Motley Fool Stock Advisor selection Nintendo (OTC BB: NTDOY.PK) briefly surpassed Sony (NYSE:SNE) in market capitalization during Monday's trading in Tokyo. While the news itself is a yawner, the cause of this reversal in fortune is far more intriguing. Nintendo's success seems to owe to the simplicity of its business compared to Sony.
Nintendo has four products, each with related software sales, and really only two products of any consequence: The motion-sensing Wii console and the touch-sensitive DS portable. In simpler terms, Nintendo concentrates entirely on the video game business. Sony, on the other hand, has HDTV's, stereos, DVD players, video game consoles, a financial services business, and a smattering of other OEM products.
Nintendo's simplified focus doesn't stop at its product lines. By aiming the Wii at nontraditional gamers who don't care about the newest, flashiest graphics, Nintendo can use technology a generation behind the chipsets employed by Microsoft (NASDAQ:MSFT) in the Xbox 360 and Sony in the PS3. This simplicity has allowed Nintendo to sell the Wii for considerably less than its competitors, yet still make a profit on every console sold.
It was a bit of a gamble to pursue consumers who generally ignore video games, but by using cheaper components, Nintendo was able to lower the cost of making that bet. Now the company's biggest problem is its inability to crank out units fast enough to meet demand.
To justify its valuation, Nintendo must prepare to defend its unique strategy and brand, because the economics of its current strategy will surely encourage competition. For the next few years, it should be smooth sailing for Nintendo. But what happens in the next product cycle will determine Nintendo's longer-term fate. Still, with its cash hoard and well-known brand, Nintendo has a pretty big head start.
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Nathan Parmelee owns shares in Microsoft, an Inside Value pick, but he has no financial interest in any of the other companies mentioned. The Fool's disclosure policy has a serious case of Wii elbow.
