First, the iPhone is not a Nintendo DSi or Sony PSP “killer.”

That word is misused like ‘awesome.’

But the iPhone does put a big crimp into the maximum market of the Nintendo DSi and the Sony PSP.

As with any electronic device, the race is to the ‘mass market’ or around 100-million units sold. What this means is that you have an effective hold on the market so hardly anyone can enter the market.

The videogame business game plan works something like this:

You offer a platform that developers want to develop games for. This serves as an enticement for consumers to buy. The larger your console/handheld sales are, the bigger the market is for developers … because while a hit game will always sell in the millions, it’s the B & C titles that can make developers money … for instance – for the PlayStation2 or the Nintendo GB (both over 100-million units), you could reach 1% of the market and sell 1-million units of a game while for the Ps3 or the XBox 360, to reach 1-million units, you have to sell to 5% of the marketplace since there are much fewer possible consoles out there – in other words, you have to try harder (design & marketing wise) and your potential market is smaller.

The Nintendo DS1 and Sony PSP gameplan was always based on the difficulty of entering the video game marketplace (console or handheld). It’s easy to sell hardware – you can get 500,000 or 1-million to buy nearly anything. The hard part are the 2 to 10-million users and to get that, the prior gameplan/business model was you needed developers to make games and that’s not an easy task.

Unless you have mass, you can’t get developers and you can’t get developers until you have mass.

See, capitalism is fun

Unless you are willing to fund them and honestly – even then, it’s hit or miss and the best new games tend to come from small obscure companies that then get big so who do you choose?

And now that games can cost anywhere from $1 to $20 million to develop, Nintendo, Sony & MS were fairly secure there were not going to be too many entries in the marketplace.

A recent try was Nokia with N-Gage, the phone that was also a video game handheld device. You can read all the details in Wikipedia which is a nice summary of its idiosyncrasies or perhaps more accurate, it’s idiocies (such as having to remove the battery to insert a game cartridge). In addition to its high cost and hardware restrictions, Nintendo & Sony knew that it would NEVER match its depth and breath of games – that yes, people wanted a phone and a game player in one but it would be a compromise.

Nintendo and Sony both counted on that we now live in a world where there are 4-5 generation of gamers and that given a choice between walking down the street skipping, giving hearty hellos and good cheer to our friends and neighbors and of course, stopping to smell the roses along the way … we really prefer to have headphones on and kill zombies … or better yet, playing sudoku or Scrabble on our handheld to pass the time away and of course, avoid talking to our creepy neighbors.

Not only did you have to pay @$180 for the handheld gaming device but that each game would cost you $20 to $30 whether it was Scrabble or a graphically intensive game … and of course, money in Nintendo’s/Sony’s pocket. There was no other option – sure you could play some games on your cell phones or your laptop but a little awkward in both cases. Nintendo of course was first and later Sony – they knew that if you wanted a handheld game with graphics and MAJOR titles, you had to turn to them and until 2008, that was the case.

Of course, to hardcore gamers who wanted portability, you were either a Nintendo or Sony fan. You could spend hundreds of hours with indepth and graphically intensive games – everything from Zelda to Grand Theft Auto … but the key to growing the market was “casual games,” everything from sudoku to the retro games to crossword puzzles to Wheel of Fortune. Basically, if you wanted a REAL gaming system & portability, you only had two choices.

But it was a big commitment – hundreds of dollars for a system and games … so Nintendo and to a lesser extent, Sony was chipping away. Again, they thought they were perfectly placed – generations of gamers who wanted access to games while on the subway, riding somewhere, on a plane … if they wanted an engaging gaming system, they would have to break down – after all, what was the alternative?

The game changed with the iPhone iTunes App Store.

As with the iPod to the Walkman – that is the possibility of the iPhone/iTouch App Store.

The iPhone/iTouch is exactly what the masses were looking for:

A multiple use device.
Easy to buy and load games.
Lots of casual games.

As with many other markets Apple competes in, the competition was asleep.

To them, “good enough was good enough.”

