Is the 3DS to Nintendo What the iPod Was to Apple?

Criticizing Nintendo (NASDAQOTH: NTDOY  ) these days is easy -- the media believes that weak Wii U numbers and lack of third-party support will doom the former industry behemoth to be crushed by Sony (NYSE: SNE  ) and Microsoft (NASDAQ: MSFT  ) .

On the surface, the numbers back that view -- the Wii U has only sold 5.3 million units worldwide despite arriving a year earlier than Sony and Microsoft, which have respectively sold 4.4 million PS4 and 3.1 million Xbox One units since their holiday launches in 2013.

Meanwhile, Nintendo's third-party support has been dismal -- nine out of 10 of the Wii U's top-selling titles were published in-house.

Overlooking the obvious

However, the media usually glosses over Nintendo's strength in handhelds with its popular 3DS family. The 3DS remains the top-selling console of the current generation, with 42.4 million units sold worldwide.

Nintendo also recently reported a whopping 45% year-over-year jump in sales of 3DS games to 16 million games sold in 2013.

Therefore, even though Nintendo's Wii U numbers are underwhelming, the 3DS could be its turnaround device -- the same way Apple's (NASDAQ: AAPL  ) iPod transformed the company from a personal computer maker into a brand new one focused on portable media devices and handsets.

Let's take a closer look at how Nintendo's 3DS could help the company mount an Apple-like turnaround in 2014.

3DS by the numbers

To better understand the 3DS family, let's review the three types of 3DS handhelds currently on the market -- the 3DS, the 3DS XL, and the 2DS.

Nintendo's 3DS family. (Source: Nintendo)

3DS Console

Key Features

Price

3DS

1 3D stereoscopic screen, 1 touch screen

$169.99

3DS XL

90% larger screens than the original 3DS

$199.99

2DS

2 2D screens, non-foldable

$129.99

Source: company website.

The main thing to notice about the 3DS is its tiered pricing scheme, and how it relates to the Wii U.

The Wii U costs $299.99, but has only sold 5.3 million units, while the 3DS family has sold 42.4 million units while being priced between $129.99 to $169.99. It should be obvious which console is Nintendo's core source of revenue.

That leads into the second most important fact about consoles -- its software attach rate. Since consoles are generally sold at either a loss or thin margins, Sony, Nintendo, and Microsoft need new customers to constantly purchase games to actually generate profits.

It's all about the software

Console manufacturers generally take roughly a 30% cut of software sales, which means that a console's success should be measured by its software numbers, and not only by its hardware numbers.

Let's put Nintendo's software numbers into perspective with other handheld and home consoles:

Company

Console

Launch date

Software units sold

Nintendo

3DS Family

Feb. 2011

125 million

Nintendo

Wii U

Nov. 2012

20 million

Sony

PlayStation Vita

Dec. 2011

20 million

Sony

Playstation 3

Nov. 2006

804 million

Microsoft

Xbox 360

Nov. 2005

873 million

Source: Vgchartz.

When we focus on 3DS sales instead, Nintendo's position in the console race completely changes.

Therefore, solely focusing on the Wii U's failure rather than the 3DS' success is akin to focusing on Sony's poor Vita sales instead of its strong PS3 and PS4 sales figures.

The Apple analogy

When the original Wii hit its peak sales back in 2007 and 2008, comparisons between Nintendo and Apple were a dime a dozen. The two companies followed the same strategy of disrupting the market with new technologies that reached untapped markets beyond their traditional customer bases.

Prior to Steve Jobs' introduction of the iPod in 2001, Apple was as a niche personal computer manufacturer that had been marginalized by Microsoft's Windows empire. The iPod, however, went on to sell more than 350 million units worldwide, leading to the release of the iPhone in 2007 and the iPad in 2010.

Today, sales of the iPhone, iPad, and iPod together account for 75% of Apple's top line, while its Mac computers only account for 10%.

Nintendo now stands at a similar crossroads. It's clear that sales of the PS4 and Xbox One will soon overtake the Wii U, but that doesn't mean that Nintendo is doomed. Nintendo's virtual monopoly in handheld consoles could help it stage an Apple-like turnaround in 2014 and beyond.

Mobile enemies at the gate

That doesn't mean that the road is completely clear for the 3DS in the next few years, however.

The 3DS' main threat doesn't come from Sony or Microsoft -- it comes from smartphones and tablets powered by Apple iOS and Google (NASDAQ: GOOGL  ) Android.

Apple sold 33.8 million iPhones and 14.1 million iPads in the fourth quarter of 2013. Apple currently controls 12% and 40% of the smartphone and tablet markets, respectively, with most of the remaining market being carved up by Google Android devices.

That's a huge number of potential portable gaming devices in the market, all of which could pose a threat to Nintendo's 3DS family. Both the Apple App Store and Google Play Store boast over a million available apps each.

Many of these free and cheap games (under $5) could threaten Nintendo's 3DS titles, which can cost as much as $40 for a new release.

Logitech's PowerShell. (Source: Logitech)

In addition, new devices such as Nvidia's SHIELD, the Ouya, and Logitech's PowerShell are trying very hard to overcome the lack of physical buttons on Android and iOS devices. Although these products haven't been huge hits, they are all aimed at disrupting Nintendo's dominance of stand-alone mobile gaming devices.

