At an iPod Touch event at the beginning of September, Apple Inc. (NASDAQ: AAPL) CEO Steve Jobs called the handheld media player “the number one portable game player” in the world. According to a new report from Internet technology research group Gartner (NASDAQ: IT), 19.5 million tablet computers like Apple’s iPad will be sold worldwide before the end of 2010. Close to 12 million of those tablets will be sold in the United States alone.
For a technology sector that is arguably only six months old, tablet PCs are quickly overtaking other consumer electronics in people’s lives. As Apple’s iPod line continues to decline, its audience upgrading to the iPhone and iPad, and as the iOS operating system continues to bring the functionality of those two devices closer in line, it might be the iPad that is the number one portable game player by the end of 2011. But what about the rest of the video game hardware industry?
Gartner vice president of research Carolina Vilanesi says it won’t just be notebook PCs who see their sales eaten up by tablets. “The all-in-one nature of media tablets will result in the cannibalization of other consumer electronic devices such as e-readers, gaming devices, and media players,” explains Vilanesi.
The iPad’s success should be concerning to companies like Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) whose home gaming platforms, the Xbox 360 and Playstation 3, appear to be cheaper than tablets like the iPad and Samsung’s Galaxy Tab but end up requiring greater investment on the part of consumers due to software and peripheral costs.
The company under greatest threat from the tablet surge, however, is Nintendo (Pink Sheets: NTDOY). Nintendo’s home console the Wii has enjoyed great success over the past four years, but is starting to see serious declines in sales, indicating that the market for the device has become saturated. Nintendo’s portable gaming business on the other hand is strong as it has ever been thanks to its line of Nintendo DS handhelds. The Nintendo DS is significantly cheaper than every tablet and smartphone on the market, and while its software commands higher prices than the gaming software found in the Apple App Store, it generally returns a much greater profit to its publishers. The portable gaming landscape is going to change dramatically in the next twelve months however.
Next spring, Nintendo will release the Nintendo 3DS, a new handheld game player that features stereoscopic 3D graphical effects that don’t require the user to wear 3D glasses. Nintendo has dominated the portable gaming space since they released the black and white Game Boy handheld in 1989 and a key factor in their success has been the affordability of its machines. The Nintendo 3DS, however, will be launching at a high price when it comes out next year. It will retail for nearly $300 in Japan, and while exact pricing hasn’t been announced for the United States, it is expected to retail around $250, a higher price point than any Nintendo portable ever released. It will also rely on physical media for its software, with 3DS games shipping on cartridges much like other Nintendo portables from the last twenty years.
Gartner predicts that worldwide tablet sales will reach 54.8 million by the end of 2011. With consumers increasingly spending less and less on video game software and turning towards digitally delivered content through services like the Apple App Store rather than physical media, it’s a significant possibility that publishers like Take-Two (NASDAQ: TTWO), Activision Blizzard (NASDAQ: ATVI), and Electronic Arts (NASDAQ: ERTS) will pour more resources into developing iPad games than the Nintendo 3DS.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.