Approximately a year and a half after the release of the Nintendo Wii U, it's safe to categorize the system as a disaster. The console is hampered by an expensive controller that failed to spur consumer interest and a lack of meaningful software support from third-party publishers. Even worse, the Wii U is still selling at a loss for Nintendo (NASDAQOTH:NTDOY) and its slow sales make reducing its build cost difficult.
As the system continues on its abysmal trajectory, the value of Nintendo's tried-and-true IPs are at risk. The company's next moves are crucial. The Wii U is destined to go down as one of the most ill-conceived pieces of gaming hardware in history, and Nintendo's place as a hardware manufacturer is in jeopardy. The extent of the console's failure necessitates that the company face reality and make substantive changes to its business model. How can Nintendo come back from the Wii U?
Wii U has forced Nintendo to change
Now that Nintendo has admitted that the Wii U is not in good shape, attention turns to how the company can restore its fortunes. Its biggest successes over the last decade came from products that sought to change the way games were experienced. Alternatively, the failure of the Wii U can be traced to a misguided application of that same strategy.
Nintendo must decide whether it will once again attempt to pitch its next console on the promise of an unproven gimmick consumers or offer a more conventional console that relies on the strength of Nintendo software. The company will also look to diversify its business with a still-mysterious move into "quality of life" offerings.
Nintendo faces very similar challenges to the ones that dogged its outlook in the days of the GameCube. Sony and Microsoft are the most relevant players in the home console space and the portable market is looking increasingly crowded, this time as a result of the mass adoption of smartphones rather than a dedicated competitor like Sony's PSP. With that in mind, it's not surprising that Nintendo is returning to a variation of the "third pillar" strategy that produced the incredibly successful DS handheld.
What is "quality of life"?
The specifics of Nintendo's quality-of-life business are set to be detailed in June at the E3 gaming expo, but some basic facts are known. The QOL ventures will be separate from the company's console endeavors and will be headed up by a separate team. President and CEO Satoru Iwata has also stated that the company's plans have nothing to do with the wearable computing push that is currently under way.
Nintendo previously found tremendous success with its health-promoting Wii Fit software, but whether the company can build a stand-alone business around similar principles in the age of abundant dieting and exercise apps remains questionable. That said, the company's short-term outlook is highly dependent on its ability to debut a viable QOL business plan in the coming months.
Nintendo must win back publishers
The biggest problem facing Nintendo on the console front is a lack of support from third-party publishers. When the Wii U was first announced, Nintendo boasted of an "unprecedented partnership" with Electronic Arts (NASDAQ:EA) that would ultimately disintegrate and cause the American publisher to abandon the console altogether. Instead, EA has partnered with Microsoft, leading to releases like Titanfall and timed exclusive content for other games.
While other major publishers have been less vocal about their lack of faith in Nintendo's hardware, EA's desertion of the Wii U kicked off a trend that has seen a gradual erosion of support. Nintendo has a long history of fostering poor relations with third parties and there simply isn't much incentive to release software on the Wii U.
The lack of support from EA and other publishers has created a situation that requires Nintendo to be almost the lone driving force behind its platforms. This problem is less severe on 3DS, but a look at the 2014 lineup for Nintendo's handheld and chief breadwinner reveals that the company is stretched thin.
For this reason, its next handheld and console hardware releases will likely receive largely similar versions of the same software. Iwata has stated that Nintendo's next hardware releases will feature hardware architecture very similar to what is currently found in the Wii U, and Nintendo is not equipped to support two distinct platforms without meaningful third-party support.
Can Nintendo make the right moves?
Having a unified hardware ecosystem could help Nintendo to improve its third-party situation by offering publishers a larger user base, but many of the issues the have led to decreasing support would likely remain. Nintendo must modernize its online offerings if it wants to regain the favor of third parties like EA. Doing so will be essential for success in both gaming and Nintendo's budding quality-of-life business. The company still has explosive potential, but there are many obstacles it will have to overcome before it can recover from the damage caused by Wii U.
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Keith Noonan has no position in any stocks mentioned, and neither does The Motley Fool. 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.