Gamers and investors alike have heard the news – Nintendo's (NASDAQOTH:NTDOY) current financial performance is as disastrous and embarrassing as a plumber hitting a rolling barrel thrown by an ape. Consumers aren't going for the Wii U; instead, new consoles from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT), as well as a legion of cheap cell phone titles, are grabbing all the attention away from the onetime juggernaut of home systems. What can the company do now to avoid further calamity?
First: Admit something about the Wii
I think it's time for Nintendo execs – as well as perhaps everyone who bought one – to advance a truth about the Wii: the only reason people went wild for it in the first place is price elasticity. Relative to the other consoles at the time of its release, the Wii was cheaper, and that was that. Some will probably have a problem with that assertion, but I know, on an anecdotal basis, gamers who were once thrilled at the prospect of owning a Wii with the fancy wand controller and its revolutionary nunchuk companion eventually pined for the good old days of Atari 2600 joysticks.
Nintendo based its Wii strategy on the wireless interface, and although the zeitgeist thought it liked it, it didn't. The market was simply killing time until PlayStation 3 and Xbox 360 became more economically appealing. Once this is accepted, then maybe the rest will come easier.
Diversify into filmed content creation
I know, it sounds crazy. For those who follow the movie and television industry, the idea of entering the realm of motion pictures is a frightening prospect because, well, let's just admit it – there is a ton of risk, and Hollywood tends to fleece the newcomers. Even the non-newcomers can get fleeced; major studios are constantly being overcharged for the services of talent by an agent-management system that seems to want higher upfront guarantees and even more lucrative first-gross-dollar participation points.
Let's keep something in mind, though. Nintendo, like all video game companies, is in the entertainment business. While video games represent a specific kind of entertainment that necessitates rigorous technological focus, that doesn't mean that Nintendo is precluded from delivering all kinds of entertainment experiences in different forms of media.
I would propose that Nintendo seriously consider competing with Sony by generating and releasing filmed content not necessarily tied to just the Pokémon and Zelda trademarks. Content is risky, but inevitable for an enterprise like Nintendo; just as Disney (NYSE:DIS) couldn't afford to ignore the merchandising implications of the video game industry, Nintendo cannot be cavalier about engaging its consumer base in ways that go beyond controlling pixels on a monitor.
And while there has been experimentation in the past with porting Nintendo's IP to the big screen, I think the company would have to do a lot better than the "Super Mario Bros." movie that was released back in 1993, starred Bob Hoskins, and was released by a Disney label at the time called Hollywood Pictures. That was a different era, one that today's movie consumers don't want to revisit, as they are used to a certain level of quality and sophistication that was absent back then in some feature product.
I'll also mention that Nintendo would have to strive to produce more competitive content than what has been seen in the previous Pokémon movies and small-screen cartoons -- the animated Pokémon series is still around, but any content plan Nintendo would hypothetically create would need to cross over to other audiences.
What kinds of content would Nintendo make?
Nintendo could produce superhero movies, low-budget horror, cartoons, comedies ... you name it. It has the connections, it has the talent, and it has the advantage of operating in an area that is becoming more like the movie business every day. I foresee a time when all gaming publishers, from Activision Blizzard to Electronic Arts, will start software franchises on the silver screen. "The Walking Dead" started out as a comic book, then became a TV show, then became a video game; the direction in which the process flows is wholly agnostic.
One of the best examples of what I'm talking about, a model that Nintendo should emulate, is the one previously employed by Marvel. Marvel used to license its IP to other studios to bolster its brand equity, push merchandise sales, and generate a little revenue. Little is the operative term, here, because when you license your movie to a studio, you're only going to get so much in return.
Marvel figured out it was better to actually make films itself so as to keep all of the bounty generated. It was a risky move; I myself wasn't sure at the time about the wisdom of the strategy. Things turned out very well for the comic-book factory.
The intersection of technology companies and entertainment is empirically obvious. Pixar is nothing but a technology company driven by creative mission statements. Nintendo is a technology company that could evolve one section of its business into a Pixar-like division that takes characters like Mario and Donkey Kong and places them in their own "Toy Story"-like world.
And it doesn't have to cost a lot. Budgets for Pixar projects, as well as those released by DreamWorks Animation, tend to run well over $100 million; Pixar's "Brave" was rendered for a reported $185 million while DreamWorks Animation's "Turbo" cost $135 million (source: Box Office Mojo). While those big guns tend to spend more, you have to appreciate what $146 million can buy you; believe it or not, it actually could buy a "Despicable Me" and a "Despicable Me 2," as the former cost about $70 million while the latter set its animators back by $76 million. (As a side note, I always thought the Gamecube title "Luigi's Mansion" would make a great CGI cartoon.) "Despicable Me 2" captured $970 million in ticket sales around the globe. Not a bad business model.
It doesn't have to be all Luigi and Pokémon films. Nintendo should cast its celluloid net further out into the cinematic ocean. Younger people love Pikachu, but as they move into their teens and beyond, they also appreciate pictures like "Paranormal Activity" and "Saw." I know, I just mentioned "Paranormal Activity" and "Saw" in a piece about why Nintendo should go Hollywood. Your first thought is: why would Nintendo do this when its image is so family oriented? My rejoinder is that Nintendo isn't above exposure to adult-oriented stuff being on its platforms; if the company is willing to be associated with something like the awesome "Resident Evil" series of games, then it probably would be OK with investing in a hard-edged horror fest every once in a while.
As I also mentioned, superhero characters are something Nintendo could excel at. While I wouldn't expect the company to create as profitable a mythology as "Batman," there is still plenty of opportunity to synthesize an imaginative set of heroes and villains that could be cross-promoted to the demos that wait with anticipation for the next release of the "Zelda" saga.
Nintendo should release another console, but...
All of this is not to say that Nintendo shouldn't eventually release a new, more powerful console. It should. One that will hopefully embrace older games while keeping the younger members of the family unit entertained as well. That's always been the image problem with Sony and Microsoft – those two tend not to program for kids. Even though the image might not be entirely accurate (Kinect, anyone?), it still is instructive for Nintendo: be open to all age groups.
At the same time, Nintendo has to do things completely differently. Entertainment, whether delivered by algorithms or optical illusion in a screening room, is a complex collection of cultural touchstones that consumers are willing to apply a premium to. It makes synergistic sense, and it is appropriately diversifying in terms of revenue generation.
Perhaps if Nintendo does a little zigging and zagging as the above suggests it can buy itself a little time as it tries to figure out its new place in the post-digital world of fickle video game consumers who don't know whether they want to play a twenty-plus hour first-person shooter or a challenging game of war between avian and porcine societies on their portable telephones. Until some better news and/or innovative thought comes out of Nintendo, this remains a company to avoid.
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Steven Mallas owns shares of Disney and DreamWorks Animation. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Microsoft and Walt Disney. 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.