Nintendo Keeps Color Dreams Up Worrying : Video games: The Brea firm that makes unlicensed games for the Japanese company’s system now faces competition from the U.S. companies that design the official Nintendo games.

Already reeling from its inability to sell its video games through major retailers, a small local company said Tuesday that a recent decision by the Nintendo Co. could pose an even greater threat to its success.

Color Dreams, a Brea firm that develops games that work on the popular Nintendo system but are not licensed by the Japanese company, said competition will intensify as a result of Nintendo’s decision to permit the U.S. companies that design its games to also manufacture them. The move is expected to clear the way for a flood of new video games on the market, perhaps driving down prices.

“We’re looking for cutthroat competition,” said Eddy Lin, Color Dreams marketing director. “The only good things happening are we’re exporting some games to Japan and overseas to the Third World and Europe.”

Nintendo of America, the U.S. arm of the Japanese parent, controls an estimated 80% of the American video game market. To ensure that only licensed video games are played on its system, the company implants a computer lockout chip in each game cartridge. Before play can begin, the chip must send a key signal to another chip in the Nintendo Entertainment System machine.

Competitors charge that the practice of prohibiting other firms from developing games for the Nintendo system amounts to unfair competition. They say the practice allows Nintendo to preserve artificially high prices for its games, which typically sell for about $50 each.

Nintendo has maintained that unlicensed games contain software flaws that could cause malfunctions and frustrate players. The company said it has assurances that the 53 U.S. firms that design its games can manufacture them without flaws.

Nintendo’s manufacturing decision has not placated competitor Atari Games Corp. of Milpitas, Calif. In a statement Tuesday, Atari Games said that “while Nintendo’s move to loosen its manufacturing restrictions may appear to ease its stranglehold on the video game industry, in reality it does no such thing.”

Calling Nintendo’s move “a sham,” Atari Games Senior Vice President Dennis Wood said Nintendo’s continued use of lockout chips gives it “total control over the titles and quantities of the games that are available to consumers.” Atari Games and Nintendo have sued each other over the issue.

Color Dreams’ games circumvent the Nintendo lockout chips and can therefore operate on the Nintendo system. The company will not say exactly how it is able to do this.

Lin said the company has developed several games, which have titles such as “Crystal Mines” and “Baby Boomer,” that retail between $29 and $39, substantially below the prices for the licensed games. He said Nintendo-related products will account for about 60% of the company’s anticipated $30 million in sales this year.

The company’s sales, however, are largely limited to exports and video rental shops because major retailers such as Toy R Us and Sears refuse to stock the games. He said he suspects that Nintendo has pressured retailers to not carry unlicensed cartridges. Nintendo has denied engaging in any unfair trade practices.

Video rental shops have proven to be a strong market, Lin said, because customers are able to judge for themselves how well they work.

Retailers’ shelves, however, are already bulging with Nintendo cartridges, Lin said, and the expanded licensing for game makers will only add to the glut.

“The market,” he said, “is saturated.”