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The end of the dedicated portable device

On October 27th, Nintendo published half year results for the fiscal year ending in March 2012. Management stated that the company lost over $900 million with a negative outlook. Nintendo cited weaker than expected sales of Nintendo DS hardware and 3DS software and Yen appreciation as the main reasons for the miss. Is this the end of Nintendo?

Before we look more closely, here is a quick summary: The company is exclusively involved in selling game hardware and software. Their console platform is the Nintendo Wii, which will be followed by the Wii U late in 2012. The Nintendo DS and Nintendo 3DS are the company’s portable game consoles. The Wii and the DS are nearing the end of their product cycles. On the software side, the company is known for gaming titles such as Super Mario and Zelda. Nintendo also pioneered the licensing model to allow third-party developers to produce games for its hardware products.

A closer look

The good news for analysts is that Nintendo publishes their estimates for hardware and software unit sales. This allows us to measure management predictive accuracy. The red line (management forecast) should be as close as possible to the dark green pillars (realized unit sales in the fiscal year).

Until CQ1 2009 devices sales grew in excess of forecasts. A similar pattern can be found for consoles and game titles. After Q1 2009 forecasts have been always higher than results, and more worryingly, the deviation between forecast and sales is widening. Management missed and lowered forecasts for two consecutive years. Management’s hope for an increase on the back of initial 3DS sales in the launch quarter (CQ1 2011) did not come to pass and they subsequently lowered forecasts again in the following two quarters.

Looking at all categories, management lowered forecasts almost continuously. The deviation remains the largest in the portable hardware business segment indicating that management was largely surprised about the development.

What caused this reversal of fortune?

Two years earlier the iPhone had launched and by CQ1 2009 iOS reached an installed base of about 38 million, half the number of Nintendo portables in the same period. Furthermore, in CQ1 2009 Android phones came to the market. Smartphones (light blue area of the chart below) sold before (and after) the debut of iOS, but the iPhone redefined the category and an avalanche of smarter phones running iOS and Android followed (blue and orange area). Portable gaming devices from Nintendo and Sony declined ever since: 17% in 2009, 31% in 2010 and already 16% in the last twelve months.

How do the game players stack up?

We already looked at the installed base in the chart above. iOS and Android have outsold Nintendo portable units by a factor of 2.1x and 1.6x. Furthermore, we can see (in the charts below) that the two main mobile platforms have 14 to 26 times more game (and entertainment) titles available. Nintendo and Sony also publish unit sales of directly sold software titles. For Android and iOS we know the cumulative app download statistics. By taking the share of Septembers’ paid and free app downloads as a proxy, we can conclude that also by this measure Android and iOS dwarf Nintendo and Sony [1]. The reach of iOS and Android is further underlined by the more than 500 million downloads of Angry Bird game titles – first released only two years ago – for any platform having sold more than twice the amount of Sony’s cumulative portable game titles and almost as many as Nintendo’s cumulative games titles since Q2/2007.

 

Who else has skin in the game?

Besides Nintendo, Sony, Apple and Google, who else is making a push into mobile gaming? Before investigating, let’s first have a closer look at Sony. Sony, just like Nintendo, is also active in stationary gaming segment with the PlayStation franchise. The Sony group also has access to entertainment most notable through Sony Pictures Entertainment and Sony Music Entertainment. Furthermore, Sony recently decided to buy Ericsson’s stake in the mobile phone joint-venture Sony Ericsson and is making a push with Android to bring its gaming titles as a differentiator for its own products to the platform. And the other major suspects? Microsoft, also active in the stationary gaming segment with its Xbox franchise, is pushing to bring the Xbox experience to mobile phones with Windows Phone. Amazon has retailed software and games for years and has started to distribute software and games via direct download on its own Kindle devices but also for the Mac. On the Kindle, Amazon is relying on a forked Android version on which it leverages its eBook and other entertainment assets. And then there is Facebook, a social network that wants to be on any platform or device. Out of 800 million users, 350 million access Facebook via a mobile device. Around 50% of Facebook members play games on the desktop. With Project Spartan, Facebook is aiming to bring the desktop experience to the mobile device including a stronger focus on gaming and video.

