The Real Reason Philips Wants to Ban Nintendo’s Wii U

Philips (NYSE: PHG  ) recently filed a patent infringement lawsuit against Nintendo (NASDAQOTH: NTDOY  ) , calling for a total sales ban of the Wii U in America.

Philips alleges that Nintendo infringed on two of its patents in its Wii Remote -- one for a "Virtual Body Control Device" and another for a "Pointing Device." Philips claims that it informed Nintendo of the alleged violations in 2011, but attempts to reach a licensing arrangement between the two companies fell through.

Source: Nintendo.

Philips' lawsuit clearly targets the original Wii instead of the Wii U, but the Wii U is backwards compatible with the original Wii Remote. The Wii was discontinued in Japan and Europe last October, but it remains available as the Wii Mini in North America.

The Wii U is currently the second most popular home console of the current generation, but that growth has stalled out due to fierce competition from Sony's (NYSE: SNE  ) PS4 and Microsoft's (NASDAQ: MSFT  ) Xbox One.

Philips and Nintendo: A Link to the Past
Philips' lawsuit against Nintendo opens up a new chapter in the troubled relationship between the two companies.

Back in 1991, Sony unveiled a prototype of a Super Famicom/Super NES with a built-in CD-ROM drive, dubbed the PlayStation. The console was designed to play both Nintendo cartridges and Sony CD-ROMs. However, Nintendo and Sony abandoned their partnership shortly afterwards due to disagreements regarding revenue sharing. Sony left with its prototype and launched the first PlayStation in 1994, forever altering the home console market.

The "Nintendo PlayStation" Source: Kotaku.

Nintendo, searching for a less ambitious partner than Sony, partnered with Philips to launch the CD-i console in December 1991. The CD-i console was intended to be an all-in-one home computer akin to the Commodore CDTV. Philips licensed Nintendo's flagship characters to appear in several titles on the console.

Unfortunately, allowing Philips to make Nintendo-licensed games was disastrous. Oddities like Hotel Mario, Zelda's Adventure, Link: The Faces of Evil, and Zelda: The Wand of Gamelon all bombed critically and commercially. All of these games felt vastly inferior to their Super NES counterparts.

Despite poor sales, Philips kept the CD-i alive for eight years, eventually losing nearly a billion dollars on the ill-conceived project. As a result, Nintendo didn't release an optical disc-based system until the GameCube in 2001 -- more than a year after Sony launched the PlayStation 2.

Why is Philips suing Nintendo now?
Philips clearly doesn't have fond memories of its days with Nintendo, but did it really hold a grudge for such a long time? Philips doesn't even manufacture a video game console anymore, so there's no clear benefit in blocking Wii U sales in the U.S.

But in my opinion, Philips doesn't want to block the Wii U -- it wants a cut of Nintendo's profits. Despite the Wii U's reputation for weak sales growth, the console has already sold 6.1 million units worldwide, putting it squarely between Sony's 7.6 million PS4s and Microsoft's 5 million Xbox Ones.

To understand what Philips has to gain from suing Nintendo, we should take a closer look at the company's Consumer Lifestyle segment, which produces consumer electronics, home appliances, and personal care products.

What Philips really wants
Philips Consumer Lifestyle accounts for 20% of the company's top line. Last quarter, comparable sales at the segment rose 7% -- making it the only one of Philips' four business segments to report positive growth. Philips attributes that growth to high demand for home appliances, health & wellness, and personal care products.

Nintendo generated sales of $5.6 billion in fiscal 2013, compared to Philips' Consumer Lifestyle revenues of $6.3 billion. If Philips convinces the court that it deserves a cut of Nintendo's Wii U annual hardware and software sales, along with royalties on all Wii/Wii U titles, it could become a major new source of revenue for its Consumer Lifestyle segment.

Generating extra revenue from royalties has always been a major part of Philips' business strategy. The Consumer Lifestyle segment already receives royalty payments for every DVD, CD, and Blu-Ray disc sold worldwide. However, those payments have declined recently due to patent expirations and an industry shift toward digital distribution.

Over the past few years, Philips started demanding royalty payments from LED lighting companies for alleged patent infringements, but that tactic didn't prop up sales at its Lighting segment, which posted flat sales growth in 2013.

The bottom line
In conclusion, Philips lawsuit against Nintendo isn't about banning the Wii U -- it's about squeezing out some fresh royalties. It employed the same strategy with optical discs and LED lighting, but it's a short-sighted approach that fails to address Philips' slowdown across three of its four primary business segments.

Considering the anemic growth of the Wii U -- which only sold 310,000 units last quarter -- Philips' lawsuit against Nintendo is a waste of time. It makes Philips look like a desperate company trying to survive on royalties from technology patented during its heyday -- just as Eastman Kodak did prior to its bankruptcy filing in 2012.

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Read/Post Comments (14) | Recommend This Article (12)

Comments from our Foolish Readers

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  • Report this Comment On May 20, 2014, at 4:35 PM, JimNiner wrote:

    Realistically, does Philips need to sue Nintendo to get the WiiU off the market? Hasn't Nintendo pretty much set that course on its own?

