Is Nintendo's CEO Heading for the Chopping Block in 2014?

Nintendo is on track to miss its fiscal targets in a big way. Will 2014 be the year that President and CEO Satoru Iwata's broken promises finally catch up to him?

Jan 10, 2014 at 6:30PM

Nintendo (NASDAQOTH:NTDOY) President Satoru Iwata has overseen some of the company's greatest successes and some its most discouraging failures. The success of the Wii has not carried over to its successor, and despite the 3DS posting solid numbers, dedicated handheld gaming is under attack from mobile. After posting rare losses in its 2013 fiscal year, Iwata promised that the company would return to Nintendo-like profits with an operating profit target of 100 billion yen.

The CEO went so far as to stress that it was his commitment to hit the target, and it was widely interpreted that this meant that he would step down in the event that the company fell short. Now, Nintendo's Wii U disaster looks to guarantee that it will fail to meet his lofty goals. Will 2014 be the year that Nintendo adopts a new direction and Iwata is replaced?

What's in a commitment?
Along with the fiscal profit targets, Iwata also stated that the company saw the Wii U selling 9 million units in the fiscal year. The company looks to miss that target by a wide margin, but selling more Wii U consoles isn't necessarily a ticket to hitting its approximately $1 billion fiscal year profit goals. In order to get the Wii U to sell at its present, albeit meager, rate, Nintendo had to implement price cuts and software bundles when the system already sold at a loss. Profits generated by the 3DS will go toward covering the losses associated with Wii U.

Halfway through the fiscal year, Nintendo had sold approximately 460,000 Wii U's, or a little more than 5% of its target. Despite these dreadful figures, Iwata and company opted against issuing a more realistic yearly forecast. With the importance that holiday sales periods have in the console gaming industry, Nintendo enjoyed a bit of cover from critics who disagreed with an adherence to the 9 million unit target. With Nintendo's third quarter earnings report set to be released on Jan. 29, that small comfort will quickly become a thing of the distant past. The view that the company presents around this time will say a great deal about the direction in which it is heading.

Nintendo's old guard
After disappointing second quarter results, Iwata stated that a major overhaul was not necessary to preserve Nintendo's future. This statement could have easily been taken as a reference to his job security. Just a month prior, he was clarifying that failure to meet his fiscal targets did not mean that he would tender his resignation. Most of Nintendo's principal owners are close to the company, so Iwata does not have much reason to worry about a populist shareholder's revolt. His close relationships with recently deceased former-President Hiroshi Yamauchi and gaming innovator Shigeru Miyamoto, along with a Japanese corporate culture that is less inclined to firings and shakeups, will continue to work in his favor.

Please understand the 6 million unit difference
With almost comical regularity, Iwata's summations of Nintendo's shortcomings are accompanied by the phrase, "Please understand." Iwata's repeated promises that the company has learned its lessons and is on the right track might be about to catch up to him. A generous estimate sees the Wii U selling approximately 3 million units in the fiscal year. The console's stumblings mean the company will fall well short of its profit target.

Ceding the console space to Sony and Microsoft?
It will take major strategic changes to propel the Wii U into serious competition with the Sony (NYSE:SNE) PlayStation 4 and the Microsoft (NASDAQ:MSFT) Xbox One. Sony's system looks to be establishing an early lead in the so-called console war, while most projections don't see the Wii U as a serious competitor. The PS4 and Xbox One both outsold Wii U's LTD sales in the UK within days of their respective releases.

Nintendo's current structure necessitates that it stay in the console space, and if Iwata cannot institute the drastic action needed to ensure that it can do so then he should not be running the company. He has managed to endear himself to portions of Nintendo's fan base with his zany behavior in the company's Nintendo Direct pressers, and as a former developer he has experience at multiple levels of the industry. But the Nintendo Direct videos that he has championed have led to the company opting out of industry megashows like E3 and losing media presence. Iwata may be well-liked, but the man is no longer producing results.

If the numbers don't go down, Iwata's time is up
How Nintendo revises its forecasts in its impending quarterly report will speak volumes about the company. In the unlikely situation that it once again refuses to revise its profit and Wii U targets, expect Iwata to take full responsibility come the end of March. A more probable scenario sees a tempering of expectations, a healthy dose of "please understand," and Iwata sticking around until at least the next fiscal year.

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Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of 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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