The competition between Apple and Google is already asymmetrical. Including the other contestants in the competitive landscape reveals Nintendo’s key weaknesses in the portable gaming market: attraction as a platform for developers in terms of ease and reach, pricing of hardware competing with operator-subsidized mobile phones and the jobs-to-be-done or value preposition. The new generation of mobile devices is standing against Nintendo’s dedicated approach. Although slowly adding features such as a browser and “app store” to its portables, Nintendo devices fall short in the variety of jobs-to-be-done compared to smartphones, let alone making a call.

Average selling prices and financial impact

With this market pressure one would imagine that average selling prices decreased for Nintendo portables. But for the last three fiscal years average selling prices for portables have increased, all things equal, mainly due to new product launches. Game title’s average selling prices have remained relatively flat. Note that these are wholesales prices for hardware and a mix of retail and wholesale prices for games. In 2011, for which we do not have data yet, the price of the newest portable, Nintendo 3DS, was lowered from its U.S. debut of 320 250$ in February to 170$ in July which will have a negative impact on ASP going forward.

The effects of Nintendo’s rigid strategy and the fast changing competitive landscape are manifested in the devastating financial performance over the recent quarters with LTM sales, gross margins and EBIT margins declining starting from CQ4 2008 and even accelerating to decline after CQ3 2010.

Furthermore, even though the company has recognized its own difficulties, Nintendo has no intention of adjusting its strategy:

CEO Iwata on the question of whether Nintendo plans to bring its game library to other platforms:

This is absolutely not under consideration. If we did this, Nintendo would cease to be Nintendo. Having a hardware development team in-house is a major strength. It’s the duty of management to make use of those strengths. It’s probably the correct decision in the sense that the moment we started to release games on smartphones we’d make profits. However, I believe my responsibility is not to short term profits, but to Nintendo’s mid and long term competitive strength.

Although realized and obvious, the disruption’s invisibility is often manifested in the paralysis of the incumbent.

Conclusion

According to Isaacson, Steve Jobs apparently always worried who could eat Apple’s lunch. The lunch of the iPod, he concluded, was ripe for mobile phones. Subsequently, Apple entered the mobile phone space. Google followed. Since then more powerful mobile phones have eaten the lunch of the dedicated gaming device. The jobs-to-be-done and their priorities in people’s life have not changed, but the tools people use to get them done have. Permanently.

Notes:

  1. Estimated by multiplying total cumulative app downloads with September’s share of game downloads: For iOS ranging from 72-80% based on Top 150 free and paid app downloads, for Android ranging  from 38-47% respectively. This is a very crude estimation, but the gist of it is that 4% for iOS and 11% for Android game downloads as percentage of cumulative app downloads would outsell Nintendo.
  • http://twitter.com/Moeskido Moeskido

    Is it too much of a generalization to note that this story reminds me a bit of what happened to the Flip camera?

    • http://twitter.com/disc1979 Dirk Schmidt

      Apple noted that the iPhone is now the no.1 camera on flickr.

    • Canucker

      The FLIP issue was even worse as Cisco bought the operation when the writing was on the wall. That’s as bad as someone like HP buying a phone operating system, producing hardware and then almost immediately shutting it down. Oh, wait….

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  • Guest

    Nintendo does not make Street Fighter.

    • http://twitter.com/disc1979 Dirk Schmidt

      Its known for it.

      • Guest

        No it’s not, the latest version of Street Fighter isn’t even on the Wii

      • http://twitter.com/disc1979 Dirk Schmidt

        I took it out.

  • Guest

    I don’t understand why the comparison DS sales to iOS and Android devices starts when the iPhone was released in 2007, instead of the sum total of DSes sold since its release in 2004. I also don’t understand why downloads of Angry Birds, a game you can download the demo of for free, and redownload perpetually, are being compared to physical media sold on the other platforms.

