The last generation? Why the 3DS may be the last of its kind

This week Nintendo stunned the gaming world by dropping the price of its new generation handheld, the 3DS, by $80, a one-third price drop on a device that’s been on the market for all of four months. The drop was due to lackluster sales, as the company said less than a million consumers have bought the new device. Such a huge price drop by the company synonymous with handheld gaming is an admission it has a big problem on its hands.

This is the same company that, after a comparable period of time in late 2004 to early 2005, generated 5.27 million in unit sales with the Nintendo DS, six times what it has done thus far with the 3DS. What went wrong? The market is not the same as it was six years ago, and Nintendo made several strategic mistakes this time around.

1. Pricing. Nintendo launched the 3DS at $249, a price point that was just plain too high when many already have a DSi or can get an iPod touch for nearly $40 less.  The DS launched at $149 in 2004, a much more palatable price.

2. Lack of disruption. Like many hardware makers three to four years ago, Nintendo saw 3D as the potential next-generation killer app. But across the board, 3D has not been strong enough to have a new generation sales cycle hoisted upon it. Nintendo changed the gaming world with the DS, but it did not do anything comparable this time by adding 3D to handheld gaming.

3. A different device market. I wrote a year ago that iPod touches, iPads and the app-marketplace model were going to hit Nintendo hard, and it looks like I was right. Surveys show kids are putting these devices rather than gaming-specific hardware on their Christmas lists.

So what now?

With a hugely disappointing launch to a new generation of hardware, Nintendo is doing the right thing by dropping the price. As Apple has shown, rapid price adjustments can be huge stimulants to demand, but Nintendo is in a much different boat with the 3DS than Apple was with the first generation of the iPhone. While I think it can ultimately recover slightly and bump sales to a more respectable level, the device is a product of an antiquated model developed 30 years ago with the first Game Boys. Chances are that Nintendo will never sell as many 3DS units as it did DS.

In fact, you could argue that the 3DS and the Playstation Vita — Sony’s next-generation gaming handheld — are potentially the last of their kind, as powerful, multipurpose devices with dynamic application marketplaces become more and more popular.

Gaming fans would argue that dedicated hardware has its place, with tailored controls for serious gaming as well as entire experiences created specifically for the gaming enthusiast. But kids (and, by extension, their parents) vote with their wallets, and the momentum is increasingly behind touchscreen multipurpose handheld devices, be they iPhones, iPod touches, Android phones or tablets.

Will we see another generation of dedicated gaming handhelds? Maybe, but Nintendo’s next device will have to be vastly different, possibly closer to a tablet, or offer some unforseen new advance in gaming no one has dreamed of yet. Motion sensing, augmented reality and even holographic technology are all likely to become a bigger part of gaming in the future, and there might be opportunities for Nintendo to disrupt the gaming market by baking in some mix of these ingredients into a next-gen device. But as it stands today, portable gaming is fast moving toward general-purpose devices, and Nintendo will need to offer a significant disruptive leap to make us excited about dedicated portable gaming hardware once again.

Question of the week

How will Nintendo move forward in a world where multipurpose handheld devices like the iPad are dominating?
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Michael Wolf

Chief Analyst NextMarket Insights

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