Why mobile challengers might not matter

All of those mobile threats would seem daunting if not for a simple fact -- 3DS software sales still surged 45% year-over-year despite rising sales of smartphones and tablets.

Moreover, the biggest weakness of the Wii U -- its lack of third-party support -- is ironically the 3DS' greatest strength.

Just like the Wii U, nine out of 10 of its top selling 3DS titles were first-party releases. The top three 3DS titles -- Pokemon X/Y (9.4 million units), Super Mario 3D Land (9.2 million units), and Mario Kart 7 (9.1 million units) -- are exclusive reasons to play games on a 3DS rather than on an iPhone, iPad, or Android device.

Pokemon X/Y. (Source: Pocketmonsters.net)

By comparison, the top selling iOS game of 2013, Mojang's Minecraft: Pocket Edition, sold 33 million copies on iOS and Android. That figure seems intimidating, but consider this -- since the game costs $6.99, it generated $231 million in revenue. Pokemon X/Y, with a retail price of $39.99, generated as much as $375 million in revenue.

When we compare those figures, the mobile gaming world isn't more profitable than the Nintendo 3DS at all. Customers generally don't think paying $40 for a new 3DS game is excessive, but they kicked up a huge fuss when Rovio sold Angry Birds: Star Wars for $50 on the PS4 and Xbox One.

In fact, a $7.99 game is already considered expensive on a mobile platform, due to the perception of 3DS titles as being "complete" games and mobile games as "light and casual" games.

The bottom line

In conclusion, it's easy to dismiss Nintendo as a "has been" when everyone is excited about Sony and Microsoft's shiny new consoles. However, that would be a huge mistake -- the biggest disruptions and turnarounds usually occur when people least expect them.

Therefore, instead of focusing on Wii U sales, investors and gamers should take a closer look at the untouchable niche that Nintendo effortlessly dominates with the 3DS. I wouldn't be surprised if the 3DS is to Nintendo what the iPod was to Apple -- the start of a new chapter for a company to grow beyond its core competencies.

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Read/Post Comments (9) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 14, 2014, at 12:23 PM, Iseeclearly wrote:

    Finally something with some substance, the numbers for mahjong and Pokémon are interesting

  • Report this Comment On January 14, 2014, at 2:45 PM, trevelyan8 wrote:

    "The media believes." Nice third person reference. The minute I let "the media" or TMF for that matter, dictate my opinion on anything is the day I unplug. Again, TMF shows their hatred and ignorance towards Nintendo.

  • Report this Comment On January 14, 2014, at 2:49 PM, TMFSunLion wrote:

    Again, @trevelyan8, you failed to read the whole article before commenting. If you actually had the patience to read the piece, you would have seen it was a positive one about Nintendo's prospects with the 3DS.

  • Report this Comment On January 14, 2014, at 3:24 PM, youngjedi81 wrote:

    Guess they have ignored the huge surge in Wii U sale recently. There hate toward nintendo gets old even if this article praises the 3DS. They come up with some BS everyday about nintendo. 1 positive article to save your image will not fly.

  • Report this Comment On January 14, 2014, at 4:39 PM, kao469 wrote:

    This article started out as a joke. They tell us the media bashes Nintendo a lot. Making it sound like they don't when they are one of the biggest complainers. Also I would like to point out that Motley Fool states time and time again that the 3DS cant compete with Apple and Nintendo needs to make games for Apple. But....now that sales are through the roof for the 3DS, they end up back tracking their statement. Always happens, every generation. This is the reason the media can and will never be taken seriously.

  • Report this Comment On January 14, 2014, at 5:05 PM, Afterberth wrote:

    Funny this article came out. I've been thinking of buying the 3DS XL. if they dropped it to $149 I would buy 1 today.

  • Report this Comment On January 14, 2014, at 11:00 PM, TMFSunLion wrote:

    @kao469 @youngjedi81:

    You guys seem to think there is one person named "Mr. Motley Fool". Nope.

    We are all different writers with different opinions and stock holdings. And no matter how much you love the Wii U, in a couple months it will be irrelevant after being overtaken by the PS4 and Xbox One -- it's inevitable.

    The 3DS, however (IN MY OPINION, not another writer's) -- might have staying power.

  • Report this Comment On January 15, 2014, at 7:59 AM, targeyone wrote:

    I know it's fun to say things like "the Wii U will be irrelevant...It's inevitable," but the original Wii was supposed to have been irrelevant compared to the other 2 home consoles back when it's specs came to light, and the DS was going to be irrelevant when the PSP came out.

    And then the 3DS was going to be irrelevant because of, you know, mobile gaming. Then it was going to be irrelevant because of the Vita.

    And now here you are 3 years after launch, saying the exact same handheld console, which was once collectively dubbed a 'failure,' 'doomed,' and the 'end of Nintendo,' is going to be Nintendo's saving grace.

    The Wii U hasn't done well at all in its first year. But the first year in the lifespan of a console is far from the end-game that you seem to be pretending it is.

    So Leo, cut your readers some slack when they take your articles about Nintendo with a large dose of salt. While you may not have personally stated everything they bring up, the only thing online journalists have proven is: No one has a clue when it comes to predicting what will happen with Nintendo.

  • Report this Comment On January 15, 2014, at 7:11 PM, jm090 wrote:

    gaming hardware at launch is sold at minimal profit or a possible loss, within a year or so it is not the case. the margins rise eventually to the point where they are making as typical of a profit as most electronics.

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