Nintendo (NQB: NTDOY) has been licking its wounds for a long time now. Sony's (NYSE:SNE) PlayStation consoles and Microsoft's (NASDAQ:MSFT) Xbox systems are devaluing the lush brand equity once enjoyed by the makers of Mario, the world's most famous plumber. The company's latest earnings report confirms such negative notions.
According to reports, the company's H1 sales revenues (for April through September) declined by 6.2%, coming in at 176.4 billion yen. Operating profit dropped 51% to just under 20 billion yen, and net profit was down 21% to 36.63 billion yen. For the full year, Nintendo believes it can achieve a net profit of 75 billion yen, which would represent a 14% decline year over year.
The blame? Lackluster GameCube sales and a price cut for the Nintendo DS handheld system. Granted, the video game sector is in transition now as the new console generation gets under way; one would expect GameCube sales to evaporate as consumers wait for the next big thing. But let's be honest; the third-place GameCube never gave either Microsoft or Sony a run for their collective money.
Nintendo has its work cut out for it -- and that may actually prove to be the silver lining in all this gloom. Amid declining sales and profits, the company absolutely must regain its console dominance of yesteryear with the upcoming Revolution system. With its corporate back against the wall, we'll see if Nintendo can rise to the challenge and figure out a way to turn the globe back into a Mario-loving world.
At this point, I don't think the key to success lies in the Revolution specs or its snazzy controller. I believe Nintendo will have to market its way out of its demise. I'm not saying that innovation isn't important. But no matter how good the product is, consumers need to feel a sense of magic associated with the Nintendo brand to overcome the image of sheer power surrounding the PlayStation and Xbox systems.
What should Nintendo do, exactly? For starters, the company had better follow Bill Gates' lead and get a bunch of content over to Viacom's (NYSE:VIA) MTV. Hooking up with Time Warner's (NYSE:TWX) WB network wouldn't hurt, either. Nintendo needs convince young, jaded hardcore gamers that its generally sunnier, cartoonier games can be just as cool as the criminal hijinks of Grand Theft Auto. Nintendo also must reach out to software publishers and ensure that any killer app found on the other systems is firmly represented on its own platform. One huge complaint about the GameCube was its relatively paltry selection of games compared to the PlayStation. For example, it probably bugged many GameCube owners that Konami's latest iterations of Castlevania and Contra, which first earned fame on the original Nintendo Entertainment System, were never ported over to the newest Nintendo system.
In my opinion, investors seeking to profit from the console wars should forget Sony or Nintendo -- even if the latter does step things up -- in favor of Microsoft. It not only offers the Xbox 360 business, but also the Windows operating-system monopoly and a ton of future dividend payments.
As many Foolish writers have pointed out, investors shouldn't overlook the game publishers, either. While all the hardware companies produce software as well, the likes of Activision (NASDAQ:ATVI) and Electronic Arts (NASDAQ:ERTS) provide a more lucrative link to the software side of the business. All of the new consoles will need a steady pipeline of discs to keep the marketplace happy; with their great portfolio of titles, those two publishers deserve investors' consideration.
Power up with further Foolishness:
Microsoft is a Motley Fool Inside Value recommendation. Time Warner, Activision, and Electronic Arts are Motley Fool Stock Advisor recommendations.
Fool contributor Steven Mallas holds no financial position in any of the companies mentioned. He owns a GameCube, and he did think that the poltergeist baby in Luigi's Mansion was pretty creepy. The Fool has a disclosure policy.
