Nintendo Adds to Bleak Holiday Forecast for Video Games

Nintendo (NASDAQOTH: NTDOY  ) isn't acting much like itself lately. 

Just six years ago, the maker of all things Mario jumped out to a big lead in the console wars on the strength of its quirky motion-controlled system, the Wii. Nintendo won over gamers in record numbers with that innovation. But the company also cheered investors as it booked profits from both the hardware and the software sales surrounding the launch.

Rivals Microsoft (Nasdaq: MSFT  ) and Sony (NYSE: SNE  )  had more impressive hardware specs but were caught flatfooted. And thanks to that strategy, Nintendo beat out the Xbox and PS3 consoles for the strongest early position in the industry, leaving the company poised to capture the biggest share of an expanding base of video gamers.

But things look different this time around.

Nintendo announced last week that it expects to lose money on sales of its next-generation console, the Wii U, when it launches in the U.S. in November. In a presentation to investors last week, company president Satoru Iwata said that Nintendo is sacrificing profitability in hopes of maximizing console sales. The Wii U, Iwata said, will be sold below cost so that prices hedge closer to something that customers would find "reasonable."

The company wants to avoid the fiasco that marked its last big launch, the 3DS. Amid flagging early sales, Nintendo had to slash the price of the handheld gaming device -- from $249 to $169 – less than six months after launch. The company risks another soft launch with the Wii U if it can't convince customers to upgrade to the next-generation console en masse. Nintendo needs a big installed base of consoles to market its software titles to, and is betting that the loss-leading $299 price will be low enough to achieve that goal.

But the bad news for Nintendo investors didn't stop there. The company also announced a sharp cut in sales and profit forecast for the year, including another lowered projection of 3DS sales. Iwata put it best when he admitted that the company's profit wouldn't be very "Nintendo-like" this year. That's true, and that bleak forecast portends a tough holiday for more than just Nintendo this year.

Older consoles, fewer gamers
Nintendo's new console will be greeting an industry that's in dire need of a refresh. Over six years old, all three major consoles are well past their primes. And that dearth of innovation has contributed to weak hardware and game sales for the Xbox, PS3, and Wii.

But it's also a pain for retailers that depend on console-related sales, like GameStop (NYSE: GME  ) and Best Buy, which have both reported sharply lower traffic lately. GameStop, in its financial filings, blames the "late stages of the console cycle" as the main driver of lower console hardware and software sales.

It's no secret where all those gamers are going. With the rise of tablets and smartphones, mobile devices are sapping console gaming's mojo. Just last month, NPD found that mobile gamers -- those who play on smartphones and tablets powered by Apple's (Nasdaq: AAPL  ) iOS system and Google's (Nasdaq: GOOG  ) Android systems -- now outnumber console gamers. Apple's iPad, with over 100 million units sold since its introduction in 2010, is a big reason for that shift away from consoles. And Google's Andriod OS, covering a wider range of products, has an even bigger base, approaching 500 million. That's a lot of Angry Birds to compete against.

Against that tough backdrop, Nintendo has a few things going for it, though. It has a first-to-market advantage again this year, beating its slower-moving competitors, who look ready to sit this holiday season out. And with the holidays to itself in the console wars, the company expects to sell 5.5 million Wii U consoles, powering sales of over 20 million games. Nintendo says that initial preorders appear strong, and that production capacity will be the limiting factor for sales this season.

Foolish takeaway
Still, investors shouldn't expect a great holiday for Nintendo or for console gaming. Despite another head start, Nintendo doesn't look prepared to stir a gaming revival this year. Unfortunately, cost and production issues will limit the upside potential on this season's only new console launch.

And with new tablet devices like the iPad mini coming onto the market, I don't see Nintendo sparking anything like the broad realignment of the industry it led in 2006. In terms of gaming devices, this is one more holiday that appears to belong to mobile leaders Apple and Co.

Microsoft may not have a new console lined up for this holiday, but the company is jumping into the mobile industry in a big way. With the release of its own tablet, along with the widely anticipated Windows 8 operating system, Microsoft is looking to make a splash in this booming market. In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

Fool contributor Demitri Kalogeropoulos owns shares of Apple. The Motley Fool owns shares of Apple, GameStop, Google, and Microsoft and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend Apple, GameStop, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 30, 2012, at 12:39 AM, Nomadder wrote:

    "Nintendo's new console will be greeting an industry that's in dire need of a refresh. Over six years old, all three major consoles are well past their primes. And that dearth of innovation has contributed to weak hardware and game sales for the Xbox, PS3, and Wii."

    I would suggest that the lack of hardware innovation you mention is less responsible for the decline in game sales than the decline in software innovation resulting from the larger publishers tendency towards risk aversion (which often leads to everything looking like CoD).

    Innovative games still sell. Even when they look like they could fit on a SNES cart. Just look to the PC for proof of that.

    "the company expects to sell 5.5 million Wii U consoles"

    +

    "Still, investors shouldn't expect a great holiday for Nintendo or for console gaming. Despite another head start, Nintendo doesn't look prepared to stir a gaming revival this year. Unfortunately, cost and production issues will limit the upside potential on this season's only new console launch."

    As was the case with the Wii when it launched. The old Wii also faced supply constraints and was "only" able to sell 5.8 million or so units by March of the following year.

    Seeing as the Wii U looks to be coming in at about that number, I guess it comes down to whether or not you believe the Wii was able to "stir a gaming revival" THAT year with such paltry numbers.

    If your answer is yes, then you might need to reconsider your thesis this time around.

    If your answer is no, then perhaps a discussion of what constitutes a "gaming revival" is in order...and it may be anyway.

    On a side note, the supply problems with the Wii don't seem to have adversely affected Nintendo, or even its stock price at the time.

    Lastly, Nintendo having to sell two of its new systems at launch is a worriesom trend. To be entirely fair, however, that is how most of the hardware manufacturers have done business over the years.

    I don't like it, but I don't see it as anything that's going to pull down the company so long as they're selling enough units to bring up the software numbers.

  • Report this Comment On October 30, 2012, at 5:08 AM, Nomadder wrote:

    "Lastly, Nintendo having to sell two of its new systems at launch" should read "at a loss" rather than "at launch".

  • Report this Comment On October 30, 2012, at 9:11 AM, SigmaSwan wrote:

    thanks for the input @nomadder. Lack of innovation on the software side definitely contributes to the funk in the industry, but six years (and counting) is just too long for a console to live, in my opinion.

    After all, these systems were developed back when myspace dominated the Internet.

    I take your point about 5 million fitting into a good launch range, but I remember the 3DS coming out swinging too, with something like the best launch Nintendo had seen to date. That ended up translating into a disappointing bit of global sales, leading to that huge price cut. So that's the nightmare scenario to watch out for here.

    Still, Nintendo has a good shot at a strong launch -- depending greatly, as you say, on innovative software titles. And hopefully it can bring that cost curve down quick and start profiting off the hardware soon.

    -Demitri

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