Analysis: Is the smartphone gaming challenge real?

By Christoph Steitz

FRANKFURT (BestGrowthStock) – The explosion in smartphone gaming has traditional console makers in a quandary: join the mobile trend and risk cannibalizing your business or hope the rich, home video gaming experience will always trump convenience on the move.

The three big console hardware makers, Nintendo (7974.OS: ), Microsoft (MSFT.O: ) and Sony (6758.T: ), have been struggling to lure new customers and retain old ones.

Motion-controlled gaming systems is one of their major hopes to breathe new life into the struggling $60-billion video game hardware and software market.

But even this will only cushion an expected 5-percent decline in sales in 2011 to about 50 million units, according to research firm iSuppli.

While traditional consoles — Sony’s Playstation 3, Microsoft’s Xbox 360 and Nintendo’s Wii — remain the industry’s cash cow, gaming on smartphones, unleashed by Apple’s (AAPL.O: ) iPhone, has sky-rocketed.

Research firm Gartner expects global revenue from mobile gaming, the segment that includes games for smartphones, to rise 19 percent to more than $5.6 billion this year, while it is forecast to grow to $11.4 billion in 2014.

The company estimates that up to 80 percent of all downloaded mobile consumer applications are mobile games.

The boom has already reached investors, as small game developers — such as Rovio, the maker of the Angry Birds game for the iPhone — are already receiving bidding approaches from potential buyers.

“Smartphone gaming is being adopted at a much higher pace than mobile phone games overall. It is taking up a lot of time and that means that customers have less time playing a (dedicated) handheld device,” Ed Barton, senior analyst at research firm ScreenDigest, said.

Researchers at iSuppli say factory unit shipments of game-capable mobile phones are expected to rise 11.4 percent to 1.27 billion this year.

This compares with a largely flat video game console market, seen up just 0.2 percent at 52.3 million in 2010. Handheld device units are even expected to decline by 2.5 percent to 38.9 million.

LESS THAN FULFILLING

Smartphones may only account for about a fifth of the broader handset market. But according to Goldman Sachs, the sector’s 56 percent growth rate outpaces a 10 percent expansion of the overall handset market.

A study by digital market research firm ComScore Inc (SCOR.O: ) showed that the number of U.S. smartphone gamers increased by 60 percent between February 2009 and the same month this year.

ScreenDigest’s Barton said that while gaming on smartphones was still a small business in terms of revenues, it was a potential “threat to the dedicated handheld device” in the years to come.

Sony, the maker of the Playstation Portable (PSP), played down the potential threat.

“I find it a less-than-fulfilling experience,” Andrew House, the European head of Sony Computer Entertainment, told Reuters at Gamescom, Europe’s biggest video game trade fair, adding that playing games on smartphones was limited in terms of user experience.

The German head of Nintendo, maker of the Gameboy and the DS handhelds as well as creator of the video game character Super Mario, struck a similar note, pointing to new devices such as a 3-D version of the DS which offers a gaming experience far superior to smartphones.

Microsoft, alone among the three hardware makers in not having a handheld console in its offering, has already joined the frenzy.

This week at Gamescom, Europe’s biggest video game trade fair, the company announced it would offer high-quality games for smartphones that use the Windows Phone 7 application.

According to Thomson Reuters StarMine, Microsoft trades at 10.3 times estimated 12-month forward earnings, a discount to both Sony as well as Nintendo, whose German head said it remained to be seen how strongly game developers would engage in smartphone gaming.

Electronic Arts (ERTS.O: ), the world’s No.2 video games maker, said earlier this week it was bullish about growth in its digital business, that also includes games for smartphones, where it posted a 52 percent increase in first-quarter revenue.

“The days when people were just putting a CD in a console are over,” its chief operating officer John Schappert said.

(Additional reporting by Nicola Leske; Editing by David Cowell)

Analysis: Is the smartphone gaming challenge real?