    • http://twitter.com/disc1979 Dirk Schmidt

      I wanted to show the momentum in that time frame.

      Life-to-date sales of units of Nintendo DS family of systems 146.42 million vs. iOS of 250 million.

  • Matt Matthews

    This is not correct: “In 2011, for which we do not have data yet, the price of the newest portable, Nintendo 3DS, was lowered from its U.S. debut of 320$ in February to 170$ in July which will have a negative impact on ASP going forward.”

    The 3DS launched at US$250 and is now US$170.

    Moreover, does CQ4 mean “calendar 4th quarter”? It launched in the last fiscal fourth quarter for Nintendo, i.e. March 2011.

    Finally, are the figures in the hardware ASP graph computed by dividing hardware units shipped by hardware revenue, as reported by Nintendo in its filings? How much did the FX rate figure into the curves you’ve got there? And how are you getting the software ASP? Nintendo’s software revenue figures include licensing revenue from third parties, and do not directly reflect software revenue on units sold to consumers.

    • http://twitter.com/disc1979 Dirk Schmidt

      1) corrected. Thanks.
      2) corrected. Thanks.
      3.1) ASP hardware: yes, revenue / units. FX has impact, but the size can not be derived from the filings.
      3.2) ASP software: also revenue / units. I noted that software revenue are a mix of several sources.

      • Anonymous

        So what exactly are your sources for software ASPs then? Frankly, your estimates seem too low. At retail the ASP is around $40 and anecdotally, retailers don’t make more than $5 per game.

        I think this is crucial when you’re trying to compare the value of Nintendo’s platforms with iOS and Android. The Nintendo DS is still driving a lot more game revenue than iOS.

      • http://twitter.com/disc1979 Dirk Schmidt

        Sources are earnings releases of Nintendo. As mentioned, these are wholesales prices and there is a license component in game title revenues.

  • Tatil

    I am sure iPod touch and all those smartphones are eating into Nintendo marketshare, but I believe 3DS is a flawed product that would not be a huge success even without these newcomers. There may be some CPU or GPU improvements in its internals, but the main attraction behind 3DS is the “glasses-free 3D screen” and that was its main marketing talking point. I am not much of a gamer, but I tried it at one of the promotional tents they set up in the city. With the cheap looking slider on its side, you can set it up so that you get a 3D image. The football game I played in the demo unit looked a little more interesting with the 3D screen, but only a little bit more. My first impression was that it was a gimmick, not an “I gotta have this” feeling, even before thinking about the purchase in a more prudent manner. I never felt like this game would not be much fun without the 3D. Then it got worse, as I noticed that 3D illusion kept disappearing and the screen became fuzzy, as soon as I moved by head a little further from the screen or my head was just a bit to the right or the left. I had to keep adjusting the slider (or my head) to keep the screen working properly. This is not the path to run-away success regardless what its competitors do.

    • Canucker

      You’d have thought they’d have gotten a clue from the stunning sales success of 3D TVs. Eyes provide the gold standard for 3D vision. Imitations of it have an incredibly high bar to jump.

      • Tatil

        It is especially difficult to pull off in a handheld game console. For example, in a football game, the player’s eyes could be focused on the defensive player who is just about to hit the quarterback or the wide receiver who is running down the field to receive the pass. The game cannot make assumptions about the eyes of the player, so it needs to keep both players in focus. The eyes do not quite blur out the objects at different depths like it does in real life, probably because light from every virtual object is coming from the screen. Then, the illusion of 3D fails quickly, as objects at wildly different distances do not look in focus at the same time in real life. It felt like seeing two dimensional objects moving at slightly different depths. Maybe Nintendo did not implement it well or maybe the limitation is inherent in the medium, but in any case it is Nintendo’s fault either for betting on a half baked medium or using a badly implemented game for its live demos.

  • Steko

    It bears mention that the app store opened in Mid 2008 and the sdk had gone out just a few months earlier. Kids that got touches that Xmas showed them to the other kids and that’s right when Nintendo sales tanked.

