What a Hit Could Mean for Nintendo, And the Gaming Industry

Mar.28.11 | About: Nintendo Co., (NTDOY)

What do Apple's (NASDAQ:AAPL) iPad tablet, Microsoft's (NASDAQ:MSFT) Kinect device, and Nintendo's (OTCPK:NTDOY) 3DS console have in common? They each represent heavy new bets on a hardware strategy that gives consumers novel ways to interact with technology. Both the iPad and Kinect devices have been huge hits so far and Nintendo is hoping for similar success with the hand held console it introduced to the U.S. market over the weekend.

Ditch the Stylus

With the iPad, Apple re-launched the tablet industry a year ago. The big idea here was that consumers would find room in their lives for a "third" device; one that was bigger than a cell phone, smaller than a laptop, and controlled by, not a stylus or mouse, but a finger.

It turns out consumers had plenty of room in their lives for it, as Apple sold over 15 million of the devices in 2010, contributing almost $10 billion in revenue in just nine months of sales. "We've never had a product that got off to that fast of a start," Apple CEO Steve Jobs said during the launch of the iPad 2 in early March. And all initial indications are that the next generation iPad has seen an even faster kick-off.

Drop the Controller

For the Kinect add-on to the Xbox video game console, Microsoft caught a bit of lightning itself. The idea here was that people would enjoy interacting with console video games using gestures instead of controllers. People in fact do enjoy the new concept. Microsoft sold 8 million units in just 60 days, what CEO Bill Koefoed described as an "incredible consumer response." Peter Klein, CFO, said he thought those numbers made the device "the fastest-selling consumer electronics device in history." According to the Guinness Book of World Records, he was right.

But records like that may not last long, particularly when consumers are snapping up "immersive" electronics devices at such a torrid pace.

Forget the 3D Glasses

With the launch of the 3DS handheld console, Nintendo is betting that mobile gamers will value 3D entertainment that doesn't require special glasses. Nintendo hopes it is "better late than never" to the technology device boom as it had to slash earnings forecasts last fall when a delay meant that shipments of the 3DS would miss the crucial holiday quarter.

But the company is still expecting a substantial launch. Initial reaction at February's roll out in Japan was decidedly positive, giving Nintendo some reason for optimism despite the delayed timing and somewhat weak library of launch titles. Reggie Fils-Aime, Nintendo President, said the Japanese introduction was the company's "biggest mobile launch [and] what's really impressive is that it was done during a non-holiday time frame."

What a Hit Could Mean for Nintendo, and the Industry

Apple's iPad has contributed to surging revenue and profit for the company but, because of its high cost of production, has put some downward pressure on margins. Microsoft has seen the exact same consequences for Kinect sales. These are problems that any company would love to have. I expect Nintendo's 3DS impact on margins and revenue to be similar. But Nintendo develops its own device software to a much greater degree than either Apple or Microsoft, so the higher software sales should more directly filter into Nintendo's bottom line.

If Nintendo can manage a successful U.S. roll-out for the 3DS device, it could deliver a much-needed boost for a gaming company struggling to convince consumers of the value of its games in a market increasingly flooded with free or near-free downloadable apps and social games. But it could also represent the third consumer electronics hit over just the last year, suggesting consumers are quite willing to pay up for immersive entertainment experiences.

Disclosure: I am long AAPL, OTCPK:NTDOY.