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Nintendo's 3DS Opens All Eyes At E3

A year ago many analysts and video game industry pundits wondered if growth for industry leader Nintendo (NTDOY) had peaked. In the fiscal year that ended in March, revenue fell 16 percent while profit tumbled 12 percent, to $2.5 billion, in part because of slowing console sales.

Earnings gains may prove even more challenging in the coming months. Nintendo's motion-sensing Wii game console faces holiday season challenges from Microsoft (MSFT) and Sony (SNE), both of which this year will introduce console accessories that also track a player's movements.

Sales of the company's handheld devices, the Nintendo DSi and DS Lite, also are under pressure as Apple (AAPL) goes after the mobile-gaming market with its iPhone, iPod Touch, and iPad. Facebook's inclusion of Zynga and other social games is adding to the strain.

Yet as the annual E3 video game conference got under way on June 15, it was Nintendo that generated the most buzz. Game developers crowded Nintendo's booth to get hands-on time with the 3DS, the newly introduced handheld that lets users view three-dimensional images without wearing special glasses. Nintendo didn't say how much the 3DS will cost.

Enthusiasts—many sporting name tags that betrayed an affiliation with Microsoft and Sony—also lined up for a glimpse of a suite of new Wii games. "The most impactful reveal at the show is the 3DS, which appears to us to be the must-have consumer electronics product over the next few years," Wedbush Morgan Securities analyst Michael Pachter wrote in a report. "The 3DS was truly impressive, and although we expect it to cost upwards of $250, we are confident that Nintendo will sell many millions of them in the first full year of production."

big support from game publishers

As the Wii changed the way people played games at home four years ago, the 3DS will transform mobile gaming, says Nintendo President Satoru Iwata. "We take approaches that are different than others," he says in an interview. "We are creating the entertainment that cannot be available elsewhere." He says that Nintendo and other console makers are competing with a widening array of social activities.

The new handheld took two years to develop and has won widespread support from Electronic Arts (ERTS), Activision Blizzard (ATVI) and other major game publishers. At launch it will appeal to both casual and hardcore gamers, Iwata said. "If we had started development of the 3DS just after knowing that the trend is for 3D, we wouldn't have been able to make the 3DS," he said.

The top screen of the 3DS offers a 3.5-inch screen that is packed with extra pixels and microscopic slits layered over a traditional LCD screen to deliver images in three dimensions without using the multicolored glasses usually needed to view images in three dimensions. It also features twin cameras on the lid for taking 3D photos viewable on the console and a tool on the right side of the lid to adjust the 3D on the display down to 2-D. The 3D3 boasts a gyroscope, an accelerometer, and a round nub analog input called the Slide Pad.

Iwata said Nintendo is considering a rare simultaneous launch in the U.S., Europe, and Asia sometime before its fiscal year ends in March 2011. The company sells its base Wii bundle for $200. Microsoft's Xbox 360 retails for $300, and analysts predict Microsoft's motion-sensing Kinect add-on will sell for about $150. Sony's PS3 costs $300, plus $99 for the "sports bundle" that includes one controller and a camera to capture movements.

Nintendo has been adjusting its playbook to keep rivals off balance. Earlier this year, the Kyoto (Japan)-based company introduced the DSi XL, which aims to capture a more adult audience with its larger screen and ability to view digital books. The 3DS may include technology that lets users digitally download 3D movies to onboard memory.

"a future that Sony will lead?"

To reconnect with core Nintendo fans, the slate of upcoming Wii games includes old favorites such as Zelda, Mario, Donkey Kong, and Pokemon.

Microsoft's Kinect add-on to the Xbox 360 and Sony's Move accessories target the casual users that have been the Wii's mainstay since its November 2006 debut. Sony also recently released a software update to 35 million PlayStation 3 game consoles to enable the device to process stereoscopic 3D graphics. "It's a future that Sony will lead," Sony Executive Vice-President Kazuo Hirai predicted.

Users of rival systems will have to pay more to get experiences similar to the 3DS and Wii, Iwata says. "Every single Wii system we have already sold is motion-controlled, but other companies sometime in the future have to first sell the peripheral that lets users take advantage of motion control, then they have to sell the software," he says. "Nintendo may not lose its advantage anytime soon."

The new software titles may stabilize Wii hardware sales at 18 million units for the fiscal year ending in March, with a decline to 13 million units the following year, according to CLSA Asia-Pacific Markets, a brokerage and investment firm.

"A successful launch of 3DS with attractive 3D games and Nintendo's focus on its traditional franchise will help it stabilize profits to a higher level than our previous forecasts," says CLSA analyst Atul Goyal.

If Nintendo's 3DS delivers half the success of the Wii, the house of Zelda, Mario, and Kong may once again prove doomsayers wrong.

Satariano is a reporter for Bloomberg News in San Francisco.
Edwards is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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