Why Nintendo’s 3DS is Doomed

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 will quickly sell 10 million units) but also raise prices of software.

While he may be right about the company being able to sell 10 million units fairly quickly — Nintendo undoubtedly has that many devoted fans among the 130 million or so Nintendo DS owners out there —  he’s wrong about the 3DS overall prognosis. The device is doomed, and it has Apple’s iPhone/iPod Touch to blame.

A Short Revolution

While Nintendo may have re-invented handheld gaming with the DS in 2004, the revolution was a short one. Just as the device was reshaping the consumer’s concept of what portable gaming could be, along came the iPhone and, perhaps more importantly, the iPod Touch, to once again show the consumer a new approach to gaming. The Apple model — now being emulated by Google with Android — is built upon a foundation of  thousands of innovative games (apps) available for free or nearly free on a highly flexible, multi-functional device (such as an iPod Touch).

But what about 3D, you ask? Those who see similar success in Nintendo’s future for the 3DS would point out that the 3D experience is unique and will generate significant interest. And while portable 3D may very well have a place in the market and might be a differentiator from the iPhone, visual trickery won’t be enough to create a sustained multi-year sales cycle similar to that of the DS.

A Broken Business Model

The problem isn’t so much that the 3DS won’t be a unique gaming experience, its that the device, and with it, the 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 course of the life of the device.

But in an iPhone world, this model poses a couple different problems. The first is the hardware life cycle and associated pricing. 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 offerings. 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, who 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.

And we all know what happened to them.

Question of the week

How do you think the 3DS will fare against iPhone, iPod touch and the Android?