  • http://twitter.com/joshwyatt Joshua Wyatt

    Sorry to be picky, but this info has to be right:

    Nintendo doesn’t make Street Fighter, that’s Capcom. And it would be more accurate to just name ‘Mario’ rather than ‘SuperMario’ (and there is a space in Super Mario).

    • http://twitter.com/disc1979 Dirk Schmidt

      1) yes, I am just saying its “known” for it.
      2) corrected. Thanks.

      • http://twitter.com/disc1979 Dirk Schmidt

        I took the Street Fighter reference out. Asymco readers are well educated and such a faux pas just distracts from the core of the article.

  • Voice Reason

    This is crazy. Look at the actual financial results. Nintendo has made more revenue on Pokemon on the DS alone than the entire revenue of the app store in its lifetime – including all apps, not just games.

    Look at App store revenue per iOS device. It’s currently $20 per device. Less than half a single DS game sale.

    And the Angry Birds thing is ridiculous. Angry Birds is FREE on Android, browser, and $0.99 MAX on iOS. And has several titles, all of which can be re-downloaded infinite number of times. Likely avarge ‘download price’ would be something like $0.10 or less. Comparing this to $40 physical game sales?

    • http://twitter.com/disc1979 Dirk Schmidt

      That is the point. The economics have changed since new entrants have established new business models. Profits have shifted.

    • GeorgeS

      How long as Nintendo been selling Pokemon? The app store has been available for about 3 years. In any case,

      No one is denying that Nintendo’s sales were increasing for a while. The point is that they’re on the way down.

      You seem to not understand that Apple sees the app store as a way to sell iOS devices. Developers seem to making some money from the app store. I would venture to guess that it takes a lot more effort and especially time to put out a game for a console or portable player than for either iOS or Android. The time from start to sales of a Nintendo game is probably measured in years, rather than weeks.

      How many small game developers are making games for the dedicated game devices? There are hundreds, if not thousands, making games for iOS and Android. Even the big guys, like EA, have seen the writing on the wall and are making iOS and Android games.

      “Comparing this to $40 physical game sales?”

      Sure, if people are buying the iOS and Android games INSTEAD OF physical games. When they can buy 10-20 iOS or Android games for what one physical game costs and the iOS and Android devices do a lot more than games, it’s not surprising that Nintendo’s sales have dropped.

      • Erick

        Admittedly, Pokemon has been around for a long time, but the franchise does beat the App Store revenue several times over, and the current incarnation continues to sell robustly (12 million and counting).

        Consider that Wii Fit has only been around since 2008 (late 2007 in Japan). That single game sold 22 million units at a retail price of roughly $120. That’s something like $2.6 billion of revenue from a single game. Nintendo is unique in the industry in that it controls a substantial number of franchises each having phenomenal, enduring appeal (not Street Fighter, as others have pointed out, but Mario Kart, Smash Bros, Super Mario, Zelda, Pokemon, and other lesser titles such as Metroid, Professor Layton and Nintendogs).

        The App Store only very recently matched the revenue of the single title Wii Fit, even with the combined weight of all the birds, plants, zombies, ropes, and blades behind it.

        I agree with much of the analysis, particularly in how significantly performance deviated from expectations, but I fear with all the minor factual errors that it wasn’t written with a deep understanding of the video game industry, and especially Nintendo which seems to have engendered the same sort of sentimental loyalty that carried Apple through the mid ’90s.

      • http://twitter.com/disc1979 Dirk Schmidt

        Yes, its written by an outsider. The lens we are using is the disruption theory. The achievements of Nintendo are not denied, but we see that the business model of Nintendo is only a non-profit service for new entrance in this market i.e. Apple runs the App Store at cost and Google is interested in making money through advertising. Profits are shifting in the value network.

      • Anonymous

        As I read comments like this, the impression I get is that gamers are complaining about the article because they don’t want it to be true. It is a simple fact that if the casual gaming market switches to phones, the demanding gaming markets will either not be served, or will have to make do with fewer titles and more expensive hardware.
        But wishing something won’t happen is simply denying reality.

