Nintendo 3DS – A Broken Business Model

Nintendo’s soon-to-be released 3DS device is causing a stir in the gaming industry. But there’s a caveat hidden in all the buzz.

On Monday, well-known gaming industry analyst Michael Pachter released a research note proclaiming the forthcoming Nintendo 3DS would “revolutionize the gaming industry.” His belief was based on the new device’s 3D experience, which he says will not only spur sales of gaming hardware (he predicts Nintendo (s ntdoy) will quickly sell 10 million units), but also raise prices of software.

As I discuss in a post at GigaOM Pro today, Pachter may be right about the company being able to sell 10 million units fairly quickly, but he’s wrong about the overall prognosis for the 3DS.

The problem isn’t so much that the 3DS won’t be a unique gaming experience, it’s that the device, and with it, the gaming experience, is built around an antiquated business model popularized over 20 years ago by Nintendo and the Gameboy. With the Gameboy, Nintendo created a model centered around the release of a new generation of hardware every five years or so and by the sales of expensive software titles over the life of the device.

But in an apps-driven world where the iPhone and iPod touch rule (and Android (s goog) is making huge forward strides), this model poses a couple of different problems.

The first is the hardware life cycle and associated pricing of 3DS. Nintendo has already seen the impact of the iPod Touch, and at a likely price of $250, the 3DS may not be worth the money when compared with Apple’s (s aapl) offerings. (While the iPod touch currently tops out at $399 from an entry point of $199, it offers consumers more bang for their buck.) And as for five-year hardware cycles, that’s a lifetime for consumers who have grown accustomed to a new iPhone every year.

However, the bigger problem for Nintendo and the 3DS is the software model. Nintendo has grown rich on a model premised on tight control of select software titles through approved partners. These partners traditionally release expensive titles through brick and mortar and online stores.

That model worked in the past, but not in today’s market. The app-store model has unleashed a wave of innovative new games (36 thousand at last count) from hungry developers looking to free themselves from the long, expensive and highly restricted development cycles associated with traditional console gaming. In comparison, Nintendo’s process is the mobile game software equivalent of the Soviet Union: too much control, artificially inflated prices, too little choice.

Nintendo may have re-invented handheld gaming with the DS, but the visual trickery on the 3DS won’t be enough to create a sustained multi-year sales cycle. The device is doomed, and Apple killed it.

Read the full post here.

Image Source: flickr user Colony of Gamers