More Like Nintendon't

Nintendo (OTC BB: NTDOY.PK) is clogged up, and even the plumbing proficiency of Mario and his brother Luigi can't get the pipelines flowing again.

The video game company behind the Wii console, several DS handheld incarnations, and a stable of proprietary game characters has posted its first annual profit decline in six years.

Sales for the fiscal year that ended in March fell 22%, to $15.4 billion, with earnings taking an 18% tumble to $2.5 billion.

Unfortunately, this doesn't appear to be a one-time glitch for the Japanese gaming pioneer. It expects to post lower earnings and revenue for the current year as well.

The video game industry has been in a funk for more than a year, but console rivals Microsoft (Nasdaq: MSFT  ) and Sony (NYSE: SNE  ) have held up relatively better lately. What's going on with Nintendo? Several factors are holding the company back these days. 

One frequent argument is that the popularity of LCD and plasma televisions has placed an emphasis on detailed graphics, which was never Nintendo's strong suit against the superior Xbox 360 and PS3 spec sheets. It also doesn't hurt that the PS3 can play Blu-ray discs at a time of home theater convergence.

Nintendo stood out originally for its motion-based controllers, but Microsoft and Sony are expected to raise the bar by rolling out new controllers later this year.

Nintendo also set itself apart from Sony and Microsoft with its audience-widening games. Between the Wii Fit workout regimens and Brain Age cerebral ticklers, video games began to hook players of all ages. However, that wider net is also creating a problem, as social gaming on Facebook and cheap diversions through Apple's (Nasdaq: AAPL  ) iPod touch, iPhone, and iPad grow in popularity.

Nintendo has denied that last point. It naively dismisses Apple as a threat.

"It doesn't look like their platform is a viable profit platform for game development because so many of the games are free versus paid downloads," Nintendo of America President Reggie Fils-Aime told video game website Kotaku last month. He went on to describe Nintendo games as snacks and full meals, whereas Apple isn't "even a mouthful" when it comes to gaming experience.

It's only natural for a declining company to publicly dismiss a competitor. The numbers tell their own story. Nintendo slashed the price of its Wii console before last year's holiday season, hoping to make it up in volume through high-margin software sales. That scenario hasn't materialized, and Nintendo's guidance for the year ahead is a sobering admission that it's not going to happen in the near term.

Nintendo is trying. Last month it became the third and final console maker to allow gamers to stream Netflix (Nasdaq: NFLX  ) , through their Web-tethered Wii systems. The rub is that iPad owners can do the same thing on their handheld tablets.

The pressure will be on Nintendo to wow diehard gamers during next month's E3 conference. If beefed-up systems and slam dunk accessories aren't in the playbook, it better hope that its slate of holiday releases is well-received.

Nintendo was special a few years ago. These days? Not so much.

Microsoft is a Motley Fool Inside Value selection. Apple, Netflix, and Nintendo are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz is a fan of Nintendo and has most generations of the console and handhelds around. He does not own shares in any of the stocks in this story, except for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 06, 2010, at 5:39 PM, axt113 wrote:

    Wow talk about half-assed analysis, wow, you'd think motley fool would do a better job, lol, Nintendo is expecting lower earnings, because the DS is on its way out and the 3DS is coming in late this year, of course they will be down

  • Report this Comment On May 07, 2010, at 5:29 PM, RussellL wrote:

    People, please do your own research and don't believe what Rick Aristotle Munarriz writes. His articles are very biased and are full of conclusions based on vague references and far-fetched comparisons.

    "The video game company behind the Wii console, several DS handheld incarnations, and a stable of proprietary game characters has posted its first annual profit decline in six years."

    So. We've been in a recession since 2007. Alot of companies have performed worse, even gone bankrupt during that time. Nintendo only had a PROFIT DECLINE not a loss. And how did they do compared to Microsoft and Sony?

    "One frequent argument is that the popularity of LCD and plasma televisions has placed an emphasis on detailed graphics, which was never Nintendo's strong suit against the superior Xbox 360 and PS3 spec sheets."

    By not competing with Xbox and PS3 is how the Wii became so popular. Not everybody wants HD graphics. According to NPD, "...December(2009) was the video game industry's "biggest sales month ever." Specifically, the group found that console sales jumped 4% compared to last December, with the Nintendo Wii unsurprisingly leading the way with 3.81 million units moved (up from 2.15 million the previous year). That's followed by the collective DS offerings at 3.31 million and, somewhat surprisingly, the PlayStation 3, which racked up sales of 1.36 million (its first time cracking the one million mark) compared to the Xbox 360's 1.31 million. Of course, no one's expecting sales to stay at quite that lofty level, but NPD says that the spike in December sales might well indicate that 2010 could be a recovery year." http://www.engadget.com/2010/01/15/npd-wii-leads-video-game-...

    "However, that wider net is also creating a problem, as social gaming on Facebook and cheap diversions through Apple's (Nasdaq: AAPL) iPod touch, iPhone, and iPad grow in popularity.

    Nintendo has denied that last point. It naively dismisses Apple as a threat.

    "It doesn't look like their platform is a viable profit platform for game development because so many of the games are free versus paid downloads," Nintendo of America President Reggie Fils-Aime told video game website Kotaku last month. He went on to describe Nintendo games as snacks and full meals, whereas Apple isn't "even a mouthful" when it comes to gaming experience."

    The games on Apple devices are nowhere near as entertaining or immersive as the ones available on Nintendo devices. Apple devices are for casual gamers and for people who want something to do while doing their business on the toilet.

    The companies that sould be worried are the ones you see in Toys R Us...Fischer-Price, Leapfrog and Vtech.

    "Nintendo slashed the price of its Wii console before last year's holiday season, hoping to make it up in volume through high-margin software sales."

    On Sept 27, 2009 Nintendo dropped the price from $249 to $199. That was the first price reduction since the console launched in Nov 2006. Since Jan 2007 to today, there are only 2 mos. where it was not the best selling console.http://www.xbitlabs.com/news/multimedia/display/200902121709...

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