        We old-timers have all seen this before. We saw it when mini-computers made inroads against mainframes; then when PCs began. We saw it when GUIs replaced CLIs. We have been seeing a version of it as more and more IT tasks can be moved to the cloud. In every case, we have people who like the current setup shouting loudly about how inferior the replacement is. And, yes, it is inferior for some purposes — but those who want the change to stop refuse to accept that many people simply don’t care about those purposes for which it is inferior.

        Now, this is not the whole story. There are other situations where, I believe, the endpoint is co-existence, not obliteration. IMHO iPads will NOT replace laptops. iPads will exist for the things they are good at; but anyone who needs to engage in serious writing (and that includes even high school kids) will soon enough conclude that a laptop is a better choice for that task; and the prices of tablets and laptops will be low enough that most people can afford both.

        So — do dedicated game devices fall into this second category? My suspicion is no; the pool of people who REALLY care enough to have a dedicated gaming device in addition to to phone or tablet, is not large enough to keep the market healthy.
        A possibility would be for a vendor to make a device that does both tasks well — basically a phone or tablet that costs $200 more than competitors, but includes dedicated GPU, controllers, etc, along with the library of old favorites. Perhaps such a device would appeal to a large enough population to be economic? Sony’s experience, however, does not seem promising. I don’t know if the Experia sucks as a phone, or sucks as a gaming device, or both; but it certainly sucks as a way to make money.

      • Anonymous

        Nintendo sales are on the way down, but if you look at their 30 year history in video games, both the DS and the Wii were the absolute crown achievements and are very hard to follow up. They’ve been fine before and they’ll be fine now, with sales that are still way higher than before the release of the DS. Arguably the graphs in this story are slanted because they don’t include the years before 2006.

        Nintendo management knows that the video game industry is hit driven like the movie industry. There is no way to chart out reliable revenue forecasts if the games you release don’t capture the attention of the audience.

        For Nintendo everything depends on developing brilliant games. That is the reason why they need their dedicated hardware. All of their break-through, billion $ selling titles over the last 5 years relied on hardware features that weren’t even available on other devices.

        Look at Nintendogs (released in 2004), look at Wii Sports (released in 2006). Tell me how Nintendo could have done that on generic hardware.

  • Canucker

    It will be interesting to see how Sony deals with this. So far, they appear to be behaving true to Sony form and hedging their bets by releasing PSP Vita (old school) and the PSP Android phone – hoping to capture both markets without losing out on either. But there is an inherent flaw with this approach which is that buyers don’t appear to care much about “PSP” certification. Rather, they care about dirt cheap games of pseudo-infinite variety (which caters to short attention span and rapid turnover). They get their deep game investment from the dedicated consoles which is thriving. The middle ground is falling away and Sony may also see its nascent tablet effort descend with it.

    • Anonymous

      Sony has failed at integrating their various business units for the last 20 years. I don’t see how it’s going to change now.

      • http://twitter.com/Marcos_El_Malo Marcos_El_Malo

        Ah, but Howard Stringer must have “cracked” the interactive TV problem, and is now ready to compete with Steve Jobs. /sarcasm

  • Paul

    Dirk- there are so many grammatical and spelling errors I this piece to make it unreadable for me. Please check your use of tenses and spelling before posting.

    • http://twitter.com/disc1979 Dirk Schmidt

      Sorry to hear that. It makes my stomach ache to know there are mistakes and I don’t see them. I am not a native speaker. I will get more proofreaders. I would also highly appreciate it if you could point out main issues so I can fix them. Thanks for you help in advance.

      • jawbroken

        Just a cursory scan to help out:

        “On October 27th, Nintendo published half year result” < results
        "last-twelve-monts" < months [first chart]
        "by CQ1 2009 iOS reached an installed base of closed to 38 million devices, half the number Nintendo sold portables" < number of Nintendo sold portables
        "titels" < titles [third chart]

      • http://twitter.com/disc1979 Dirk Schmidt

        Thanks, I fixed it.

