Microsoft versus Sony versus Nintendo. Who wins? by Don Reisinger @FortuneMagazine August 16, 2012, 10:12 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons The games business isn’t all fun and, well, games. After years of impressive growth, major game companies are struggling. Depressed consumers, aging console systems, and a massive shift from physical to digital media have created new headache for traditional firms like Microsoft, Nintendo and Sony. All three are gearing up their next generation of games. Question is, how will they stack up? Microsoft MSFT , for one, must be feeling confident. It has sold more consoles in the U.S. than Nintendo NTDOY or Sony SNE every single month for the last 18 months. And in a blog post in July, the company reported that the Xbox 360 captured 47% of all U.S. hardware sales in June, making it the 16th consecutive month it was able to reach 40% or higher. Microsoft’s success wasn’t predicted years ago when the Xbox 360 couldn’t match Nintendo’s cheaper, motion-reading Wii. But Microsoft has been able to win over gamers by delivering its own motion peripheral, the Kinect. Another key move has been getting publishers to ensure the Xbox 360 gets the top titles. Microsoft has also aggressively added entertainment offerings to its Xbox Live service, including 24-hour ESPN programming and HBO Go, turning the device into a home media hub. That, coupled with price reductions that have brought the console down to $199, has helped Microsoft become a dominant force in the industry. MORE: Samsung’s secret? Ubiquity The same can no longer be said for Nintendo. When the current generation of consoles kicked off, the Wii was far ahead. Nintendo’s console had motion gaming and competitors didn’t. The Wii was far cheaper than the Xbox 360 or PlayStation 3. And perhaps just as importantly, Nintendo had the kind of hype surrounding its console the others couldn’t muster. Nintendo watched its sales soar. All of that success came early on, however. In its first two years of availability — 2006 and 2007 — the Wii hit 20 million unit sales worldwide. In both 2008 and 2009, Nintendo sold over 20 million units. Since then, sales have fallen off, culminating with 2011 unit sales of just 11.6 million. During its last-reported quarter, Nintendo said that it sold just 710,000 Wii units worldwide, down from the 1.6 million units it sold during the same period last year. In other words, the Wii is dying. The Wii’s fall from grace follows the similarly disconcerting demise of the gaming handheld business. Both Sony SNE and Nintendo had for years made boatloads of cash with gaming handhelds. Nintendo is best known for its popular Game Boy, and its even-more-popular DS. Sony’s PlayStation Portable took a while to get off the ground, but found a following. MORE: Xbox: Microsoft’s white knight Now, though, Nintendo and Sony, armed with their 3DS and PlayStation Vita, respectively, are facing headwinds like never before. According to Nintendo, worldwide sales of its 3DS hit 1.86 million last quarter — a respectable figure, but not blockbuster. And after a strong opening, Sony’s PlayStation Vita — a new portable loaded with technology goodies like 3G wireless and a big touch screen — is having trouble keeping sales up. Why? Blame it on Google GOOG Android and Apple’s AAPL iOS. Smartphones and tablets are becoming more popular and their components more powerful. Meanwhile, major game publishers, like Electronic Arts ERTS , are realizing that gamers increasingly prefer to use those devices to play titles. And why not? Smartphones and tablets today deliver high-quality visuals at every turn. And the sheer convenience of being able to switch from a phone call or text message to a video game is too appealing to pass up. MORE: GameStop won’t stop That’s likely why mobile gaming revenue has transitioned so dramatically in the last several years. Back in 2009, according to research firm Flurry Analytics, Nintendo owned 70% of all U.S. portable game software revenue. Last year, that figure dropped to 36%. Meanwhile, iOS and Android’s revenue has combined to grow from just 19% three years ago to 58% last year. In a note to investors last month, Cowen analyst Doug Creutz issued some doubts about Zynga ZNGA , another gaming company impacted by smartphones. But his concerns could just as well be directed at Nintendo or Sony. “We believe that consumer preferences may be switching decisively to mobile games, given that game quality is similar, if not better, and mobile games have the added advantage of being playable at any time, anywhere,” he wrote. Years ago, the gaming industry was driven by consoles, PCs, and handhelds. And the winners won mostly because of better timing and better games. Now, the games themselves appear to be taking a back seat. Whiz-bang technologies like motion-capture matter as much as access to the Internet or streaming movies and television shows. And, perhaps most importantly, past success doesn’t ensure them same in the future.