Nintendo has at last admitted the iPhone (and iPod touch ) are direct competitors to its Nintendo DS Lite and DSi handheld gaming consoles – even as a Nintendo games developer admits there’s more processing power packed into an iPhone than you’ll find inside a Wii.

A developer, Yare, from Telltale Games, (who built Tales of Monkey Island, among others) explains: “The Wii is just not a powerful console. An iPhone is much more powerful than a Wii, even… The Wii and DS are extremely underpowered and their popularity doesn’t remove the hardware limitations.”

The developer was defending the company against some complaints concerning “frame-rate issues” in the recently released WiiWare version of Tales of Monkey Island.

That Apple now poses stiff competition in the games market has also been confirmed by Nintendo itself. In its latest earnings report this week, Nintendo revealed a 66 per cent decline in operating profit, citing “slowing demand for its Wii console and a stronger Yen,” as cause.

The company also admitted DS sales are slowing down, and pointed the finger directly at Cupertino, saying the slow-down was attributable to, “increased competition in the handheld business from Apple’s iPhone.” (We’d add the iPod touch to your list there, Nintendo).

This doesn’t mean it’s doom and gloom for Nintendo. It still aims to sell 26 million Wii consoles this financial year, along with a total of 30 million DS and DSi handhelds.

We’d speculate that Nintendo may be driven to upgrade its product range in the near future, in order to compete in the long term the company will have to close the processor speed gap its devices have in comparison to Apple.

This could be a much tougher target than most realise. Apple’s invested heavily in chip production talent in recent months, ever since its PA Semi purchase. This means Apple now has the kind of world class expertise it requires to design its own low power yet ultra-high performance processors, based in theory on the ARM processors presently used inside its handheld range.

Apple may, in the future, also pose some threat to Wii. After all, if the premium App Store does emerge to be a shop front for sale of high res versions of existing games and media for use on the much-anticipated 10-inch iTablet; and if these games are also offered for sale to Apple TV owners, then Apple will have some kind of play at Wii’s home market.

Should it be technically possible to link an Apple TV up with an iPod touch or iPhone for use of the handheld devices as motion sensing controllers for gaming on the Apple TV, then Wii – and Nintendo – will have one helluva fight on their hands.

Piper Jaffray’s Gene Munster now anticipates sales of 6.6 million Apple TV’s by the end of this year. Munster also expects launch this year of new Apple TV hardware equipped with a TV input and DVR functionality.

Wait and see how this game goes. And don’t forget, Nintendo is one of the companies commentators occasionally cite as a potential takeover target for Apple. With Apple on its current trajectory into the gaming market, such a purchase could make more sense now than ever before – assuming Nintendo has any technologies or patents Infinite Loop may consider worth bringing into the Apple fold.

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