    • GeorgeS

      Take your own advice.

      “Dirk- there are so many grammatical and spelling errors I this piece to make it unreadable for me.”

      That could more correctly be:

      “Dirk: there are so many grammatical and spelling errors in this piece as to make it unreadable for me.”

      There are other possible constructions, of course. Thus, you made at least one spelling error (“I” instead of “in”) and a punctuation error (using a hyphen and space where you should use either a colon or dash, which you could indicate with two hyphens “–“) and left out a word.

      You might benefit from a principle I learned in my days on CompuServe, starting in 1985, including 10+ years as a Sysop. If you are going to criticize someone’s grammar, punctuation or spelling, make very sure that you don’t make any errors, yourself. It would also be better to bring this up to Dirk privately.

  • joe

    This is a very interesting article.

    I remain curious about
    – ASP of Nintendo’s games vs ASP of iOS games vs ASP of Android games? Surely Nintendo makes much more per game than the smartphones. (This point was raised by several earlier commenters)
    – Nintendo’s revenue and profit on games vs devices? Are they shifting toward a razor-and-blades model? Or, conversely, are they moving away from it, like Apple’s recent “buy our device and look at all the neat things you get with it” model?
    – Why has Nintendo’s EBIT margin declined so sharply in the last year?

    and of course we can have a very interesting but fundamentally non-quantitative discussion about Nintendo’s strategy of continuing to produce dedicated hardware. In Iwata’s statement I seem to hear echoes of Apple: Nintendo as a company makes the “whole widget”. Perhaps Iwata and Nintendo are choosing to stay true to that philosophy, and sink with it if needs must.

    Thank you, Dirk, for the research and the article.

    • http://www.facebook.com/james.scariati James Scariati

      “Nintendo’s revenue and profit on games vs devices? Are they shifting toward a razor-and-blades model?”

      I was wondering this exact thing myself. Does Nintendo make more on sales of consoles or sales of games? I’d guess games just because new ones typically cost $50 a pop, so you only need to buy 4 or 5 before you’ve spent more on games than on the console itself. And that seems like a pretty low number considering how many years you own a console.

    • http://twitter.com/disc1979 Dirk Schmidt

      Thanks Joe.

      1) it would be nice to be able to drill down so deep. I believe the average app price for iOS (including free) was below 1.50$
      2) unfortunately, I was not able to derive that from public data. That would be some insight.
      3) when you look at the EBIT vs. gross margin you see they develop in the same direction. That indicates that Nintendo is not cutting down on SG&A (including R&D). What is affecting gross profit is sales price, volume or costs. My analysis indicates that sales prices are fairly stable (but the analysis includes revenues from licensees as pointed out by Matthew below, enjoy with caution). Therefore my educated guesses are: 1) Management missed quantity forecasts and ordered larger volume which could not be sold in the same time period. 2) Component prices are increasing.

      4) I am also excited to see how this develops.

      • Anonymous

        Dirk, where did you get the ASPs for Nintendo games? It’s not in their financial reports, and just to be clear, Nintendo’s reported revenues don’t include 3rd party games beyond the licensing fees while their units sold stats do include 3rd party games. I trust you didn’t mix that up.

      • http://twitter.com/disc1979 Dirk Schmidt

        1) they publish it on a yearly basis (previously also on a semi-annual basis)
        2) yes, I mixed them up. I dared to publish those since the portable game ASPs are very rigid.

      • Info

        there is an interesting comparison of priceses at: http://www.distimo.com/publications#FSContact2

        A.

  • Pieter

    Thank you Dirk. Very interesting. (Pity that the comments focusses on the detail in lieu of the big picture.) Amazing how the management of Intendo seems to be in denial since 2009.

    • http://twitter.com/disc1979 Dirk Schmidt

      Thanks. I regret that too. But it is my mistake.

    • Anonymous

      So what exactly should they have done? There’s still a lot more revenue in Nintendo’s dedicated platforms. iOS game revenue is currently only half of Nintendo DS game revenue ($2.5 bn vs. $5 bn for 2011). They may be equal in 2012 or 2013, but releasing for iOS today would be a big mistake for Nintendo, even if you don’t believe they have any innovative ideas left in them.

