Mini-project: Nintendo’s Strategy in
Handheld Video Games
Entrepreneurship and Innovation Strategy
Prof. Ron Adner
Brian Ramirez
Daniel Bogomoltz
Thiago Vasconcelos
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Introduction
This paper analyzes the dynamics of the handheld videogames industry and the threat that the
recent uprising of games for smartphones puts on leading players of this industry, specifically on
Nintendo. It also assesses the strategic options Nintendo has in dealing with this threat, and our
recommendation for their best option.
The first handheld video game was created by Milton Bradley in 1979 and was called Microvision.
In the following years several handhelds were launched but there was not one that could be
considered a huge success, until 1989, when Nintendo launched the Game Boy. The Game Boy was
an instant hit, due to the bundling of the game “Tetris” with the hardware and the longest lasting
market battery as its two primary innovations. In 1998, Nintendo innovated again launching the
Game Boy Color, that again sold very well and consolidated Nintendo’s leading position in the
market.
More recently, in 2004, Nintendo launched the DS console, with two screens, one of them being
touch sensitive, and once again achieved significant success in terms of sales and across fans all
over the world. In 2005, Sony leveraged its expertise in console video games and challenged
Nintendo’s position in handhelds by releasing the PlayStation Portable (PSP), which became DS
main competitor.
In recent years, a serious threat for the handheld industry has surged. As smartphone technology
improved, it consolidated one’s mobile phone, computer, and casual gaming system into one
device, and became a serious competitor for the handheld video games, since it presented strong
advantages such as multi-funtionality, wireless internet, and online game distribution. How should
Nintendo respond to this new and real threat to their handheld business?
Handheld Video Game Ecosystem

Historic evolution of handheld games
The first video games date from the early 70’s, with the first arcade video games being developed in 1971 at
Stanford University, and the first console video games coming a few years later (1972-1975). However, it
was not until the 80’s that video games became a success, with the advent of the Atari 2600.
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Handheld videogames came to the market slightly later, in the late 70’s. In 1977, Mattel introduced a
handheld single-game device, with the game Auto Race. In 1979, a company called Milton Bradley that
worked in the game industry, developed the first handheld console with interchangeable cartridges was
launched, called Microvision.
The first big hit in the handheld video game business happened with the launch of Game Boy by Nintendo in
1989. The Game Boy presented some technological disadvantages in comparison to its main competitors at
the time (Atari Lynx and Sega Game Gear). For example, both rivals featured color display, Lynx has some
networking capabilities, and Game Gear was compatible with Sega’s main console video games. However,
the Game Boy simpler device provided some characteristics that determined its dominance in the market: It
used only 4 AA batteries (instead of 6 AA batteries for the other devices), and had a 10-12 hours battery life
instead of 4-6 hours of the competitors. It also was bundled with the games “Tetris”, that was a success at
the time. Besides, Nintendo thrived in building a better relationship with its third-party developer network,
whose differentiators that were killer advantages. Finally, Game Boy’s price point was lower than the
competitors’ devices ($90 Game Boy vs. $190 Atari Lynx and $150). More than 25 million units of Game Boy
were sold in the US by 1992.
Nintendo thrived as Game Boy was a leading device for almost 20 years. Ten years after the launch of Game
Boy (which had a black and white screen), in 1998, Nintendo launched Game Boy Color, featuring 32k colors
and a larger display. By 2005 a total of 120 million units of Game Boy (including the Color) have been sold.
The decade of 2000 presented big innovations in the handheld video game business. In 2001, Nintendo
launched Game Boy Advance, adding more buttons, a larger screen and more computing power. In 2003,
Nokia released a hybrid mobile phone and handheld video game called the N-Gage, whose failure we
analyze later in this paper.
But in 2004 Nintendo innovated with the launch of Nintendo DS, a new platform that incorporated two
screens, touchscreen technology and wireless connectivity. In the same year, Sony introduced its PlayStation
Portable (abbreviated PSP), using an optical disc format as cartridges (Universal Media Disc or UMD),
memory sticks as primary storage medium, and presenting a larger screen, multi-media capabilities and
connectivity with its console video games (PlayStation 3).
As of December 2009, Nintendo has sold more than 125 million units of its handheld video game worldwide
(Nintendo DS, Nintendo DS Lite and Nintendo DSi).
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However, the threat for Nintendo did not come from inside the video game industry, but from mobile phone
technology. In 2011, the company launched the Nintendo 3DS, and despite bringing additional video gaming
technologies, the product was not as well received as its predecessors. The rise of mobile video gaming
seriously threatens Nintendo’s dominance in the handheld video game industry.

The Ecosystem of handheld video games
The console manufacturers have a major role in the handheld video games ecosystem, coordinating efforts
of suppliers, games publishers/developers, and the sales distribution system.
