Following its third-quarter results, which revealed a third consecutive loss in annual profits despite a spike over the holidays, Nintendo (NASDAQOTH:NTDOY) CEO Satoru Iwata recently announced that Nintendo will be expanding into the smartphone and tablet market ... more or less. While refraining from specifics during an investor briefing held in January, Iwata asserted that "service" apps were to be released for smartphones in 2014. The CEO said these apps would extend the online purchase of console games for Nintendo hardware to third-party mobile devices.
While Iwata took the time to assure Nintendo investors that there would be "no change to game consoles being the center of its strategy," he did emphasize that more attention would be given to designing Wii U games that utilized the tablet-like controller for the system. In addition, the CEO did not rule out the possibility of creating third-party specific app-games for the likes of Apple and Android—though with regard to using recognizable Nintendo characters to this end, Iwata stated that such apps would be built to highlight "the appeal of our platform."
Given Nintendo's existent platforms and current financial situation in relation to the rest of the video game market, all of this matters because Nintendo may be eyeing game-app development. However, as its history of outside development clearly evinces, Nintendo's sense of self has never particularly comported with third-party products—which leaves the possibility of hardware development.
Unlike its early competitors in the 1980s and '90s, Nintendo has displayed an almost allergic reaction to the notion of developing for other platforms. As Atari, Sega, NeoGeo, Turbo Graphics 16, and any number of early competitors fell to the wayside in the dawn of console gaming, Nintendo maintained a solid foothold in the market. Both generating innovate new hardware offerings and a stable of top-notch in-house titles while wooing an array of software developers to create for their platforms, Nintendo's formative years saw the company forgo potentially large profits in cross-platform development in favor of an in-house software-to-hardware model.
Compounding this us-and-us-alone attitude toward development is Nintendo's long-standing success in the portable games market. From the Game Boy up to the 3DS, Nintendo has not only reaped considerable profits from the portable game sector, but has historically defined what consumers consider to be a worthwhile portable-gaming experience. While the company's 3DS is generating respectable business, it is arguable that the Wii U has not done as well as Nintendo hoped. Even with current plans to bring certain DS and 3DS titles to the Wii U doubts linger. While May's slated release of Mario Kart 8 will almost certainly produce a sales spike for the Wii U, it remains to be seen that a single title will simultaneously haul the company from a three-year sales slump and single-handedly endear a generation of gamers to Wii U.
Which bring us to the most sizable, if not necessarily most important, of this trinity of factors: app gaming is paying serious dividends and has been for quite a few years. One has only to do a casual Yahoo or Google search for quarterly and annual profits of ubiquitous smartphone titles such as Fruit Ninja, Candy Crush, Doodle Jump, and Angry Birds to see that the smartphone sector is too lucrative for Nintendo to ignore in perpetuity. For a company expecting, by its own sales estimates, to lose 35 billion yen ($15 million U.S.) on the Wii U, continuing to thumb its nose at mobile app development could be disastrous.
What does any of this have to do with Nintendo making smartphones?
For all its stubbornness, Nintendo has stood the test of time—it is still here, still respected, still a worldwide recognizable brand with characters that nearly rival the recognition levels of Disney properties. While the obvious solution to Nintendo's woes may be to simply open up its titles to out-of-house hardware platforms, an adherence to old attitudes could facilitate a more innovative approach to the portable game market. And if Nintendo has done one thing particularly well across the years, it is reconfigure how people approach video games and video game technology. Even at present, Nintendo is whispering about forthcoming "non-wearable" technology that will revolutionize the way video games are experienced.
But would Nintendo sink millions upon millions into the development of smartphones or smartphone like portable gaming technology with multifunctional capabilities? Only the very high-ups at Nintendo know the answer to that question, but the above facts do raise the question. If Nintendo refuses to develop for other parties and refuses to develop its own smartphone-ish device, the company cuts itself out of potentially massive profits at a time when it's on the business-end of a three-year financial beating. Given the company's historic reticence to produce almost anything for third-party hardware, the only option left (should they wish to take-in a piece of that portable gaming/ app-action) is to develop their own hardware—hardware that does not take up extra space in the pockets of consumers that increasingly expect to have one do-it-all slim-fit rectangle in their shirt pocket.
Currently the 3DS utilizes a parallax barrier technology that—while it may have issues that need to be worked out—creates a 3D experience in the palms of consumers' hands. What would that be worth to the smartphone crowd? The phone might be a bit thicker, but to step back no more than five years to the slightly bulkier slide-screen mobile phones in order to have a 3-D smartphone...could there be a market for that? And if Nintendo even attempted to create such a product, would it even work? Who can tell, but Nintendo has accomplished stranger feats. Whether such a phone is of Nintendo's making or someone else's, and how Nintendo is going to get a piece of those game-app profits—those are the only real questions.
Bennett Elliott has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.