Can Sony Retake Portable Games Market?

Sony's PSP2 will face off with Apple, Nintendo

At the end of 2004, the video game industry was waiting with bated breath to see how the portable hardware market would change. Nintendo (Pink Sheets: NTDOY), coming off its  first operating loss at the end of a fiscal year in more than 100  years as a business concern, released the bizarre Nintendo DS, a dual-screened, graphically underpowered device without any multimedia capabilities beyond game-playing. Sony (NYSE: SNE), on the other hand, was on top of the world, flush with success after four years of astronomical sales for the Playstation 2 and ready to unleash its first handheld Playstation Portable. The world expected the graphically advanced PSP, which also supported video and music playback, to do for portable game hardware what the Playstation and Playstation 2 had done for home consoles — namely, unseat Nintendo as the dominant force in the industry.

Business is full of surprises, however. The Nintendo DS has, over the past five years, grown to be the second-best-selling video game console in history and is set to eclipse Sony’s Playstation 2 by the middle of 2011. The Playstation Portable, on the other hand, has been a mixed success at best. While the device has enjoyed modest sales consistently since its worldwide debut in late 2004 to early 2005,  it has also been plagued by piracy, losing millions in potential software sales due to the device’s notoriously poor security. Sony has also had to contend with the miscalculation of using a proprietary physical media format, the UMD, as the PSP’s chief software delivery method. The high price of the hardware, disastrous missteps like the release of the download only PSPGo console, aging hardware and the rise of the iPhone have left the PSP a wheezing anachronism in 2010. According to recent reports, though, it sounds like Sony is preparing a new device to combat Apple’s (NASDAQ: AAPL) mobile device and the Nintendo 3DS in the new portable game hardware market.

Game design magazine Develop reports  that multiple game studios have had development kits for the Playstation Portable 2 since early 2010, ensuring that the still-unannounced system will launch with a strong lineup of software. Executive producer Shaun Himmerick from NetherRealm Studios, creators of the successful Mortal Kombat franchise now controlled by Time Warner’s (NYSE: TWX) game publishing division Warner Bros. Interactive, said in an interview last week that his studio already has its  game running on the hardware. The device is rumored to be a significant graphical step up over the current PSP and possibly more powerful than both Nintendo’s 3DS and Apple’s iPad. Like those competing devices, the PSP2 is also rumored to include touch and motion controls. It will not, however, forego a physical media drive and offer only downloadable games. Sony Computer Entertainment CEO Kaz Hirai told UK magazine MVC in August that future portable consoles would support physical media due to poor network infrastructure in developing countries.

Sony’s biggest challenge in the portable game space is offering a product that can successfully compete with Apple’s iPod Touch and iPhone handhelds. While the PSP has enjoyed strong game developer support in Japan, the one territory where the hardware has thrived, major developers across the world have flocked to Nintendo’s DS handhelds and the low development costs of iOS game development. The PSP2 will need to offer tools that make porting downloadable software to the device simple in addition to a feature set that will appeal to both core gamer and family audiences to garner support from Western game companies like Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ: ERTS). At this point, the rumored Sony Ericsson (NASDAQ: ERIC) Playstation Phone might be stronger entry into the portable game hardware market than a devoted machine.

As of this writing, Anthony Agnello did not own a position in any of the stocks named here.

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