iPod Touch Cutting Into Handheld Game Market

iPod Touch (Left) Nintendo DSi (Middle) Playstation Portable 3000 (Right)

iPhone and iPod Touch games are a booming business in the App Store, but how do they stand up against the big daddies of the handheld game market?

The Nintendo DS and Sony PSP boast huge install bases of about 70 million and 35 million, respectively, and a robust game library featuring well-known, high-quality franchises; will they ever feel the competitive heat from Apple? According to Michael Pachter, managing director at Wedbush Morgan Securities and a top game industry analyst, that’s actually a fait accompli.

“iPod Touch game sales are already cutting into the handheld market, particularly at the low end,” Pachter told me by email. “The iPod Touch’s market share will continue to grow, I suppose to around 10 percent to 15 percent of all handheld game sales.” Pachter sees the Touch as a more direct competitor to the DS and PSP lines, “as prices come down and parents begin to view it as a substitute” for those handhelds. The iPhone, by contrast, is less of a threat, he argued, “as it requires a relatively expensive data service plan, which most parents are reluctant to fund for children under 18.”

For Pachter, the crucial challenge for the iPod Touch as a game platform is pricing. “The sticking point is whether we’ll see these games offered at $9.99 or at $29.99. If at the lower price, the developers/publishers would take a profit hit; if at the higher price, the popularity of the iPod Touch as a gaming device will suffer.” (Currently most of the top-selling App Store titles, even from major game publishers,sell for well under $10.)

At the moment, Pachter noted, Sony and Nintendo have access to better games, including exclusive first-party titles that will never show up in the App Store; this gives both companies a distinct competitive advantage over Apple: “Everyone who owns a DS or PSP is a potential game customer,” as he puts it, “while only a fraction of iPod Touch owners will buy expensive games.”

That said, Pachter still believes the iPod Touch’s expanding market and lower prices “will ultimately make a dent in the PSP and DS software markets.” The question is whether it’s supplementing the existing handheld market, or cannibalizing it.