The Money Making Game #1: Nintendo's $300 Handheld

We certainly have no problem getting caught up in the fun of playing games, but the people who create them have their pocketbooks to worry about, too. In this column, finance expert and GameSpy contributor Chris Morris guides you through the tricky corridors the gaming industry's financial side, touching on big-time business decisions and how they matter to the common gamer.



The Price of Portable Fun

When Nintendo announced the price of the 3DS, jaws dropped. 25,000 Yen converts, as you undoubtedly know by now, to just under $300 -- a figure the gaming world howled was too high. Many gamers initially assumed the system would carry the same price tag when it hit the states, and the outrage increased. Analysts and industry observers predicted (after currency conversion and other factors) that the U.S. launch price would likely be closer to $250, but this did little to mollify people.

What many people tend to ignore or forget, though, is that Nintendo made some enormous pricing mistakes with the Wii -- leaving millions of dollars on the table. And with the 3DS, the company's taking steps to ensure it doesn't repeat those gaffes. $250 (or even $300, if the company decides to surprise everyone and roll the dice) is, admittedly, an extraordinarily high price for a handheld gaming device... particularly one that has a single function. And this pricing strategy could backfire and give Apple a window to increase its market share. But from a pure business standpoint, it's a sure way for Nintendo to regain the confidence of its investors.

The Wii, as you'll recall, was the Holy Grail among shoppers for the better part of two years. Stores couldn't keep them in stock and Nintendo couldn't make them fast enough (let's ignore those conspiracy theories that the company was deliberately creating a shortage). The demand came, in part, because the company had created something that was truly novel. And it has a chance to do that again with the 3DS.


The Wii was a huge gamble for Nintendo; it was so dramatically different from anything the video game industry had offered before, that no one was entirely certain how the general public would react. So pricing that console at $250 -- an extremely affordable price for a new system -- made sense. It was, in many ways, a carrot meant to attract people.

It worked, but it soon became obvious that Nintendo could have charged considerably more and still had sellouts. At the same time, it sent a message to consumers: Nintendo might have some unusual ideas, but they're fun. Now Nintendo hopes that people remember this when the 3DS hits shelves.

"Demand will be greater than the manufacturing capacity for the first few months," says Michael Pachter, an analyst with Wedbush Securities. "You satisfy demand at whatever price you can get."

That's going to cause grumbling among some gamers, many of whom may vow that they will wait for the 3DS to come out of the stratosphere before they buy in. But those folks might want to get comfortable. Supply constraint for the system's 3D screen is likely to be a real issue; this is already being blamed for the system's delayed Japanese launch. And it's not something that's going to be corrected immediately (Pachter, in fact, says he would not be surprised if the company further delays the U.S. and European launch dates as those draw near).


That means sellouts -- and if Nintendo is going to sell every system it can make anyway, it makes a lot of sense to sell them at a higher price. And as soon as it looks like the demand is starting to decline, a timely price cut can keep the frenzy going for several more months. That's why $300 for a U.S. launch price isn't as insane as it might sound. If anything, it would give the company a revenue bump for at least six months... and if they're forced to slash prices, they're still able to get $250 as holiday 2011 rolls around.

Nintendo, of course, is famous for never selling their hardware at a loss; they're likely to make a hefty profit on the 3DS at either $250 or $300. But even if supply constraints weren't an issue, the premium price tag would still be a wise move. After all, it works like a charm for Nintendo's biggest growing competitor: Apple.

Depending on whom you choose to believe, it only costs Apple between $230 and $270 to make a 16GB iPad (without 3G). That same product retails for $499 -- and is among the hottest items at retail today (the 3G-enabled, 64GB model is estimated to cost just $346 to produce, and sells for $849 -- a 145 percent markup). Despite that, Apple sold 4.5 million iPads in the first three months.

Are the iPad and the 3DS the same? Of course not, but the lesson here is.

Price isn't what makes or breaks a sale when it comes to new technology, especially in the entertainment world. Ultimately, it comes down to how novel your product is, and the consumer excitement it can generate. As we saw at this year's E3 Expo (and as Nintendo has reminded us in defending its pricing decision), the 3DS has plenty of excitement surrounding it.



Chris Morris has covered the video game industry since 1996, offering analysis of news and trends, and breaking several major stories, including the existence of the Game Boy Advance and the first details on Half-Life 2.