Nintendo Is Missing Out By Not Bringing its Games to Apple's iOS

Despite the exploding popularity of mobile gaming, Nintendo (NASDAQOTH: NTDOY  ) has staunchly refused to participate. Rather than bring its wildly popular Mario, Zelda and Pokemon franchises to mobile platforms, including Apple's (NASDAQ: AAPL  ) iOS, Nintendo has stood by its long-standing business strategy: keeping its games confined to its proprietary hardware.

In the past, this made sense -- those that wanted to play Nintendo's games were forced to buy its devices, resulting in additional profits and giving it the ability to extract valuable licensing revenues from third party publishers.

But times have changed: Nintendo's handheld business is unraveling. As mobile gaming grows ever more popular, Nintendo's management may need to reconsider its strategy.

Demand for Nintendo's handhelds is crashing

When Nintendo reported earnings late last month, it revealed a staggering decline in the sales of its handheld console, the 3DS. Last quarter, Nintendo sold just 820,000 3DS consoles -- a more than 40% decline from the same three month period in 2013.

This does not appear to be an aberration, but rather, an acceleration of an ongoing trend. In its last fiscal year, Nintendo sold 12.24 million 3DS consoles -- a more than 12% decline from the prior year. The following chart shows Nintendo's total handheld console sales (the 3DS and its predecessor the DS) over the last five years.

Per Nintendo's annual reports, Y-Axis tens of thousands

Nintendo's current handheld, the 3DS, is trailing behind its predecessor, the DS, in unit sales. Originally released in the first quarter of 2011, the 3DS has been on the market for just over three full years. The following chart compares the annual sales of the 3DS and the DS during their three first full fiscal years on the market.

Per Nintendo's annual reports, Y-Axis tens of thousands

While Nintendo's DS saw robust growth in its second and third years (and also its fourth, though not pictured) Nintendo's 3DS has already begun to stagnate.

iTunes revenue continues to surge

Of course the DS had a huge advantage over its successor: It didn't have to compete with mobile devices. Apple's first-generation iPhone wasn't around until the DS's third year on the market, and it was another year before the app store made its debut. The DS never truly had to compete with tablets, as Apple's iPad was not unveiled until very late in the DS's life.

The 3DS, however, has had to compete with mobile devices from its very first day -- and they're clearly taking a toll. Since its debut, Nintendo has sold more than 44 million 3DS consoles, which isn't a terrible figure, but simply doesn't compare to the 150 million iPhones and 71 million iPads Apple sold in the last year alone (not to mention the hundreds of millions of Android-powered devices).

To be fair, it would be disingenuous to make a direct unit comparison -- Nintendo's 3DS specializes in gaming; mobile devices, including Apple's iPhones and iPads, are suitable for a wide variety of tasks. A better measure would be to look at app revenue.

Apple's iTunes has emerged as its fastest-growing business: From October to the end of June, Apple's iTunes, software, and services revenue grew 14% on an annual basis, generating more than $13 billion in revenue for Apple. Although that segment includes many other products (notably music) analyst Horace Dediu estimates third-party apps have become the largest grossing component.

During its last earnings call, Apple revealed that it has now paid app developers $20 billion. Much of that is going to game creators: Last year, research firm Distimo estimated that mobile games were responsible for nearly 80% of iTunes app revenue.

In Nintendo's own home country of Japan, mobile gaming has overtaken traditional consoles. Last year, according to CESA, Japan's mobile gaming market generated $5.1 billion in revenue -- more than traditional video game hardware and software combined. It's not surprising, then, that the 3DS saw its demand take the sharpest dive in Japan -- declining by nearly 60% last quarter on an annual basis.

Will there be a market for a 3DS successor?

Ultimately, Nintendo's 3DS is far from a failure. Unless sales fall off a cliff in the near term, Nintendo should sell at least 60 million 3DS units over its lifetime, and tens of millions of software titles.

But the trend is nothing short of frightening. The mobile gaming market is massive, and continues to grow at a rapid rate. As a competing platform, Apple's iOS appears to be weighing on the market for Nintendo's handhelds -- the 3DS's lifetime sales will not come close to the DS's more than 150 million.

When it comes time for Nintendo to release a follow up to the 3DS, perhaps in 2016, it will face a market saturated by Apple's mobile devices, and a mobile gaming ecosystem full of developers generating billions. Though Nintendo's management remains opposed to mobile game development, the demand for its handheld consoles is clearly waning.