  • Report this Comment On May 20, 2014, at 4:38 PM, AudieMurphy wrote:

    I'm sure Nintendo looks like the easiest target of the 3, but if it's a patent for the motion control Nintendo introduced for the original Wii it's been on the market for 8 years; bringing a lawsuit after all this time looks stupid. Philips was once a great company run into the hole by bad management and their response is unfortunately typical these days.

  • Report this Comment On May 20, 2014, at 5:50 PM, awang0718 wrote:

    @ JimNiner Ha Ha very funny....Its like Nintendo isn't going to release Mario Kart 8 in the next few days (sarcasm)

    But realistically, Mr. Sun is right. Phillips should know that the Wii U is selling poorly, but it's too late. They should have tried to sue Nintendo back during the Wii's heyday, when the Wii was selling 2 million units per month. Now, Phillips may only be able receive royalties from a console that sells 100,000 units per month ( hough that number will significantly increase with the starting with the release of Mario Kart)

    Phillips is a desparate company.

  • Report this Comment On May 20, 2014, at 6:26 PM, rylog wrote:

    phillips your jealeous is why you are suing nintendo up yours

  • Report this Comment On May 20, 2014, at 6:39 PM, Manaphy2007 wrote:

    so phillips are patent troll and just want a piece of nintendo's success and their money because phillips isnt selling like it used to. one might think wii u isnt selling and will be a flop which it is not, people want nintendo games on ther devices cuz they are just lazy and too cheap, actually buying apps make it that more expensive than buying a $60 game as micro-transactions take effect, its like $60/day on one game compared to $60 on one game for that month. btw Fools, wii u will sell once MK8 is released and once other big titles like X and when nintendo does decide to bring gcn to the vc library, problem is that people are holding off on the console for nintendo franchises like MK and i understand them, i however bought the console late dec solely on smash which they should have started development at least 2 years before the release of wii u.

  • Report this Comment On May 20, 2014, at 6:40 PM, Manaphy2007 wrote:

    i forgot to mention that Fools is right for once about phillips being desperate for some cash

  • Report this Comment On May 20, 2014, at 7:46 PM, doomrider7 wrote:

    @awang0718

    They still have a LARGE sum of money on their accounts that they can lose millions for the next 4-5 decades and STILL be in good shape. The reason they're going after Nintendo and not say Sony or MS is that the Former is losing money in EVERYTHING except their gaming division so the money will be lighter and the Latter is WAAAAAY to big and financially powerful to tangle with. As for WHY wait? With Nintendo poised to release the highly anticipated Mario Kart 8 and have some BIG news on E3 regarding the new Super Smash Bros., Philips is likely banking on Nintendo not trying to get tangled in a lengthy lawsuit and go ahead and pay them off to silently go away. Whole thing in general reeks of desperate cash grab all the way.

  • Report this Comment On May 20, 2014, at 8:25 PM, Death215 wrote:

    The Wii U is currently the second most popular home console of the current generation?

    Since when, i must be lost.

  • Report this Comment On May 20, 2014, at 8:26 PM, Zonniwoop wrote:

    Nintendo should really just take it's trademarked characters and its patents and sell out to either SONY or Microsoft and just be done with it... No one who partners with them likes them and it seems the 'Big N' is in its 'death-throws' as a company anyway... It would take a miracle of colossal proportion to even salvage Nintendo and survive let alone turn any profit from this point. I'm sure that Microsoft would pay the most right now (between them and Sony) for its library of characters and all it has in SEGA history too. MS could use that to an advantage against SONY in the yet next-gen consoles after the war between Xbox-one and Playstation 4 is over in about what... like 6 to 10 years time maybe?! Maybe MS could retire the xbox name entirely and have a new name for the next gen console... Anyway I am still looking for the RETRON 5 to be released soon (I hope!)

  • Report this Comment On May 20, 2014, at 11:13 PM, veelalynne wrote:

    They just want their share of the Wii U profits. BOTH dollars.

  • Report this Comment On May 20, 2014, at 11:37 PM, puppybone wrote:

    They're trying to do us all a favor and kill off Nintendo faster than they're killing off themselves. It's so we all don't have to endure the fanboys in denial any longer!

  • Report this Comment On May 21, 2014, at 12:00 AM, rockslasthope wrote:

    Zonniwoop Nintendo would but they have vast stores of money in their bank and would rather make their own consoles. i believe they have around 11 billion. So they can keep on losing money from the wii for another 40 or so years and still have money to spare. So theyre not hurting for cash at all. They had a massive success with the wii and 3ds (not including games) so even though the wii u is kind of flopping theyre still pretty good.

  • Report this Comment On May 21, 2014, at 1:21 AM, clamo wrote:

    "Philips claims that it informed Nintendo of the alleged violations in 2011"

    this should redflag this right off the bat. Y is Phillips contacting Nintendo about this when they should be contacting there layers so an investigation can be made. you never contact a competitor 1st.

  • Report this Comment On May 21, 2014, at 4:08 PM, Theinsultedelf wrote:

    Oh please Philips, get real.

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