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Sony Corporation (ADR) (SNE), Microsoft Corporation (MSFT): Little Games, Big Impact

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Sony Corporation (ADR) (NYSE:SNE) and Nintendo aren’t afraid of mobile gaming. But the facts are that mobile game revenue surpassed portable console games at the end of last year and user engagement on smartphones and tablets continues to rise. Both companies could take a lesson from Nokia Corporation (ADR) (NYSE:NOK), the one-time champion of mobile phones, which didn’t see iOS or Android as threats either. We all know how that worked out.

Two different markets

Sony Corporation (ADR) (NYSE:SNE)

Both Nintendo and Sony Corporation (ADR) (NYSE:SNE) made appearances at E3, an annual video game conference where Sony unveiled some new information about the upcoming PlayStation 4. In an interview with AllThingsD Sony Corporation (ADR) (NYSE:SNE) President Jack Tretton was very confident about the future of console gaming. “Turn to anyone … here in this crowd,” he said, “and ask them if they’re turning to smartphones or tablets over consoles. And then run.”

Of course very few of the attendees of a video game conference are going to tell you mobile gaming is better than console gaming. These are the “hardcore gamers,” the people that want the next great thing in gaming.

The comparison of smartphones and tablet to set-top game consoles is something like apples to prime rib. I’m a vegetarian, but I can tell you prime rib tastes better.

A real comparison

Portable consoles ought to be what these games are measured against first. In this case, the market has all but declared mobile apps the winner. Even with prices of $40 to $50 for Nintendo 3DS and PS Vita games, game app revenue is vastly exceeding both platforms combined.

Between the fourth quarter of 2012 and the first quarter of this year, iOS game revenue increased 40% while Google Play’s game revenue increased 100%. Growth like this must come at the expense of other entertainment, and indeed portable console sales fell dramatically from their seasonally high fourth quarter.

Gamers only have so much money to spend, and they’ve chosen to spend it mostly on in-app purchases. The days of spending $50 on a portable game are numbered. Nintendo and Sony Corporation (ADR) (NYSE:SNE) ought to figure out how they can replicate the model instead of ignoring the problem it’s creating.

Nintendo’s stubbornness

This trend is of much greater importance to Nintendo than Sony Corporation (ADR) (NYSE:SNE) because its Wii U console, released last fall, has sold poorly. Currently, the company is largely dependent on its portable platform to continue selling games. As spending on mobile game apps rises and portable console spending falls, however, the company finds itself in a tough situation that CEO Satoru Iwata is refusing to recognize.

Instead of cutting the price on the Wii U, which the company points out is already aggressively priced, Nintendo is hoping a slate of new proprietary titles will help boost sales. These releases are timed to go head-to-head with stiff competition from Sony and Microsoft Corporation (NASDAQ:MSFT) as they release their new consoles with their own flagship game titles. Nintendo may be setting itself up for more disappointment.

Iwata reiterated the company’s resistance to mobile apps, stating “Our IP is the most important asset with which we can attract people to our own platform” in an interview with AllThingsD. Meanwhile, Sony and Microsoft Corporation (NASDAQ:MSFT) have introduced apps that act as companions to their games and consoles.

At home

I know I said the comparison between set-top consoles and mobile platforms isn’t quite appropriate, but that doesn’t mean mobile platforms won’t have an impact on console game sales. Americans are using their phones and tablets for entertainment during prime gaming hours, and more frequently using them to play games.

70% of the American adult population uses a tablet at some point between 7:00 p.m. and 9:00 p.m. – prime gaming hours. There are a finite number of hours during the day for gaming and entertainment, and while enthusiasts aren’t turning to their tablets or smartphones for their gaming fix, many more casual gamers are.

This is another misfortune for Nintendo in particular, which found great success with the casual gaming market and its Wii console. But it also likely means fewer game sales for all consoles as more consumers turn to their smartphones and tablets for entertainment options. Even if gamers still buy graphic intensive games, less “serious” titles may see poor sales as big name game makers such as EA have started producing mobile game apps.

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