However, a key component of the ecosystem is the games developers companies. In the history of handheld
games, some very good consoles failed because the devices manufacturers could not coordinate adequately
with the efforts of the developers, and could not build a critical mass of games for their platforms. As an
example, Neo Geo Pocket was one handheld console launched in 1999 that was severely hurt by not
establishing a good relationship with its third-party developers, despite universal praise from gamers.
Furthermore, there are a few newer players in the handheld ecosystem: Recently, some companies started
to introduce in-game advertising, thus generating an additional source of revenues, creating a new role in
the ecosystem responsible for negotiating and introducing ads into the games. Another player is the content
licensor, a company who is focused on licensing trademarked content to be used in games. Those games can
sometimes generate an important part of the revenues of a console.
The following diagram summarizes the handheld video games ecosystem:
Exhibit A
Technology
suppliers
Device
manufacturer
Distribution
channels
End
customer
Games
developers
Content licensor/
in-game advertiser
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Nintendo – Current State of the Company and Handheld Products
Nintendo competes both on the console and handheld videogames market and after years of
declining sales and market share, the company improved profitability with the launch of Wii in
2007. With Wii, Nintendo expanded its consumer market by targeting women, families and older
consumers, that were not considered the traditional customers for videogames and the product
was a success for years.
Today, Nintendo is again facing a difficult moment. The company reported losses of $328 million in
the second quarter of 2011, influenced by weak sales of Wii and the 3DS (the new handheld
device). To react to these results, the company decreased the price of the 3DS by 40%. The
investors, however, are pressuring the company for a more dramatic change in its strategy: they
want Nintendo to develop games to mobile platforms, such as the iPhone. The Company is
reluctant to do so. Curiously, one of the primary reasons for the increasing popularity of mobile
games is the same that made the Wii a success: its appeal for non-conventional game users. Should
Nintendo resist entering this market?
Lessons Learned Through Entering Mobile Gaming Market
A few forward-thinking companies attempted to mesh handheld gaming consoles with Internet-capable
mobile devices starting in 2003, but were unsuccessful. Nokia attempted to leverage their strength in
mobile phones to introduce the N-Gage: a mobile phone/handheld video game console in October 2003
(Image 5). The console was designed to provide gamers the opportunity to carry one device as opposed to
both a mobile phone and game console. However, the N-Gage failed for two reasons. Even though it was
priced higher than its competitors at $229, its design was also larger and not competitive in an era when
devices were smaller with each update.i However, it was primarily the low range of quality games (58) that
caused the N-Gage to fail. Nokia failed to entice third-party developers to create quality handheld games.
Developers felt that the N-Gage was a console for “java” versions of the games that were currently in use on
other mobile devices: in other words, Nokia was trying to pass games built for casual gamers as games built
for serious gamers.ii Low-quality games coupled with low console sales (5,000 during the first two weeks of
the 400,000 shipped) eventually led to the N-Gage’s demise six years later in October 2009.iii
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The failure of the N-Gage demonstrates the divide between casual gamers and serious gamers, and
reinforces the importance of handheld console makers establishing strong relationships with the third-party
game developers within the handheld video game ecosystem. Serious gamers did not value one
consolidated device over carrying two separate devices, so long as the video game console was built with
their needs in mind. The failure to attract third-party developers created a death spiral, in which consumers
would not buy the console because of its small range of low-quality games, and third-party developers
would not produce programs for the N-Gage because of its low sales.
The Rise of Mobile Gaming Focusing on Casual Gamers
Mobile devices have been equipped with gaming capabilities since 1994. In 1997, Nokia launched “Snake” in
some mobile models and this game ended up being the most played video game on the planet, as it was
embedded in more than 350 million devices worldwideiv.
Especially after the launch of the iPhone, and its embedded capacity to access the App Store, playing games
on mobile became a World fever. Games played on mobile devices were categorized as casual gaming.
Casual games are distinguished by their simple rules and lack of commitment required in contrast to more
complex hardcore games. A recent example of a casual gaming success is Angry Birds, which is considered
the largest mobile app success the world has seen so far, with +350 million downloads across different
platforms (e.g. iPhone, iPad).
The new business model developed by Apple, enabling an open development of any kind of software based
on Apple’s platform (iOS), and being commercialized through an online App Store, re-shaped the portable
gaming industry. Several new developers emerged (Zynga, YoYo Games), and customers became used to
having immediate access to new games through the online store. As a consequence, both Nintendo and
Sony opened their version of online stores: DS Store and the PSP Go Store.
Another characteristic of mobile gaming is the presence of thousands of games, several of them available for
free or for a very low price point (between $1.99 and $3.99), in contrast to handheld video games that cost
in the range of $15-30. As a consequence, both “serious” and casual gamers are getting access to a larger
variety of games for a much cheaper price, and part of the revenue of serious games is migrating to the
casual market. Also, the emergence of open source development enabled several new entrants to penetrate
the game development market, creating an additional pressure on the current market leaders.