      The best way for Nintendo is probably to keep their exclusive platform but to co-opt Android as Amazon have done with the Kindle. Rumours are they’re working with HTC on that.

      • http://twitter.com/Marcos_El_Malo Marcos_El_Malo

        I’m not sure how releasing for iOS would be a mistake. The mistake is clutching their old business model which is not growing profits. Indeed profits are declining. They have a lot invested in their systems that they hope to recoup, but by focusing on that, they are missing a huge opportunity. They’re wearing blinders about where the market is going.

        They’re sort of like RIM, but worse off in some ways while temporarily better off in others.

      • Anonymous

        Releasing on iOS would destroy Nintendo’s revenues and hence profits. I don’t get your RIM comparison. Are you saying RIM should have given up their platform and their hardware business and instead focus exclusively on licensing BES and BBM? I don’t think so. What RIM should do is improve their products and their platform, and so should Nintendo.

      • Tatil

        Huh? The choice for Nintendo is not between a healthy handheld console business and releasing game titles for iOS. The growth of smartphones have permanently decreased the size of the potential market. The hardware side of the business is not making healthy profits due to lower than expected sales. They just cut the price, so they are even less likely to make more profits per device in the future. The licensing income will eventually shrink due to a smaller customer base, too. Besides, Nintendo DS & 3DS and iOS devices are quite different in form factors, so the cannibalization will not be all that much. I don’t see a reason why the two businesses could not live side by side for a long while.

      • Davel

        I don’t know how much is hype and how much is real. But there were a few releases of Apple products where a well known game developer got on stage and talked up how good of a platform the iPhone is.

        It cannot compete with a console, but it can compete with the handhelds. You won’t get the raw power of a good handheld because of design, but you will get something good enough and more flexible.

        Also as pointed out the games are significantly cheaper. Developers will get better at making better games and Apple will get better at improving the gaming platform.

        Also do not forget Facebook. They have a compelling game platform too.

      • http://twitter.com/wjv Johann Visagie

        If you want to see a good example of what happens when a platform holder in the videogaming business decides to throw in the towel and become a multi-platform vendor, you need look no further than the history of Sega over the past decade. (Hint: It’s not a pretty picture.)

      • unhinged

        My vote is for Nintendo to get into the smartphone business.

    • http://twitter.com/Marcos_El_Malo Marcos_El_Malo

      The criticism in the comments seems to me to be constructive. We want Dirk to succeed! Horace has set a high bar for quality of content and quality of presentation. Dirk has the talent to measure up, he just needs practice. I imagine the feedback he’s getting is useful for him if he doesn’t take it personally.

      • http://twitter.com/disc1979 Dirk Schmidt

        Yes, I am thankful for every comment.

  • MattSchaal

    Dirk, you are doing a great job. Thanks for this piece.
    Picking up on the Flip camera comment, it would be insanely interesting if we can observe ‘tiered disruption’ in the camera business. I’m not sure if possible, but one could analyse category growth/decline of the top 3 camera manufacturers. i.e. growth vs. expectations in segment point-and-shoot up to $200, point-and-shoot up to $350 and semi-pro cameras up to $500. I would imagine one would find consistent slowing of growth in such segments with ‘jumps’ (and a small delay) after availability of iPhone and Android iterations. The better the camera in mobile devices and the larger the install base, the higher the impact on the camera tiers in ascending category steps. Hypothesis to be tested? A trend already in full swing or something camera manufacturers could still adapt to? -given they acknowledge the phenomenon…
    Cheers from Cape Town – mattschaal

    • http://twitter.com/disc1979 Dirk Schmidt

      Thanks.
      Something like this is on the agenda. I am not sure yet if I can find sufficient data to make it a piece.

  • Davel

    This is interesting. Thank you.

    I see this as with the advent of the app store and the inexpensive/free games you have a disruption that is hard to compete against.

