Why Nintendo should re-invent itself as an iOS developer

Nintendo’s investors think the company is wasting time and energy developing for its own devices. Instead, according to Bloomberg, fund managers think Nintendo should turn its attention to developing for smartphones, especially Apple’s iPhone(s aapl), which has been the most successful development platform when it comes to translating downloads into paydays for software publishers. Nintendo President Satoru Iwata doesn’t seem all that interested in making such a move, but what could the company expect if it did decide to join Apple’s mobile ecosystem?

Where Nintendo is right now

The past few years haven’t been overly kind to Nintendo. Even leaving aside the disastrous launch of the 3DS, which led the company to institute an emergency price cut of nearly a third in the U.S. for the handheld gaming device within six months of its introduction, Nintendo has seen its stock prices steadily decline as the early successes of the Wii and DS gradually wore off between about 2007 and 2008. Share prices are now sitting at a six-year low.

The 3DS has not succeeded in jump-starting Nintendo's flagging mobile efforts.

In its quarterly earnings report in late July, Nintendo also posted its first quarterly operating loss ever. It reported a net loss of around $328 million U.S., and an operating loss of $485 million, down from operating profit of $299 million measured year over year.

Nintendo game sales are down, but that’s just reflective of a general trend. Video game sales in general seem to be slumping lately, and fell for the second straight month in June. Nintendo still has some franchises that are doing well (the 3DS re-release Legend of Zelda: Ocarina of Time saw 283,000 sales in June, despite being an old game that most fans bought during its first g0-around), but milking legacy brands isn’t exactly the best way to attract new customers.

According to Wedbush Securities (via the Los Angeles Times), the DS is bleeding market share, and the 3DS isn’t picking up the slack; that’s where the iPhone, iPad and iPod touch come in.

The state of iPhone, iPad and iPod touch gaming

Claiming that smartphone gaming isn’t having an impact on Nintendo’s business, as Iwata maintains, is just plain burying your head in the sand. While traditional gaining sales see steady declines, tablet gaming is up, as is smartphone gaming, led by the iPhone. Nielsen found (s nlsn) that iPhone gamers spend twice as much time gaming on their devices compared to other platforms in a study last month, and app research firm Distimo found that on average, iOS users download 5.1 million games per day. While only 600,000 of those are paid, that’s still an amazing volume for a single day’s worth of business, and lots of those remaining 4.5 million are still taking in other revenues from advertising and in-app purchases.

Analysts estimate that smartphones are currently taking one out of every three dollars spent by consumers on portable gaming, and the problem for gaming-specific platforms is only expected to get worse. The iPhone and the iPad iterate much faster than do gaming consoles and handhelds, with a new model coming out approximately every year. Better hardware and software means more for developers to work with, and more potential for unique game design that catches consumer imagination, as did Angry Birds, for example.

Not uncharted territory

A screen from a recent EA iPhone release, Shift 2 Unleashed.

Nintendo wouldn’t be the first major game publisher to make the jump to iOS. It has the distinction of also being a hardware maker, but it shouldn’t let that detail become a noose around its neck. The company would do better to focus on leveraging its success on the software side in the new and thriving iOS ecosystem, the way companies like EA (s erts) have managed to do.

EA Mobile’s revenue has been climbing steadily since the introduction of the iOS App Store. Revenue was up 12 percent in 2010 compared to 2009, and jumped again 10 percent during its first quarter of 2011, versus the same period a year ago. An increasing chunk of that growth can be attributed to iOS, as revenue from PSP(s sne) and the DS fell by 42 percent and 27 percent respectively during the same time frame. iOS revenue for EA Mobile, by contrast, increased an impressive 100 percent during the quarter ending in May, as compared to a year ago.

The key takeaway is this: Mobile game publishers are hedging their losses with traditional handhelds and consoles by investing heavily in smartphone platforms, and iOS is delivering the highest return.

Follow the example of other gaming hardware icons

Will the 3DS or the Wii U be Nintendo's Dreamcast?

Nintendo wouldn’t be the first gaming company to stop making hardware and turn its attention entirely to software if it did change its focus to developing for Apple. Sega made the same move back in 2001, based in part on the same kind of mistake that’s causing Nintendo’s headaches today. Sega created the Dreamcast, an ambitious console that necessitated high sales targets that ended up being unreachable. The 3DS is similar to the Dreamcast in that regard, with one key difference: People loved (and still love) the Dreamcast.

Nintendo also has more reasons to embrace software development for other platforms than Sega did at the time. For one, its characters and franchises are stronger and more widely recognized, with far fewer disappointing titles to dilute the brand. And second, the question of whether or not Nintendo properties can survive and succeed on iOS isn’t really a question; it’s almost a given, considering how well even brands tangentially associated with Nintendo, like EA and Square Enix, have done on the platform.

I’ve loved Nintendo’s hardware since I got my first NES back in 1991. And I’ve owned every Nintendo console or handheld released since, with the exception of the Virtual Boy. But the only way the things I love most about Nintendo, which are its games, will survive and thrive, is by embracing the shift in gaming that the rise of mobile smart devices represents. Let’s hope Iwata, or whoever succeeds him if it comes to that, can come to grips with that.