Nintendo Could Be Forced to Discontinue the Wii U Next Year

Discontinuing video-game consoles is far from unprecedented. Sega released, and then rapidly abandoned, four consoles between 1992 and 1999, before ultimately exiting the hardware business entirely. Nintendo (NTDOY -0.82%) has had its own failure -- it gave up on the Virtual Boy after just seven months.

Is the Wii U next? The console's first year on the market has been abysmal -- Nintendo has shipped just 4 million Wii U units, far short of its own expectations. After cutting the price, Nintendo is now selling the Wii U at a loss, and sales are unlikely to improve in the face of rising competition from Microsoft (MSFT -1.84%) and Sony (SONY 0.37%).

The Wii U has been a total failure
The failure of the Wii U is no secret. Originally, Nintendo had expected to sell 5 million consoles by last March -- but by the end of September, Nintendo had shipped fewer than 4 million units. In an effort to juice sales, Nintendo cut the Wii U's price by $50 in late August, leading to a 200% sales jump in September. But when the base number is so low, large percentage increases look better than they really are. Even with the spike in sales, Nintendo sold just 300,000 consoles from July through September.

Nintendo's management still believes that it can sell 9 million Wii U consoles by the end of March. That seems utterly insane in light of the increased competition Nintendo's console will face in the next few weeks.

Microsoft will steal Nintendo's core market
In less than two weeks, Microsoft's Xbox One will go on sale. At $500, it's far more expensive than the Wii U's $300, but for the money, Microsoft's machine provides far more value. In addition to serving as a true next-generation video-game console, the Xbox One is packed with entertainment features that could appeal strongly to Nintendo's core market.

The original Wii was massively successful in large part because it appealed to casual gamers. Although the Wii had its fair share of core Nintendo franchises, its best-selling games were titles such as Wii Sports Resort, Wii Play, and Wii Fit. Rather than rely on buttons, these games used simple motion controls, making them accessible to non-gamers.

Microsoft's Xbox One should tap into this market. Unlike the first Kinect, an optional add-on for the Xbox 360, Microsoft's second-generation Kinect is included with all consoles, which should lead to more developer support. Similar to the Wii, Kinect-based games use body movement instead of button-mashing, making them far easier to play.

Certainly, for those who bought Wii Fit, the Xbox One should be enticing. Microsoft has partnered with a number of famous trainers for Xbox Fitness -- interactive workout videos that rely on the Kinect's technical capabilities.

Unlike Sony, Nintendo can't afford to support a failing console
Losing the casual gamer would hurt, but the bigger threat to the survival of the Wii U as a platform is Nintendo itself. Nintendo is unique in the sense that it's the only console maker that's strictly a video-game company -- it can not afford to subsidy losing hardware for very long.

In contrast, Sony, as an enormous conglomerate, can. The PlayStation 3 sold poorly at launch, and Sony lost money on the console, but it was able to stick by its machine for the long-haul. Indeed, by taking a loss on the PlayStation 3, Sony was able to support another part of its business -- its Blu-ray technology beat out the rival HD DVD, as early PlayStation 3s doubled as cheap Blu-ray players.

Sony will sell its PlayStation 4 at a loss as well, though the company expects to recoup the loss on games and PS+ subscriptions. At any rate, Sony's PlayStation 4 is even more competition for Nintendo's Wii U. Like the Xbox One, it will go on sale later this month, but unlike the Xbox One, it's only $100 more expensive than the Wii U.

This holiday season will be crucial for Nintendo
On Nintendo's last earnings call, the company's president, Satoru Iwata, characterized the upcoming holiday shopping season as crucial, remarking that Nintendo would evaluate what it needs to do, "over the long term, about its platform" once the holiday results were in.

That could mean discontinuing the Wii U. Given that Nintendo's console will have to compete with two new machines from both Sony and Microsoft, the Wii U's holiday sales aren't likely to be good.