Is Nintendo’s Wii U Problem Terminal?

by Brad Moon | January 22, 2014 6:00 am

We’ve written about Nintendo (NTDOY[1]) frequently over the past year as the former video game powerhouse has struggled. It was hit hard by the rise of casual mobile gaming on smartphones and tablets, forcing it to slash prices on its 3DS handheld. It beat Sony (SNE[2]) and Microsoft (MSFT[3]) to the punch by a full year with the Wii U next generation game console, but not only failed to capitalize on that head start, it fell flat on its face.

A bad situation has deteriorated rapidly. Last week, the company released a revised financial forecast[4] with slashed sales projections for all its hardware en route to an expected annual loss of $240 million and a 17% hit for NTDOY.

Wii U 300x223 Is Nintendo’s Wii U Problem Terminal?[5]How bad is the situation for Nintendo?

The company anticipated selling 9 million units of the Wii U game console between April 1 2013 and March 31 2014 — a period during which Nintendo had more than seven months as the only choice for consumers shopping for something more advanced than the Wii, Playstation 3 or Xbox 360. Instead, Wii U sales tanked and Nintendo now expects it will have only sold 2.8 million[6], despite a $50 price cut in September intended to boost interest in the lead up to the PS4 and Xbox One launches.

To put things in perspective, In the two months since its release Sony’s PS4 has sold more than 4.2 million units[7].

Nintendo also cut sales estimates for the 3DS (from 18 million to 13.5 million) and the original Wii console (from 2 million to 1.2 million). Along with the hardware slump, software sales have also taken a beating: the company expected to sell 38 million Wii U on the year, but has since revised that number down to 19 million.

When it cut prices last fall, Nintendo was already losing money on every Wii U it sold[8] — there’s no room for trying to boost sales through discounts. Third-party game publishers were already wary of the unusual hardware design, and they’ve stayed away in droves as sales have failed to materialize and Nintendo has failed to address The Wii U’s general lack of online multiplayer gaming.

And while the 3DS has been a successful product, there are clouds on the horizon in the form of physical controller accessories[9] for Apple’s (AAPL[10]) iPhone and iPod Touch — the first of which are now on the market.

Smartphones were already eating into Nintendo’s mobile gaming market, but the iPhone 5s is more powerful, sports a larger and higher resolution display than Nintendo’s offering and console-quality games like Infinity Blade for iOS are going for five bucks or less (compared to $30 or more for 3DS titles). Smartphone competition is likely a large reason why 3DS sales forecasts were also slashed.

So, what’s Nintendo to do?

It can take years to develop a new game console, so there’s no immediate replacement for the Wii U. On the mobile side, Nintendo released the cheaper 2DS in 2013 — a $129 3DS variant in tablet form that lacks 3D capability — but that did little to stop the slide (2DS sales are included in the 3DS numbers).

One obvious solution that’s been frequently suggested is that Nintendo cave and release games featuring its iconic properties for iOS and Android[11]. Games and characters like The Legend of Zelda, Mario, Pokemon, Donkey Kong and Metroid have been Nintendo exclusives for decades.

The demand is there, but Nintendo would have to sell an awful lot of Mario titles for iOS and license a ton of merchandise to make up for its hardware business — which it would essentially be throwing away, since most people who buy a Nintendo console do so to gain access to those exclusive games. As recognizable as Mario and company are, they aren’t at the Disney (DIS[12]) level of pop culture significance.

Going this route would likely be short-sighted and disastrous for Nintendo in the long run. History has not been kind to console makers that dumped hardware in favor of licensing their games. Just look at Sega (SGAMY[13]) and Atari — former console market leaders that are shadows of their former selves today.

Some have suggested leaving the tablet controller out of the Wii U altogether to slash the price of the console and to make it easier for developers. Doing so would come at the cost of eliminating the console’s only real technical advantage over the PS4 and Xbox One while alienating existing Wii U owners who paid for a premium for an accessory that was supposed to be integral to the gaming experience.

Another possible way to staunch the bleeding is for Nintendo to appeal to gamers and developers by upping support for third-party downloadable titles through online app stores. Doing so would help to combat the huge price advantage enjoyed by iOS and Android games while helping to level the playing field with Sony and Microsoft who enjoy strong independent game developer support for their consoles. The company would need to beef up its app stores (which crashed under the load of the existing Nintendo customers over the holidays[14]) and actively reach out to independent developers.

There’s no question that the company is between a rock and a hard place with few options. However, it does have the cash needed to weather the Wii U crisis and prepare a replacement console. If it goes that route, the next product launch will be do or die for the company. And in the meantime, NTDOY is likely to continue to take a beating.

Nintendo President Satoru Iwata announced he will be presenting short-term and mid-term prospects for the company on January 30[15] (the day after Q3 financial results are reported), so we can expect to hear Nintendo’s strategy at that time.

I’m betting the strategy involves staying the course with both the Wii U and 3DS for the near future, while doing everything possible to make the platforms more attractive to developers. The Wii U problem isn’t terminal yet … but another misstep like this, and the company will be on its last life.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Endnotes:
  1. NTDOY: http://studio-5.financialcontent.com/investplace/quote?Symbol=NTDOY
  2. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE
  3. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  4. released a revised financial forecast: http://www.nintendo.co.jp/ir/pdf/2014/140117e.pdf
  5. [Image]: http://investorplace.com/wp-content/uploads/2014/01/Wii-U.jpg
  6. Nintendo now expects it will have only sold 2.8 million: http://www.nintendo.co.jp/ir/pdf/2014/140117e.pdf
  7. Sony’s PS4 has sold more than 4.2 million units: http://www.vg247.com/2014/01/07/playstation-4-sells-through-4-2-million-units-says-sony/
  8. Nintendo was already losing money on every Wii U it sold: http://bgr.com/2013/08/08/nintendo-wii-u-sales-loss/
  9. physical controller accessories: http://investorplace.com/2013/06/watch-out-nintendo-apple-is-designing-game-controllers/#.Ut6lLnn0DZs
  10. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  11. cave and release games featuring its iconic properties for iOS and Android: http://investorplace.com/2013/08/nintendo-still-wont-make-a-cash-grab-for-mobile-games/
  12. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  13. SGAMY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SGAMY
  14. which crashed under the load of the existing Nintendo customers over the holidays: http://kotaku.com/nintendo-online-services-broken-now-continuing-christm-1489822952
  15. presenting short-term and mid-term prospects for the company on January 30: http://www.nintendo.co.jp/ir/en/library/earnings/140117/index.html

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