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Finally, in the last release of iPhone 4S, an important part of the announcement was dedicated to showcase
the new gaming capabilities of this new mobile phone, closing the gap in terms of performance to handheld
video game devices. Thus, it is clear that mobile are making harder moves into the video gaming world,
threatening the landscape for companies as Nintendo.
Nintendo’s Competitive Response to Mobile Gaming
Nintendo currently faces three options to respond to mobile gaming. It can choose to compete directly with
Apple and other mobile phone producers by building a Nintendo-branded mobile device. It can also choose
to increase its efforts behind its current handheld consoles, and make a significant investment to improve its
existing technologies. However, despite all data pointing toward the growing prominence of mobile gaming,
Nintendo should resist the urge to compete and focus instead on meeting the needs of serious gamers
through its handheld consoles.
Entering the mobile ecosystem will prove too difficult for Nintendo, because they will be competing for
relationships with new hardware suppliers, new mobile application and software developers, mobile
network operators, physical and online mobile device stores, and will need to market to a different
consumer market. On top of these complications, Nintendo will not be able to offer mobile market
expertise to its new partners. Ultimately, Nintendo would spend its time catching-up to Apple, HTC, and
other established mobile device manufacturers, which would require significant capital investment and most
likely impede progress in developing their next handheld console.
Doubling-down its efforts to expand its current handheld market share will result in wasted resources,
because mobile technology has already exceeded consumers’ expectations for gaming. Even though mobile
devices do not have the same level of complexity and gaming power as traditional handheld gaming
consoles, most gaming consumers’ gaming needs are met by their mobile devices (Exhibit B). Mobile
devices multi-faceted nature makes them a better investment for casual gamers than handheld video game
consoles. Nintendo could ultimately try to compete by lowering their prices, but this would erode the profit
margin on their new investment and further increase their current stock price and earnings slump.
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Exhibit B
Instead, Nintendo should concentrate its efforts on discovering new niche market segments, most notably,
the serious gaming market. Mobile gaming is attractive to casual gamers, because it provides device
consolidation, lower gaming complexity, at a lower price point than traditional video games. However,
Nokia’s N-Gage demonstrated that consolidation and lower-complexity games are not as important to
serious gamers as is the portfolio of games and game control. Serious gamers demand more of their
hardware and software. Mobile devices cannot yet compete with the level of sophistication of traditional
handheld devices or with the feel of the hardware controls required by serious gamers. In order for
Nintendo to solidify its brand within the serious gaming segment, it must develop its reputation for
innovation by meeting the needs of serious gaming as well as for providing a portfolio of consistently highquality titles.
The one area in which Nintendo will have to compete is in the race to continuously attract the best software
developers to build games for its hardware. Nintendo was able to maintain market leadership for over a
decade with the Game Boy, because it attracted the top developers, and thus, the best collection of games.
These developers could eventually find it more lucrative to develop less sophisticated games for a higher
scale market as market successes such as Angry Birds become more commonplace. However, one of the
complaints about the current suite of mobile gaming options is that they are usually low-quality.v Nintendo
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will have to exploit this market perception, by removing current barriers to partnering as well as rethink the
sales terms it has in place with developers in order to grow its partner list.
Many analysts are already predicting the demise of Nintendo, due to the threat of mobile gaming
and Nintendo’s “inability to adapt.” vi While it is true that Nintendo was out-innovated by companies such
as Apple and Google, it still has the opportunity to leverage its strong brand reputation and refocus its
efforts on the serious gamers that appreciate its capabilities. It seems that Nintendo is on the right path, as
Nintendo President/CEO Satoru Iwata recently stated that mobile is not in the company’s future.vii
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Image Exhibits:
Image 1. Microvision, first handheld game
console with interchangeable cartridges
Image 2. The Original Nintendo Game Boy
Image 3. Atari Lynx
Image 4. Sega Game Gear
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Image 5. Nokia N-Gage
Image 6. Nintendo DS
Image 7. Nintendo 3DS
Image 8. Sony Playstation Portable (PSP)
i
http://tech.uk.msn.com/features/photos.aspx?cp-documentid=149711648&page=21
http://www.allaboutsymbian.com/features/item/What_will_Nokia_learn_from_the_Failure_of_N-Gage.php
iii
http://en.wikipedia.org/wiki/N-Gage
iv
http://en.wikipedia.org/wiki/Mobile_game
v
http://gigaom.com/mobile/nintendo-3ds-vs-smartphone-gaming-which-wins/
vi
http://seekingalpha.com/article/297640-nintendo-seems-doomed-in-the-face-of-strong-competition
vii
http://www.qj.net/nintendo-3ds/news/nintendo-will-not-make-mobile-games-says-iwata.html
ii
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