on paper at least, shouldn't have been a huge seller. The system, called Game Boy, wasn't the first portable device to offer interchangeable game cartridges (that was Milton Bradley's Microvision, which went on sale 10 years before). The Game Boy was also beset by a notoriously poor screen that displayed games in blurry, barely distinguishable shades of gray-green. Around the same time, Atari launched the Lynx, a handheld console with a 16-bit color screen. It was superior to the Game Boy in almost every way.
But the Game Boy had two things going for it. Its cheap, simple hardware allowed for a low sales price and wide availability: The Game Boy sold for $109 while the Lynx cost $189, and Nintendo could produce the Game Boy much faster than Atari could churn out its handheld. More importantly, Nintendo recognized the importance of having a few killer titles. The Game Boy launched with Tetris, an addictive game that perfectly suited the device's simple graphics, and Super Mario Land, which marked the first time you could take Mario in the car. As a result, Game Boy was an instant blockbuster. Nintendo would ultimately sell more than 118 million Game Boys, making it the most successful handheld gaming system ever developed—until Nintendo launched a new handheld system, the DS, that would break the record with its 146 million units.
The Game Boy is a microcosm of Nintendo's history. Time and again, the company has released products with markedly inferior specs to those of its rivals and has won despite these shortcomings. See, for instance, how the Wii crushed the Xbox 360 and PlayStation 3. Nintendo has always understood what its competitors often miss: Hardware matters less than the experience of playing the games. Systems with subpar specs can still offer a superior gaming experience.
But now Nintendo is in trouble. On Thursday, it reported dismal sales figures for the first quarter of its fiscal year—the company lost $328 million, and it predicts that profits for the year will come in 80 percent lower than it had previously forecast. The company's older gaming systems—the Wii and the DS—are seeing rapidly declining sales, while its newest device, the 3DS, has failed to take off. The company expected to sell 16 million 3DSes this year; in the first quarter, it sold just 700,000. To boost sales, Nintendo announced that beginning in August, it will slash the price of the 3DS from $250 to $170.
Why is Nintendo in the dumps? Because another company has stolen a page from its playbook. Over the last four years, Apple's iOS devices—the iPhone, iPod Touch, and now the iPad—have captured a sizable and rapidly expanding share of the market for handheld video games. In 2009, according to the research firm Flurry, iOS accounted for 19 percent of the portable game market, while Nintendo had 70 percent. In just a year's time, Nintendo's share had dipped to 57 percent, while the share of smartphone games (both Apple and Android) shot up to 34 percent.
Android and iOS devices are winning for the same reason that Nintendo's handhelds stayed on top for so long. As gaming devices, touchscreen phones and tablets can't match the specs of the 3DS, which offers immersive, three-dimensional games that don't require players to wear silly glasses. The 3DS has a direction pad, an analog stick, a bevy of buttons, and two screens. Smartphones, by contrast, only have a touch screen and an accelerometer.
While they can't match Nintendo's gaming hardware, Apple's gadgets offer a superior gaming experience for a wider audience. Through the App Store, you can choose from a much wider variety of games than you can find for the 3DS, and at far lower prices. There are lots of free iPhone games, and the ones for sale cost from $1 to $10, as compared to $30 to $40 for 3DS cartridges. As multifunction devices, phones and music players also appeal to people who don't want to play games all the time. This means that they attract a substantially larger audience than a dedicated device like the 3DS, which in turn makes the iOS platform more attractive to game developers.
With the iPhone and iPod Touch, Apple is doing to Nintendo what Nintendo did to the Xbox and PS3. It's offering a cheaper, more widely accessible gaming experience, despite hardware that gamers look down on. The strategy is working. Since 2007, Apple has sold 222 million iOS devices—more than any gaming console in history. According to some estimates, there are now more than 60 million iOS gamers around the world, and they collectively download 5 million games a day.
All is not lost for Nintendo. The gaming business is naturally cyclical and unpredictable. Companies that look unstoppable one day—Sony during the PlayStation and PS2 era—can look pathetic the next. (Sorry, Sony.) The same goes in reverse: Nintendo is still a devilishly innovative company, and it has always come back from slumps by developing great new games and gaming systems. 3D gaming hasn't become the instant hit that motion-gaming was (it doesn't help that people have complained of eye strain), but if Nintendo can create one or two irresistible 3D titles, it could still turn the ship around.
I worry, though, that the company doesn't yet comprehend the challenge posed by smartphones. Satoru Iwata, Nintendo's CEO, has repeatedly criticized the App Store model of game distribution. He argues that allowing developers to create free ad-supported games, or games that sell for just a buck or two, will reduce the quality of the games available for his consoles. "If we were simply going to say OK, the only way we could sell more products is by decreasing the price, then there wouldn't be a bright future and the entire industry will fold," he told All Things D in June. His comments also seemed to suggest that Nintendo won't try to offer its games to other platforms—even if those platforms eclipse Nintendo's own devices.
Nintendo made its fortune in the era of dedicated, single-function portable devices, but the multifunction smartphone is ushering in a new age. This doesn't mean that all dedicated devices will die. Amazon's Kindle, for instance, has thrived despite competition from smartphones and tablets. The reason Amazon has done well is that it has proved willing to shift its strategy in response to its rivals. By pushing for ever-cheaper content from a wider variety of authors, it has made Kindle a powerful force in the publishing industry. Amazon is also not selfish about Kindle content—you can read books from its store on Amazon's device, but also on the iPhone and pretty much everything else.
It would be difficult for Nintendo to match this strategy. I doubt that Apple will allow it to set up a game store on the iPhone—it could do so for Android, however—and many games developed for the 3DS and DS won't work on touchscreen-only devices. But surely Nintendo could make a push for cheaper games, and even for free games—and, in general, open itself up to the possibility of developing novel business models. When asked about that possibility in the past, Iwata has been adamant: "Nintendo is not interested," he told All Things D. Perhaps a long slump will change his mind.
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