    Apple is a phone/communication/music device that also plays games. It is not as good as a console, but is good enough.

    The fact that you can download in one minute a free game and try it and then move on is compelling. Hard core gamers see it differently, but the consoles need the casual gamers which have been siphoned off by the phone platforms.

    I don’t know what the consoles can do to compete. Probably nothing. But years ago they went mobile and the smartphone has killed the mobile market. Why spend $200 for a mobile device you need to carry around when you already have one in your phone? The games are not as good, but for a short time they are good enough.

  • Anonymous

    This is a pretty good summary of the challenge facing Nintendo. Watching Nintendo transform the video game industry with products like the DS and the Wii is actually how I was introduced to the concept of disruption, so it’s a little sad to see Nintendo fall on its own sword like this.

    Many contend that handheld consoles can coexist with smartphones, just as home consoles coexist with PC gaming, but I’ve always felt that the different conditions around the job of mobile entertainment as compared to home entertainment represent a unique threat to handheld consoles.

    At home, we have specialized rooms which focus on particular tasks, such as sleeping and eating. It’s quite easy to maintain both an office with a PC that can be used for work and solo entertainment, and a living room with a TV and console for relaxation and group entertainment. Convergence is less important in the home, where we have space for specialized devices.

    Space is much more limited in our pockets. We don’t want to carry around a phone, a camera, a PDA and a game console all at once. Here, convergence has great value, and is well worth the compromises a convergent device must make.

    Nintendo has tried to fight back by providing experiences that aren’t possible with a smartphone (3D displays do not work well with a device that has a touchscreen or multiple orientations), but ultimately the only markets which will be left to handheld consoles will be those who can’t afford a smartphone or those who demand the highest quality in mobile entertainment. The former group will shrink as smartphones and data contracts get cheaper and cheaper, and the latter will shrink as smartphone gaming experiences get more and more sophisticated.

  • Gomer

    How much of the poor 3DS sales had to do with the lack of solid game titles at the time of launch? Nintendo is releasing several Mario titles (Kart, super Mario 3ds, etc) shortly.

    • http://twitter.com/disc1979 Dirk Schmidt

      Unfortunately, Nintendo does not publish enough data to look at your suggestion. That doesn’t mean this couldn’t be a factor. I will follow Nintendo through the next quarter.

      • Christian

        Lets face it, the last 3 months has really shown that calling Nintendo dead on one years data (and the sales data of some phones) shows a lack of understanding of the games industry. A lot of conclussions can be made on the verge of change, but until all the data is in, those conclussions will often be false.

  • Jomy

    In a conference call in October Mr. Jobs explained his aversion by saying that the company needs the money for potential acquisitions. “We’d like to continue to keep our powder dry because we do feel that there are one or more strategic opportunities in the future,” Mr. Jobs said. “That’s the biggest reason.”

    Nintendo market cap is 19B and falling.
    Apple could build a Wii into every Apple TV and have exclusive titles.

  • aCnMobility

    The trend chart is great graphic depiction of what is happening, and will continue to happen, in the market. As the wave swells with portable device uptake, dedicated gaming devices slowly creep along the bottom. Mobile devices that serve multiple purposes appeal to the considerably larger casual gaming market that might kill a few minutes with game. Hard to argue that this trend won’t continue.

  • Info

    Dirk, I am wondering if you have any data about games business models and revenues models of games. Thanks!

    • http://twitter.com/disc1979 Dirk Schmidt

      Do you mean how successful game business models / revenue models are? I have not looked further than what is presented here. Any tips or pointers for me? Thanks.

  • Anonymous

    Fascinating, Dirk. What other dedicated devices are vulnerable? This angle of dedicated game devices demonstrably disrupted by smartphones, made me think of the analogous displacement of point-and-shoot cameras by the same. Flickr states that the iPhone accounts for about half of all submissions.

    • http://twitter.com/disc1979 Dirk Schmidt

      Yes, “we” at asymco have also wondered about that. Obstacle is data availability.

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