Oscar Auerswald Carroll, 9, plays a video game on a Nintendo 3DS at home in… (Ricardo DeAratanha, Los…)
Nine-year-old Oscar Auerswald Carroll's hazel eyes widened with bewilderment when asked which game device he preferred — his Nintendo 3DS or his mother's iPhone 4. After a long pause, the Mar Vista soon-to-be fourth-grader choose his 3DS "because it has two screens."
His momentary struggle highlights the pitched battle between Nintendo and a new generation of smartphones and tablets for the hearts and minds of young gamers.
For now, the 3DS is holding its own. Sixteen months after launching the device, Nintendo sold 5.14 million 3DS consoles in the U.S. by the end of June, fueled in part by a 33% price cut in August. The console, which features a 3-D screen that doesn't require players to wear special glasses, is outpacing Nintendo's previous bestselling hand-held device, the DS, which sold 4.15 million units in 16 months after its launch in 2004.
The sales surge of 3DS has disproved critics, who pronounced it a dud after a lackluster launch.
But it's not game over. Some question whether Nintendo can keep up the momentum amid a changing market.
"Nintendo's price cut clearly had a positive impact on retail sales and prevented a repeat of the declines we saw last summer," said Mitch Lasky, a partner at Benchmark Capital who has invested in a number of game companies. "But I don't believe it will be sufficient to reverse the larger trends."
Those trends include a shift in the way parents buy such games.
"Everyone is used to paying $1.99 for 'Angry Birds' now," said Rebecca Levey, co-founder of KidzVuz.com, a site featuring thousands of game and toy review videos posted by kids under age 13. "Asking parents to pay $30 for a DS game that their kids may get bored with after a week has a become a really hard sell. But for $1.99, you're more willing to take that risk."
As a result, Nintendo's share of the U.S. portable games software market shrank to an estimated 36% in 2011 from 70% in 2009, said Peter Farago, an analyst with Flurry Analytics in San Francisco. Meanwhile, revenue from games sold onApple Inc.'s App Store andGoogle Inc.'sAndroid Marketplace exploded to 58% of the $3.3-billion market last year from 19% of the $2.7-billion market in 2009.
Scott Moffitt, Nintendo's executive vice president of sales in the U.S., said Flurry's figures don't include purchases that 3DS owners make from the company's eShop, an online store that bypasses traditional retailers and sells games for $2 to $9. He declined to say how much Nintendo generates in eShop sales.
"We can say, however, that people who have gone on to buy a game from our eShop have bought an average of 4.7 games per person," Moffitt said. "We continue to see momentum for the 3DS, and we're excited about the upcoming holiday, when we'll have one of our busiest game launch schedules ever."
Titles lined up for the fall include "Paper Mario Sticker Star," "Luigi's Mansion: Dark Moon," and "New Super Mario Bros. 2."
Moffitt's emphasis on games reflects a painful lesson Nintendo learned last year when its relatively shallow selection of games kept players from buying the 3DS when it launched.
Alarmed, Nintendo's chief executive, Satoru Iwata, slashed the 3DS price by more than a third to $169.99 and beefed up the game lineup.
The stimulus plan worked. Sales of the 3DS in the U.S. surged to 1.3 million from September to December from 470,000 units from June to August.
The move, however, cost Nintendo dearly, plunging the Japanese game company to its first annual loss in at least three decades. Nintendo posted a $534.6-million loss on $8 billion in revenue its fiscal year that ended March 31, compared with a $960.5-million profit on $12.6 billion in sales the year before.
But the bitter side effects are supposed to be temporary — Nintendo in April said it expects to "cease selling [the 3DS] below cost by" this fall.
"There will always be room for Nintendo in the hand-held market," said Edward Williams, an analyst with BMO Capital Markets. "The reason they've had so much success is not so much because of their hardware. It's because of the strength of their game franchises, and they have a whole stable of them."
Nintendo's Mario, Donkey Kong and Zelda remain powerful assets — adored by children and trusted by parents, Williams said.
The longer-term question is whether Nintendo will stop making hardware and instead unleash its highly profitable games on a broader range of devices, such asApple Inc.'s iPhones or iPads.
"Investors don't think there's much opportunity in hardware in the future," said Evan Wilson, an analyst at Pacific Crest Securities. "The thinking is that there are 250 million iPhones out there versus 5 million 3DSes. It's a huge revenue opportunity that they're missing out on."
Nintendo has repeatedly brushed off such speculation over the years, insisting that its games shine only if they are played on its consoles.