According to a new report by Interpret, mobile phones now make up 43.8 percent of the mobile gaming market, which includes Nintendo's DS and Sony's PSP lines of handheld devices.
While the proportion of games played on phones has increased by 53.2 percent over the last year, the number played on the DS and PSP have actually fallen by 13 percent.
The firm noted that "a full 27.2% of consumers who indicate that they play games on their phones only (and not on the DS/PSP) actually own a DS or PSP, but do not actively use the device(s)."
Courtney Johnson, a research and analysis manager at Interpret, added that "the proliferation of highly multifunctional smartphones and messaging phones is a very real threat to the dominance by the DS and PSP of the handheld gaming market. Devices which satisfy a variety of entertainment and utility are fast outstripping single-function devices as consumer favorites."
Adapting to a changing market
Prior to the appearance of the iPhone, Apple faced similar threats to its iPod lineup at the hands of smartphones, which analysts predicted would eat into iPod sales by offering MP3 features that made standalone players obsolete. However, the iPhone and iPod touch helped Apple to maintain its position with the iPod while leveraging its existing economies of scale to successfully enter the smartphone market.
Additionally, Apple's release of an open Software Development Kit for iPhone in 2008 helped create an entirely new market for paid downloadable apps, one that hadn't ever really taken off for previous mobile platforms before.
By that time, the hardware of the late 2004 Nintendo DS and Sony PSP were already being challenged by the new iPhone. By the end of 2008, gaming legend Jon Carmack of id Software went on record as saying the iPhone was "more powerful than a Nintendo DS and PSP combined," and praised Apple's App Store revenue sharing model in the App Store.
Since then, smartphones have advanced significantly in processor and graphics capabilities while Nintendo has largely only offered a bigger DS screen and Sony has done little to advance the PSP. Both Nintendo and Sony have also made only the barest of attempts to push downloadable games, likely out of fear of disrupting the highly lucrative market for licensing third party titles.
Bleak future for PSP2, 3DS
Sony is rumored to be readying a PSP2 as a successor to the existing PSP toward the end of 2011, and Sony Ericsson is also working to create an Android phone cable of playing PSP games, expected in February 2011.
Nintendo has released subtle improvements to the DS line, but will be launching its first major upgrade in the spring of 2011 under then name 3DS, featuring games with 3D screen effects that don't require glasses, 3G mobile connectivity, an accelerometer and GPS features.
Apple's iPhone 4 and iPod touch already deliver a host of gaming related hardware features, including a gyroscope and a high resolution Retina Display. Unlike the DS and PSP line, Apple's iOS also features strong web browsing and productivity apps, a high quality mobile camera with video capture and editing and FaceTime video chat, and other software titles that move well beyond gaming (in addition to the iPhone working as a phone).
iOS cracks open mobile gaming
Michael Pachter, an analyst at Wedbush Morgan Securities, recently stated that mobile games were "approaching saturation on the handheld market. Were starting to see DS hardware sales crack," he said.
"I think the big woody of the iPod Touch is cutting into the handheld market, I think the PSP is dead on arrival and I think the PSP2 is going to be dead on arrival. It looks to me like young kids are just as happy playing with an iPod Touch or a Nano.
Pachter asked, whats the difference if you play Tetris on an iPod Touch or on a DS? Well, you pay a buck on the iPod Touch, you pay $20 on the DS. Parents prefer $1 or free software. I think the iPod Touch is going to sell really, really well. I really think as the iPod Touch gets more and more powerful, youre going to see a lot of free games over there."
Pachter predicted that Nintendo's forthcoming 3DS "will prolong the handheld market for the game manufacturers, but ultimately, I think handhelds are in trouble. After the 3DS has had its little rush I think the handhelds will continue to decline.
The top titles for Nintendo's DS are primarily first party games created by Nintendo. If the market for standalone handheld game hardware collapses at the foot of smartphones and the iPod touch, Nintendo may find itself in the position of Sega after the failure of the Dreamcast console.
Sega gave up on building hardware and began creating games for existing platforms, including some of the first games for Apple's iOS.