Nintendo didn’t want to bother with movies/TV shows playing on their device. They did not want to add storage capacity to the devices beyond a small amount and they wanted users to buy cartridges/discs that they controlled the manufacturing and could make the most amount of money. The problem with this was that it was difficult for small developers to really come in – not only development costs but the physical cost of manufacturing the disc that the game went on – and of course, there had to be enough discs manufactured so the stores could stock enough that consumers would have retail access to it and also, the developer had to absorb any unsold games at retail. In other words, a process on top of the process.

For Sony, it was similar – although you could play movies on a PSP – you had to buy UMD’s – the small discs that cost not much less than a DVD but had no extras. While you could hack your Sony to play movies from a memory card, Sony frown upon that also.

Again, not saying they aren’t great gaming systems but beyond the hardcore gamers who wanted 75 levels to their games, both systems were not consumer-friendly for the casual user who wanted a gaming system that could be a PDA, a camera, a photo player, an Mp3 player, a video player, a web browser and maybe even a phone.

The iPhone was all that with GB of storage plus iTunes for everything entertainment AND a phone. The iTouch is everything but the phone – and now with WiFi, a “free” phone.

Now add GAMES (and other apps).

You have a game-changer, not a killer but a game-changer.

Now, you have an all-in one device that has a world class user interface and easy to load … and now, literally THOUSANDS of games to choose from. It doesn’t have major 75-level titles YET but for the average casual gamer, they just want to jump on, play a couple levels and get off their stop or join in on the conference call or the few minutes arriving at the school before the kids run pell-mell from their classrooms to the car

No need to read reviews to decide if a game is worth $19 or $29 dollars and then have to go buy the disc – hoping they like it or get enough value … the Phone/iTouch – don’t even need to plug in – you can buy it via WiFi – anywhere from FREE to $9.99 (virtually every game I believe is $9.99 or less). It’s totally digital – no need to load a disc or look for one – and the opposite of the stigma of holding a gameboy or PSP – you’re holding an iPhone/iTouch.

And that is a big problem for Nintendo or Sony. Sales are going to continue but now, they will not break out into the mass market as they presumed.

You’ve seen the Lisa Kudrow ads for Nintendo right? An average casual gamer now wanting to play a brain teaser or a cooking lesson – how many instead are going to reach for an iPhone/iTouch or spend the same amount for a Nintendo DSi? (with way less memory on a DSi dependent on your memory card choice),

Of course, Nintendo is scrambling hard to reinvent the DS as a Touch(ish) like and launching a new store with games starting at $2 but after 25 years being stand offish to third party developers (if not outright hostile) … it may be too late … because when push comes to shove, Nintendo is clearly going to protect its margins with a $29/$39 game on disc … and of course, Sony is a large bureaucracy that insisted on the PSP only offering movies on disc to protect the DVD division so for them, they are incapable of making any decisions taking less than 2 years and 400 meetings.

So, again, the iPhone/iTouch is not going to kill off the PSP or the DSi as hardcore gamers will always want a dedicated gaming machine but that TOTAL MARKET number is now suddenly much smaller as the iPhone/iTouch and even the Blackberry/Pre will chip away … so just as there is a distinction between those buying the Wii and those buying a PS3/PSP, the market is split between casual gamer and hardcore gamers … the margins are higher with hardcore gamers but the total audience if you count Japan, Europe & the US might number a total of about about 125 million while casual gamers probably number in the 500 million+ range so both sides will survive and thrive but Sony, Nintendo or MS dreaming of breaking past the marks they set with the GB, the original Nintendo or the PS2 are not going to happen. The market has expanded but the casual gamer is not interested in devoting hundreds of hours to getting proficient – it’s age, it’s time available and it’s interest so … that’s the difference.

So, while the return on a $19-$39 game (for handhelds – more on consoles) seem more obvious, there are also huge costs incurred to get that game to market – from development to production to retail distribution … many costs that a true mobile platform reduces greatly … as evident by a few people in their sparse time making a nice return via the iTunes store while there are no such stories anyore for the more traditional gaming systems … and that is what Nintendo, Sony & MS have to fear from the iTunes and the other new online sync-buy stores …