By Neil Hughes

Published: 08:00 AM EST

As the iPhone has proven itself to be a formidable competitor in the handheld gaming business, the president of Nintendo has said his company must differentiate itself to survive.

As Apple portrays the iPod touch and iPhone as the ultimate portable gaming machine, Nintendo, maker of the Nintendo DS, has seen its profits freefall last quarter, from 133 billion yen a year prior to 64 billion yen. Highlighting the newfound competition between Apple and Nintendo, The Wall Street Journal noted that Nintendo has fended off several potential portable challengers, but it hasn't quite faced a competitor like the iPhone.

Satoru Iwata, president of Nintendo, is reportedly an Apple fan who uses an iPhone and Mac laptop. He also denied that there is a rivalry between his company and Apple, noting that attempts to create one makes him "uncomfortable." But Iwata also allegedly sees the iPhone as enough of a threat that Nintendo must work to stand out from it and devices like it.

"If we can't make clear why customers pay a lot of money to play games on Nintendo hardware and Nintendo software and differentiate ourselves from games on the mobile phone or iPhone, then our future is dark," he said.

The Journal cited research firm DFC Intelligence as stating that growth for dedicated portable gaming machines like the Nintendo DS and Sony PSP has reached an apex. That firm believes that Apple products will be the driver of portable game sales in the next five years, rising from $46 million in 2008 to more than $2.8 billion in 2014.

To combat declining interest in its Nintendo DS platform, the company will launch a new form factor for the hardware in Japan in this month, and next year in the U.S. The Nintendo DSi LL will feature 93 percent larger 4.2-inch dual screens and will carry a $222 price tag in Japan.

For two years now, Apple has pitched its iPod touch as a portable gaming machine, dubbing it "The funnest iPod ever" at its September events. The latest upgrade to the hardware includes the ability to run Open GL ES 2.0, with up to 50 percent faster performance.

Iwata and Nintendo said they believe the iPhone attracts a different kind of game playing market, as dedicated hardware like the DS offers unique titles unavailable anywhere else. Among those are Nintendo-exclusive franchises like Mario and Zelda.

But one advantage Apple does have over Nintendo and Sony is the price and availability of software. The company boasted at its media event in September that, at that moment, the iPhone OS had 21,179 game and entertainment titles available via its App Store, compared to 3,680 for the Nintendo DS and 607 for the Sony PSP. Many of those are budget-priced, with major franchises like Madden football selling for under $10. Comparatively, most games for the Nintendo DS and Sony PSP cost between $25 and $40.

This year, large publishers with key properties have brought titles like Tetris, The Sims 3 and Metal Gear Solid Touch to the iPhone and iPod touch. They have helped to bring the total number of applications on Apple's App Store to over 100,000.