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  • Report this Comment On August 09, 2014, at 4:36 PM, Nuvendil wrote:

    Is the demand waning or is it simply returning to normal? Last gen was absurd for console sales. Total sales of hardware were absolutely ridiculous. 270mil handhelds and 260mil home consoles. Those numbers are extraordinarily high. And you are skewing the mobile market to be the promised land. Tons of the companies that go in go belly up very fast. Zynga is in free fall. The mobile market is flooded with mediocrity and running on an unsustainable freemium market. To abandon a market that has been profitable for decades for one that has been relevant for less than a decade would be a major mistake. Especially since it would drain resources that are helping to improve the Wii U and are also supporting the 3DS.

    And mobile games (Angry Birds, CandyCrush) are NOT the same or INTERCHANEABLE with portable games (Pokémon, Fire Emblem). So stop assuming that Nintendo can just rip their portable games from the 3DS and plop them on iPhones and make a fortune.

  • Report this Comment On August 09, 2014, at 6:21 PM, Manaphy2007 wrote:

    you guys are fools, that is what the site is called and i think you guys are smoking some good stuff to think nintendo will loose money if they dont add their games to smartdevices, let me tell you one thing, how did campcom do when they added their games to mobile? well they almost went bankrupt. also the mobile market is full of casuals that play these so called "games" to pass the time, do you really think casuals wanna play games like pokemon? yes that games is a casual game but also is hardcore when it comes to competition. do you think people will play games like metroid prime on their phones? no because it requires time and patience which casuals dont have neither, pokemon requires time and patience rpg's require those, hell even fps require those and casuals have neither like i said. nintendo is doing fine, 3ds sold 45 million, will is outselling x-bone, and yes that is a fact, not an opinion. nintendo knows that people want their games on mobile but its all about the fanbase. let me go back to capcom, they added games like megaman thinking it will sell but the thing is, true games dont wanna pay $15 on googleplay or itunes or amazon store, you can get the first megaman on wii u and 3ds vc for half the price or a bit more than half the price. also these casuals want pokemon x/y (or any nintendo game) for $0.99 thinking it will make nintendo money, that will make nintendo bankrupt, the only reason mobile "games" make so much money is micro-transactions, they display the games as either "free-to-play" for sell it for $0.99 and have in-app purchases, you spend more money on these game than lets say mario kart 8 in a single day. so you Fools need to stop being actual fools. also investors want nintendo to go mobile but the thing is its short term, what about the long term? do you think these investors care about the games and how they go about it? no, all they care is money, data, and numbers they dont see what will happen when they fail. again nintendo is doing fine, especially on the 3ds side, wii u is doing ok and again it is outselling xbox one, slightly.

  • Report this Comment On August 09, 2014, at 6:26 PM, Manaphy2007 wrote:

    also before i forget, that would divert sales from 3ds and wii u and people will think what point is there to buy either when you have a tablet or smartphone, did yu ever think about that? no, because you guys are blind as a rhino, bats have perfectly good eyesight so i dont know why they assume that they are blind. nintendo is not stupid and they politely keep saying 'hell no, that would sink us and no one will buy a 3ds or a wii u if we add our games to the mobile market, so if you want our games then go buy a damn 3ds or a damn wii u'.

  • Report this Comment On August 10, 2014, at 1:56 AM, awang0718 wrote:

    "Unless sales fall off a cliff in the near term, Nintendo should sell at least 60 million 3DS units over its lifetime, and tens of millions of software titles."

    3DS sales would have to slow down to below 5 million units a year for the next 3-4 years for the 3DS to only sell 60 million units lifetime, which won't happen even if Nintendo tried. This is possibly the WORST sales forecast this site has ever made. Expect hardware sales to be around 90 million units lifetime, give or take.

    Software sales are at 171 million, which is at the HUNDREDS of millions, not "tens" of millions.

  • Report this Comment On August 10, 2014, at 1:57 AM, awang0718 wrote:

    The DS was an exceptionally innovative product that came at the right place at the right time. Mobile devices didn't exist back then, which is why it saw units sales of over 27 million units per year for a 3 years in a row.

    Meanwhile, previous Nintendo handhelds (GB, GBC, GBA) sold about 12-18 million units per year average. This means the 3DS is following similar sales trends to those handhelds. Expect Nintendo's next handheld to follow the same sales trend as well, assuming it improves upon the 3DS (HD graphics, dual analog sticks, optional 3-D etc.)

  • Report this Comment On August 10, 2014, at 2:01 AM, awang0718 wrote:

    And no, Nintendo won't put their IPs on mobile platforms. That doesn't means they shouldn't make mobile games, but putting their current games (Pokemon, Smash Bros, Super Mario, Mario Kart, Animal Crossing, Yoshi etc.) would destroy Nintendo's entire hardware business. .

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Sam Mattera

Sam has a love of all things finance. He writes about tech stocks and consumer goods.

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