Who's the Real King of Gaming?

When Nintendo (OTC BB:  NTDOY.PK) introduced the Wii console four years ago, the free-form gameplay it supported was a radical shakeup of time-honored traditions. Nintendo's stock more than quintupled from the early rumblings of what Wii could do to the peak of the craze in 2007, and early investors are still sitting on a 150% gain today, after a lot of the luster got rubbed off along the way.

It took almost four years for Microsoft (Nasdaq: MSFT  ) and Sony (NYSE: SNE  ) to develop their own joystick-less controllers for their Xbox and PlayStation systems. Now they're here, and the companies are bragging themselves blue in the face about how fast they can shift their new units. But how impressive are the sales numbers for Microsoft's Kinect and Sony's Move really?

Hit me with those digits!
Microsoft sold 2.5 million Kinect add-ons in its first month on the market, and Sony sold 4.1 million Move controllers in its first two months. That's nice, but hardly earth-shattering. Consider that the Wii reached 3.2 million units sold in its first holiday quarter, where the product hit store shelves at the end of November. And who knows what numbers Nintendo could have reached if it weren't for the fact that Wii consoles were notoriously hard to find at retail for many moons after launch. Nintendo simply couldn't make them fast enough to meet demand.

Then there's the "me too!" flavor to these new systems, which makes the Kinect and Move sales numbers even less impressive in my eyes. Nintendo had to blaze its own trail and present something new and fresh to a market long accustomed to 20-button controllers. Microsoft and Sony can market this stuff as comparable to the Wii, effectively riding the coattails of the earlier revolution.

Moreover, Nintendo lives and dies by the success of its game consoles and in-house game development. For Sony, gaming systems are a small part of a much larger consumer electronics machine -- and mostly unprofitable to boot. In Microsoft's case, the Xbox hardly even qualifies as a hobby. Then again, Mr. Softy has a soft spot for lots of unproductive side projects, but doesn't catch as much flak for that character flaw as Google does.

Better late than never?
So Sony and Microsoft have finally managed to catch up to Nintendo, even surpass it in the controller technology department. The next challenge is to convince consumers that they need to spend another pile of hard-earned clams on these add-ons when they could just get the freeform gameplay included with every Wii.

Another unsolved mystery is the all-important question of turning a profit: Nintendo's financial strength rests more on the high-margin business of selling games than on the less lucrative hardware operation. Churning out impressive numbers of newfangled controllers could be a hollow victory unless the companies can follow up with strong software sales.

Four of the 10 best-selling games last week were Wii titles, all developed and sold by Nintendo itself. Five of the other six came from independent game developer houses Activision-Blizzard (Nasdaq: ATVI  ) , Electronic Arts (Nasdaq: ERTS  ) , and Ubisoft. Microsoft snuck in a win with the Kinect Adventures! title, which ships with every Kinect controller sold. Show me some more of that verve, and I might even be impressed. Then again, remember what I said about games being no more than a diversion for Microsoft? Even huge hits like the Halo series can't really move this ponderous needle very far.

Who's the king, baby?
If you believe in the video game industry, I think you'd be a happier investor owning specialists like Nintendo and Electronic Arts, or perhaps cheeky underdog Take-Two Interactive Software (Nasdaq: TTWO  ) . These companies (yes, including Nintendo) focus on the lucrative software side of the business, and really have no choice: They must succeed at this gaming deal, or die trying. Sony and Microsoft will never have that motivation, and will never become the true kings of videogaming -- no matter what their launch-fueled sales numbers might say.

Share your investment ideas for the gaming industry in the comments below.

Google and Microsoft are Motley Fool Inside Value recommendations. Google and Take-Two Interactive are Motley Fool Rule Breakers picks. Activision Blizzard, Electronic Arts, and Nintendo are Motley Fool Stock Advisor choices. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Activision Blizzard, Google, Microsoft, and Take-Two. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (7) | Recommend This Article (7)

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  • Report this Comment On December 01, 2010, at 5:19 PM, PositiveMojo wrote:

    The real story is that Microsoft is not asleep behind the innovative wheel. The development and acquisition of "gesture technology" is a huge innovation. Getting rid of controllers is a big deal!

    The gesture technology is just at the tip of the iceberg right now - but it is very cool and quite fast. I think Wii ought to be worried about being leapfrogged by MSFT.

  • Report this Comment On December 01, 2010, at 11:42 PM, ET69 wrote:

    I have to agree with PositiveMojo. As impressed as I have been with Nintendo's Wii it does seem to me that they didn't leverage this into a huge knock out punch game changer that it should have been.

  • Report this Comment On December 02, 2010, at 8:21 AM, matts68 wrote:

    http://www.findstocknow.com/kinect.aspx has some stores listed as in stock right now. GamesStop and some Amazon third party sellers.

  • Report this Comment On December 03, 2010, at 12:54 PM, jrod87 wrote:

    comone THQI and Blizzard (Not ATVI) Are the kings baby lol ttwo also makes quality games...when they make them.

  • Report this Comment On December 03, 2010, at 4:18 PM, BioBat wrote:

    There is nothing lucrative about Nintendo right now. You missed the stock jump by about 4 years if you're buying today.

    Yes, they have greater numbers and yes the top software titles on their platforms are Nintendo releases but riddle me this? Do you know how little owners of Wii's actually purchase software relative to those that purchase software on PS3s, 360s? The number might surprise you.

    As for ERTS. Please don't go there. It's a company that's coasted on its sports titles for nearly 2 decades and has let everyone else catch up. They have managed to bungle almost every major release outside of that genre for 2-3 years running. If you want to go with the 'it can't get any worse' mantra, go ahead but I'd rather invest in a company that consistently puts out quality games and shatters sales records (ATVI), yet still remains undervalued.

    I also don't think motion sensing is nearly as much a game changer as people think. At least not anytime soon. It's a fad, like Guitar Hero, and Farmville - it's fun for a while then you realize how unsatisfying it is and you go onto something else.

  • Report this Comment On December 03, 2010, at 4:24 PM, BioBat wrote:

    Nintendo's business model is actually very ingrained in selling hardware. The difference between them and Microsoft and Sony Nintendo's operation is that Nintendo sells every unit from launch day on at a profit.

  • Report this Comment On December 03, 2010, at 4:29 PM, BioBat wrote:

    One last thing. 4 of the top 10 software sales were Wii games because three of those titles (Wii Sports, Wii Sports Resort and the New Super Mario Bros) are coming prepackaged with the Wii this holiday season, yet a hardware sale is still counted as a software sale. If you threw in Pac Man with a 360 or PS3, you would see a 25 year old game top the list. The only one that's truly selling is Donkey Kong Country Returns, which sold 500K it's first week. A far cry from what we've seen with recent offerings from other companies.

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