Forget Xbox vs. PlayStation. In the videogame industry, the biggest brewing battle these days is the one between traditional developers and the new breed — those who specialize in Facebook and iPhone titles.

While social networking games and mobile gaming apps are still dwarfed financially by franchises like “Halo” and “Call of Duty,” they’re stealing eyeballs — and talent — from the console world. And, according to some high-ranking execs, they’re putting the future of the industry at risk.

“Game development is drowning,” says Satoru Iwata, global president of Nintendo. “Our industry has certainly expanded, but it also gives me concern because I feel our business is devalued in a way that threatens the continued employment for those of us who make games for a living. … Until now, there has always been the ability to make a living (making games). Will that still be the case moving forward?”

His argument resonates with some people in the gaming world who fear that the explosion in cheap and free apps, on both social media and mobile platforms, has devalued game development, which could endanger the entire industry.

Leathernecks or Bolsheviks?

A showdown between the two sides seems inevitable. At the recent South by Southwest conference, Peter Vesterbacka, whose company Rovio makes “Angry Birds,” declared that console games were “dying” because they are overpriced and lack the nimbleness of the new school of gaming.

Several traditional game developers, meanwhile, have walked away from the console world to explore the new fields, including Neil Young (a former Electronic Arts executive who oversaw “The Sims 2” and Steven Spielberg’s “Boom Blox”) and Richard Garriott (creator of the “Ultima” role-playing games). And to hear one of the most senior people in gaming accuse them of helping to orchestrate the industry’s downfall not only angers them, it reinforces their conviction that they were right to make the move to the space.

However, they say, they don’t see themselves as enemies but rather as trailblazers.

“We want good gameplay, we want compelling experiences, we want casual, and we want hardcore,” says longtime industry veteran Brenda Brathwaite, who is now chief operating officer and game designer at Loot Drop. “We want to make a great game for the 43-year-old Facebook mom, because — dammit — she deserves a great game, too. We are not the ones making what some … call ‘evil games’ but rather the first wave, the Marines storming the beach to take our medium, our culture and our potential back.”

Brian Reynolds, chief designer at Zynga Games, agrees. Before making the leap to social games, Rey-nolds designed several mainstream hits, including “Sid Meier’s Alpha Centauri” and “Rise of Nations,” but it was his own passion for playing social networking games that led him to leave the traditional videogame industry.

“I don’t really understand (Iwata’s comments), and I feel like maybe he has been thinking a lot about console games and hasn’t really been thinking a lot about mobile,” says Reynolds. “I came to do this because I was playing those kinds of games. I think they’re fun. … We’re providing the kind of entertainment that players manifestly want.”

Quantity vs. quality

Iwata is resolute — though Nintendo noted that his comments were not aimed at a specific company. Outlets that emphasize cheap gaming titles, he says, are leveraging the industry’s popularity and care little (if at all) about how good the games actually are.

“Smartphones and social network platforms are not at all like our (industry),” he says. “These verticals have no motivation to maintain the high value of videogames. For them, content is something that is created by someone else. Quantity is what makes the money for them. Quantity is how they profit. The quality of videogame software does not matter to them. … The fact is, what we produce has value, and we should protect that value.”

Nintendo is betting that the innovative qualities of its games and upcoming 3DS handheld system will keep audiences engaged. And the company, like Microsoft and Sony, has begun working with independent developers to offer less expensive, innovative titles. But to date, none of the major publishers has shown interest in working with the garage development community, which has been responsible for some of the iPhone’s biggest hits.

“I would separate out the true independent developer vs. the hobbyist,” says Nintendo of America prexy Reggie Fils-Aime. “We are absolutely reaching out to the independent developer. … Where we’ve drawn the line is we are not looking to do business today with the garage developer. In our view, that’s not a business we want to pursue.”

It is a business, however, that’s growing fast. Forrester Research predicts overall revenue from apps will hit $38 billion by 2015. Games won’t be responsible for all of that, of course, but they are the largest category in the space — and even if they generate just a quarter of that amount, they’ll be an undeniable force.

Meanwhile, traditional retail videogame sales fell 6% in 2010 to $10.1 billion in the U.S. (That figure does not include game hardware sales or income from the sale of used games, digital downloads and subscription fees, which represent up to an additional $4 billion.)

The surge in digital income is offering some sense of comfort to traditional game developers. As the next generation of videogame systems looms, the business is hoping that online distribution solutions will help raise margins moving forward. Some insiders say the cost to develop those titles could easily be double today’s costs.

Facebook games make money through microtransactions — tiny payments players make for in-game items. (Zynga, for instance, has been a profitable company since its launch and currently has a valuation between $7 billion and $10 billion.)

With apps, though, the business model still hasn’t been cemented. There’s obviously demand — “Angry Birds” has been downloaded more than 100 million times — but figuring out how best to monetize it and create companies that are sufficiently liquid is still a mystery.

“No one has figured it out yet,” concedes Vesterbacka.