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Nintendo and digital sales: Better late than never?

October 22, 2012: 5:00 AM ET

Nintendo has been trying to nose its way into the profitable digital format business. Will the traditional gaming firm be able to make the jump?

By Chip Lebovitz

FORTUNE –The gem of the video game industry these days is digital format sales -- games you can directly download from the web. After all, downloading is convenient and eliminates packaging and shipping costs that hurt profit margins. But if there's money to be made at the digital profit trough, Nintendo has been fasting.

In the past couple of months, however, Nintendo has been trying to nose its way into the profitable digital format business, which drives around $400 million in sales industry-wide every month.

In August, Nintendo released its first big budget title, New Super Mario Bros. 2,for the handheld 3DS system in both packaged and digital formats. Building on the Mario momentum, the video game maker announced plans this month to release a whole slew of games in its online store, the Nintendo eShop, in time for the holidays.

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This eShop ramp up comes at a time when the online video game market has reached new competitive heights. There are over nine major competitors in this space, ranging from traditional console competitor Microsoft's (MSFT) Xbox Live Arcade to video game developer EA Games' (EA) Origin. Nintendo is pushing the boundaries of what it means to be fashionably late to the digital format, while established industry leader Valve's Steam is reaping the benefits of its almost-awkwardly early arrival. Launched in 2003, Steam, a download service for desktops and Sony Playstation 3, has dominated the business ever since. Its estimated market share ranges from 50-70%.

Nintendo's eShop debuted in June 2011, and the shop's in-store catalog, which is just one third the size of Steam's, shows its youth. The shop also has yet to have a major impact on Nintendo's overall revenues. Wedbush Securities analyst Michael Pachter estimates that eShop sales will comprise about 5% of New Super Mario Bros. 2's total sales. More

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