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Thursday 31st January 2013
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Whenever the market shifts, as ours does with such regularity, we come to inflection points. Opinions invariably divide on how those inflection points will pan out - it's the nature of disruption.
This week's quarterly financials from Nintendo, which highlighted missed sales targets for the Wii U and 3DS, have brought exactly such a situation into sharp focus. When a company as big as Nintendo, which has until so recently been held up as a paragon of adaptive success and market growth, stumbles, pundits and punters alike are quick to make a diagnosis.
We're no hive mind at GamesIndustry International, so we prefer to give you both sides of the argument whenever we can. To that end, we'll have two pieces about the impact of both the financial results and the sales figures revealed by Iwata, each arguing from a different perspective.
Below, we have an op-ed from our West Coast Editor, Steve Peterson, arguing that Nintendo needs to make some changes or risk serious damage. Tomorrow, regular columnist Rob Fahey will be putting his case for a different interpretation: that any doom sayers are over-reacting and that the publisher will ride out the storm quite happily. Of course, we expect to see you having your say in the comments threads, too.
The quarterly report from Nintendo was, once again, disappointing. Not only did the company miss its numbers, but Nintendo lowered its forecast for the fiscal year by a couple billion dollars. CEO Satoru Iwata apologized as he cut sales estimates for all of the company's consoles. This is becoming a regular quarterly ritual for Nintendo, and it's agonizing to watch. What's going on? Is this just a bad patch before a great surge in sales? Let's look at the overall picture.
Nintendo has known for years that Wii sales are declining, and the pace is accelerating. Nintendo's answer was the introduction of the Wii U, a new console that finally brings Nintendo to relative parity with the current generation of HD consoles. Many have argued that Nintendo should have done this a year or two earlier, before the Wii completely lost its ability to sell and to attract third-party development. Regardless, Nintendo finally introduced the Wii U, but with a relatively high price of $299 for the entry level (and most sales were of the $349 version).
As was expected, many fans rushed out to buy the Wii U; after all, it's a new console from Nintendo. Yet as many in the industry feared, Wii U sales have dried up since Christmas, and Nintendo just lowered its Wii U sales forecast for the year ending in March to 4 million consoles total, down from its previous forecast of 5.5 million units. That's a reduction of of over 25 percent. 3DS sales estimates were also cut, from 17.5 million units down to 15 million units, and DS sales were reduced from 2.5 million to 2.3 million.
"Nintendo's chance to attract third-party development dollars is rapidly vanishing along with the Wii U's sales momentum"
Nintendo is still planning on generating a profit this year, though the net income projected is only $154 million on total sales of $7.368 billion, which works out to about a two percent profit. Nintendo would be better off investing its money; that's a terrible rate of return. It's especially embarrassing when you look at the profits Japanese companies like Gree and DeNA are posting, which are hovering around the 45 percent level on sales of over $2 billion apiece. If you put Gree and DeNA's sales together the total is approaching Nintendo's; give the two companies another year or two and they will probably pass up Nintendo and never look back.
Clearly, for Nintendo to post a profit on this scale is not a sustainable business strategy; it's a way to avoid embarrassment, such as the massive $473 million loss of last year. With slower than expected sales of hardware and software, Nintendo has probably been cutting back on marketing expenditures. Certainly we didn't see a massive amount of TV commercials, nor other kinds of marketing efforts over the holiday season. Yes, it's good that the company has been keeping expenditures under control, but the trend line is not promising. Much of the gain Nintendo is looking at comes from the improvement in exchange rates, which is outside of anyone's control. As a business strategy, sitting around waiting for the macroeconomic environment to get better is not a winner.
Iwata-san took to video last week to apologize for delays in Wii U software, and to talk vaguely about great games coming in the (mostly unspecified) future. That's not going to revive sales of the Wii U; people are going to wait until the games they have to have actually appear before dropping $300+ on a Wii U and accessories. That's a rational decision, given that Nintendo may well reduce the Wii U price at some point, or software might be delayed, or some nifty new console might arrive from some other manufacturer. Why spend the money on a Wii U now if there aren't enough games, and a proven stream of exciting releases, to make your investment worthwhile?
The gaming environment is only going to get more competitive as time rolls on. Nintendo will be attacked on the high end, with new consoles from Sony and Microsoft, on the low end with Android consoles like Ouya and GameStick (and existing consoles with much lower price points), and on the undefended flanks by smartphones and tablets and free-to-play online games. Nintendo's chance to attract third-party development dollars is rapidly vanishing along with the Wii U's sales momentum.
Look no further than EA's earnings call yesterday, when EA CEO John Riccitiello basically said the Wii U was not a next-gen console, and not one the company is looking at to revitalize the game industry. The Wii U can expect weak support from publishers who are gearing up for new consoles from Sony and Microsoft. Sure, they may not sell all the that well, either, but at least it hasn't been proven that they are slow sellers. Sources in the industry indicate there are not many big titles being planned for the Wii U among major publishers, and this should not be a surprise