Smartphones Threaten to Topple Game Consoles

When I received my first Game Boy at the tender age of seven, cellphones were primarily used for -- get this -- making phone calls. If you were lucky, your phone came equipped with a few classic games like Snake or Space Invaders. But If you wanted a variety of games to play while on the go, you had to pay for Nintendo's pocket-sized console. Flash forward almost thirteen years, and the gaming landscape has drastically changed.

The idea of the cellphone (and now the tablet) as a mobile gaming platform has gained steam in recent years, as games like Angry Birds, developed by Finland's privately held Rovio Mobile, and Fruit Ninja, developed by HalfBrick Studios, have made games the most commonly used apps on portable devices.

These simple-to-use, easily accessible games have been claiming an increasing amount of portable game revenue in recent years, and have been steadily chipping away at the profit margins of Nintendo (Pink: NTDOY) and Sony (NYSE: SNE), which have long dominated the market with the Nintendo DS and PlayStation Portable (commonly shortened to PSP), respectively.

According to charts released by Flurry Analytics, a company that combines NPD data with data it collects by monitoring smartphone activity, iOS (the operating system of the Apple iPhone) and Android made up 58% of portable gaming sales in 2011. Compare this to 2009, when iOS and Android controlled only 19% of the market, while Sony controlled 11% and Nintendo controlled 70%.

Online and mobile games should grow total video games market size to $87 billion and take 50% revenue share at $44 billion this year, predicts Digi-Capital, an investment bank focused on high-growth digital companies across video games, technology, media, and telecoms.

Click the image below to see a slideshow of some of the highlights from Digi-Capital's Q3 2011 industry update.

While both Nintendo and Sony are on track to lose money for the fiscal year, the two companies are responding very differently. Nintendo, which built its company on the casual gamers that apps are now attracting, is staunchly opposed to branching into the app market. Nintendo is also unwilling to release games for non-propriety platforms, despite owning classic titles that would likely sell well if retooled for tablets and smartphones.

As an interesting aside, the sudden dominance of smartphone apps in the mobile gaming market has lead Nintendo executives to regard the iPhone as its largest competitor, as opposed to the PSP made by long-time rival Sony.

Sony has taken a different path, as March saw the release of the Android-based Xperia play, a PlayStation-certified smartphone manufactured by Sony Ericsson Mobile Communications . The phone opens to reveal a video-game style button layout for gaming, and boasts 200 (and counting) Xperia-optimized games from industry giants like Electronic Arts Inc. (Nasdaq: ERTS), Konami Digital Entertainment (NYSE: KNM), and Square Enix.

In addition to popular titles like Madden, Xperia allows the user access to the same games that originally turned smartphones into a thriving gaming platform. The average cost of Xperia-optimized games is between $3 and $5, with numerous other titles priced at $2 or less.

With casual gamers, who make up the majority of the gaming population, rapidly turning to their smartphones and tablets for their gaming needs, producers of portable gaming consoles are facing a unique dilemma. With PCs and the Microsoft Corp. (Nasdaq: MSFT) Xbox seemingly cornering the hardcore demographic, it's quite possible that the days of dedicated portable consoles are behind us.