An Apple Joystick Would Be Huge Threat to Nintendo, Sony

In 2011, Nintendo (PINK:NTDOY) sold 11.4 million units of its latest handheld gaming system, the 3DS. Although the company had to cut the introductory price from $269 to $169 to boost sales, the platform still represented crucial revenue for Nintendo in a year when sales for its other major product — the Wii home video game console — slumped to just 4.5 million units in 2011 in the U.S. (a 35% drop from the previous year).

Nintendo is expected to report net losses for the year of $838 million — Its first loss in 20 years. The company is vulnerable. The Wii U, a replacement for the Wii gaming console, is expected to be released later this year, but even though it boasts a unique controller, the system’s graphics capabilities are just reaching parity with the Sony‘s (NYSE:SNE) PlayStation 3 and Microsoft‘s (NASDAQ:MSFT) Xbox 360 � 2005-era systems that are expected to be replaced by more powerful consoles within the next year or two.

Sony, coming off a bad year itself, is looking to its new PlayStation Vita handheld gaming system to be a hit. Research firm Strategy Analytics thinks this a possibility. In a GameInformer article, company analysts predict that the $249 device ($299 with 3G support) could net Sony $2 billion in hardware and software sales for 2012. Engadget was reporting Vita sales the first two months of 2011 were 1.2 million units worldwide, lower than Sony was hoping for, but there have been rumors of a possible price cut that would likely spur sales.

Apple as spoiler?

Both Nintendo and Sony have been battling a new entrant in the handheld video game console market: Apple (NASDAQ:AAPL). Apple doesn’t make a mobile video game system, but it does sell three mobile devices that have proved remarkably popular for playing casual video games: the iPod Touch, iPad, and iPhone. These devices have much better battery life than Sony�s or Nintendo’s mobile gaming units, they have access to half a million apps (many of which are priced at $1), and they have the added advantage that many people are already carrying one. No additional system to buy.

Game developers like Electronic Arts (NASDAQ:EA) have begun porting increasingly complex game titles to Apple’s iOS platform — the kind of games that used to be the sole domain of dedicated gaming systems. Reception by players has been positive. Epic Games‘ Infinity Blade game franchise for iOS earned over $30 million from sales in 2011, despite pricing that usually ranged from $5 to $7.

Now that highly complex and graphically rich games are available on Apple’s iOS devices (and at a fraction of the $30 or more charged for 3DS or Vita games), the remaining complaint against playing serious video games on an iPad, iPhone, or iPod Touch is their purely touch-based interface. This is ideal for some games, but physical joysticks, buttons, and control pads are the preferred input method for many games.

The Apple controller �threat�

The desire to have “real” controls for iOS devices has led to some opportunities for third-party accessory makers like Ion Audio and its $100 iCade, which adds classic arcade controls to an iPad while mounting it in a miniature, retro arcade style cabinet. The product started out as an online April Fool’s joke, but demand from iPad owners was so strong that it was manufactured.

Apple Insider recently reported on a rumor that Apple is secretly developing a physical controller for iOS devices such as the iPad. This has to be causing considerable consternation at Nintendo and Sony, and at any game studio whose revenues are largely tied to their platforms.

Add-ons like the iCade can be dismissed as a gimmick, and third-party controllers like theiControlPad suffer from compatibility issues with many games. But the prospect of an official Apple controller for an iPad, iPhone, or iPod Touch is something altogether different. It would undoubtedly look good (Apple is known for its design aesthetic), and an officially supported device would likely come with an accompanying move by iOS game developers to release updates for full controller support.

A built-in market

If Apple were to release such a device, not only would every iOS device sold from that point on be a potential 3DS or Vita killer — with a physical controller possibly even bundled at point of purchase — but the 172 million iOS devices Apple sold in 2011 could also be upgraded.

Apple releasing its own physical controller for iOS devices seems like a natural move. The demand is clearly there. Third-party versions, while not perfect, are in high demand and Apple has shown it has no qualms about entering a space already served by its accessory makers (such as when it released its own Smart Cover for the iPad).

Add the company’s recent moves to hire senior video game industry veterans, such as a former Xbox Live product marketing executive and a senior manager from Electronic Arts and Activision (NASDAQ:ATVI), a patent application for a mobile game controller and an Apple push into serious gaming seems a real possibility. If and when that happens, it won’t just be accessory makers that feel the heat; for Sony’s PlayStation Vita and Nintendo’s 3DS, the party may well be over.

As of this writing, Brad Moon did not own a position in any of the stocks named here.