As Nintendo prepares to release a cheaper version of its flagship Switch console — the Switch Lite, the future of its aging handheld business has been called into question.
The Switch Lite, set to be released in September, is Nintendo's latest handheld device which has fewer features and will retail at a lower price than Switch. It comes amid waning interest in the gaming company's aging devices such as the portable 3DS, which has seen slowing sales.
Mobile games could be the answer to the 3DS, according to Daniel Ahmad, a senior analyst at Niko Partners.
"Mobile is ... on track to sort of replace it if Nintendo can generate, you know, a billion dollar mobile business each year," Ahmad told CNBC. That would allow the firm to "offset" 3DS software sales with mobile, he said.
In its financial report for the quarter ended June 30, Nintendo said its mobile and intellectual property-related income saw a 10% year-on-year increase to 10 billion yen (about $94.26 million).
But the company's key business revolves around video game platforms — with Switch alone accounting for more than 80% of Nintendo's sales, according to Nintendo's financial report.
Nintendo's mobile portfolio has grossed about $862 million, according to data gathered by app data tracking firm Sensor Tower for CNBC on July 26.
The data showed Japan generating 56% of mobile gaming revenue for Nintendo, while the U.S. was in second place at 28%.
The performance of Nintendo's mobile gaming portfolio to date has been "a bit of a mixed bag," Ahmad said.
"They've had some games that are okay," Ahmad said, adding that Fire Emblem Heroes was "without a doubt" the best performing game released by Nintendo on mobile. Data from Sensor Tower showed the total gross revenue from the title came in at $591 million — or nearly 70% of the total mobile portfolio's earnings.
Other titles have not performed as well. The game Super Mario Run — released in December 2016 — only brought in $72 million by comparison, despite being downloaded more than 200 million times, Sensor Tower data showed.
"The limited success of Nintendo's existing mobile game portfolio — developed in conjunction with some of the leading mobile games studios from Japan — underlines that it takes a lot more than well-established games brands to succeed in the fast-moving and highly competitive mobile games market," Louise Shorthouse, research analyst of games and applications at IHS Markit, told CNBC in an email.
At present, Shorthouse said, Nintendo's mobile and console gaming divisions appear to be treated as separate even though the company is aiming to use its engagement with its mobile audience as "a gateway to selling more consoles and console games."
Nintendo "is still learning in the mobile space," Ahmad from Niko Partners said. The company has been experimenting with ideas such as the "buy-to-play" model, with titles like Super Mario Run, which requires players to purchase the game after an initial trial.
"I think that they learned very early on with the introduction of Mario Run that ... the buy-to-play model ... does not work for them," he said.
Looking ahead, Ahmad said Nintendo is likely to release a handful of titles each year featuring its most popular intellectual property before extending them to Switch. This could come in the form of games being available on both platforms or through interoperability, which is the ability to link the experience in two different games on different platforms.
One such example was when Nintendo launched the game "Pokemon: Let's Go, Pikachu!" and "Pokemon: Let's Go, Eevee!" for Switch last year. To encourage gamers to interact between the Switch and the Pokemon Go mobile game, players are rewarded with an exclusive item that helps them move along faster in order to obtain a certain character.
In terms of how Nintendo could make money from its mobile games, Ahmad said the gaming company will likely "follow" the industry standard, at least initially, by making money through the sale of in-application purchases.
"There is always room for innovation in how mobile games are monetized," he said, citing the example of the "premium subscription model" where gamers pay a periodic fee in order to gain additional perks, in addition to their in-app purchases.
"(It) didn't really exist on mobile until Fortnite popularized it and now it's starting to become more common," Ahmad said, referring to Epic Games' blockbuster video game that has taken the gaming world by storm. Just last month, a 16-year-old became the champion of the first Fortnite World Cup took home $3 million.
As for the 3DS, Ahmad said it had likely reached the "end of (its) life cycle."
The 3DS portable gaming device was first launched in early 2011. Only 200,000 units were sold globally from April to June 2019 — that compares with more than 2 million units of Switch that flew off the shelves in the same period.
It comes despite Nintendo's own insistence that demand remains for its 3DS family of devices.
As recently as June this year, the president of Nintendo of America, Doug Bowser, told Time magazine that its "3DS business continues to do quite well."
Historically, Nintendo's business was largely driven by having two different types of consoles — one for the home and one that was portable for on-the-go gaming.
The Switch upended that pattern, with the device being a hybrid portable console that allows gamers to play both on-the-go as well as connected to a screen.