Nintendo Is Getting Its Lunch Eaten

Nintendo (PINK:NTDOY) would rather forget that 2011 happened. In its latest round of financials, the company announced an expected annual loss three times larger than forecast in October.

Last year saw a confluence of factors that battered Nintendo and set the company up for a record loss (full year losses to March are predicted to be in the $844 million dollar range). Sales were down 32% from the same time the year before and its stock is now trading below $17. Yes, a higher Yen is partially to blame for the Japanese company’s financial woes, but the real story is the growing domination of smartphones and tablets in the casual gaming space. While dedicated mobile gaming gear remains popular in Japan, in Europe and North America the tide is shifting to downloading inexpensive video game apps on iPhones, iPads, and Android devices.

For the past several decades, Nintendo has been one of the most successful manufacturers of video game hardware, especially in the mobile space. A string of handheld hits including the Game Boy, DS, and DS Lite have been must-haves for generations of gamers. The DS line alone has sold 151 million units worldwide.

At the height of its popularity just five years ago, Nintendo stock was trading near $80. But times have changed, and the DS line is growing long in the tooth. Unfortunately, the 3-DS, a more powerful portable with advanced 3D graphics,�tanked on launch in 2011. Initially introduced at $249, gamers simply weren’t buying and the company was forced to lower the price soon after to $169. Despite the fire sale, only11.4 million units were sold (14 million had been forecast at the higher launch price).

Game-console headwinds

When it came to the living room, Nintendo’s Wii took the sales lead for the current generation of home gaming consoles, to date selling nearly 95 million units worldwide compared to 56 Million Xbox 360s for Microsoft (NASDAQ:MSFT) and 56 million PlayStation 3s for Sony (NYSE:SNE). However, Wii sales have dropped significantly in 2011 (down to 9 million units sold for the year) as the more powerful consoles from Sony and Microsoft became more affordable and gamers grew tired of the Wii’s relatively simplistic graphics and lack of online content. A new console, the Wii U, is in the works for 2012, but it faces an uphill battle against the current Sony and Microsoft consoles that offer similar graphic capability to Nintendo’s new system, while offering players a huge catalog of games.

The real story behind Nintendo’s terrible year is mobile gaming. While the market for portable games has grown to the neighborhood of $8 billion for 2011 (with projections to increase to over $11 billion over the next two years), an increasing chunk of that is going to smartphones through the Apple (NASDAQ:AAPL) and Google‘s (NASDAQ:GOOG) Android app stores. Many people already carry an iPhone or other smartphone with them, and when this device offers high-powered graphics, online access, and hundreds of thousands of apps that range in price from free to $10 (with most in the $1 to $2 range), it’s easy to see Nintendo’s problem. Why shell out $169 for another device to carry, then pay $30 or more each for games, with a limited selection of titles? In 2009, Android and Apple’s iOS devices cornered an estimated 19% of portable video game sales in the US. In 2010, they hit 34% and in 2011 topped 58%.

The trend in mobile gaming is pretty clear �don’t count on a Nintendo resurgence in that space. If Wii U isn’t a hit in the living room, 2012 could be even worse for the company than the miserable 2011.