Nintendo Adds to Bleak Holiday Forecast for Video Games

Nintendo (NASDAQOTH: NTDOY.PK) isn't acting much like itself lately. 

Just six years ago, the maker of all things Mario jumped out to a big lead in the console wars on the strength of its quirky motion-controlled system, the Wii. Nintendo won over gamers in record numbers with that innovation. But the company also cheered investors as it booked profits from both the hardware and the software sales surrounding the launch.

Rivals Microsoft (MSFT +0.01%) and Sony (SNE +0.01%) had more impressive hardware specs but were caught flatfooted. And thanks to that strategy, Nintendo beat out the Xbox and PS3 consoles for the strongest early position in the industry, leaving the company poised to capture the biggest share of an expanding base of video gamers.

But things look different this time around.

Nintendo announced last week that it expects to lose money on sales of its next-generation console, the Wii U, when it launches in the U.S. in November. In a presentation to investors last week, company president Satoru Iwata said that Nintendo is sacrificing profitability in hopes of maximizing console sales. The Wii U, Iwata said, will be sold below cost so that prices hedge closer to something that customers would find "reasonable."

The company wants to avoid the fiasco that marked its last big launch, the 3DS. Amid flagging early sales, Nintendo had to slash the price of the handheld gaming device -- from $249 to $169 – less than six months after launch. The company risks another soft launch with the Wii U if it can't convince customers to upgrade to the next-generation console en masse. Nintendo needs a big installed base of consoles to market its software titles to, and is betting that the loss-leading $299 price will be low enough to achieve that goal.

But the bad news for Nintendo investors didn't stop there. The company also announced a sharp cut in sales and profit forecast for the year, including another lowered projection of 3DS sales. Iwata put it best when he admitted that the company's profit wouldn't be very "Nintendo-like" this year. That's true, and that bleak forecast portends a tough holiday for more than just Nintendo this year.

Older consoles, fewer gamers
Nintendo's new console will be greeting an industry that's in dire need of a refresh. Over six years old, all three major consoles are well past their primes. And that dearth of innovation has contributed to weak hardware and game sales for the Xbox, PS3, and Wii.

But it's also a pain for retailers that depend on console-related sales, like GameStop (GME +0.01%) and Best Buy, which have both reported sharply lower traffic lately. GameStop, in its financial filings, blames the "late stages of the console cycle" as the main driver of lower console hardware and software sales.

It's no secret where all those gamers are going. With the rise of tablets and smartphones, mobile devices are sapping console gaming's mojo. Just last month, NPD found that mobile gamers -- those who play on smartphones and tablets powered by Apple's (AAPL +0.01%) iOS system and Google's (GOOG +0.02%) Android systems -- now outnumber console gamers. Apple's iPad, with over 100 million units sold since its introduction in 2010, is a big reason for that shift away from consoles. And Google's Andriod OS, covering a wider range of products, has an even bigger base, approaching 500 million. That's a lot of Angry Birds to compete against.

Against that tough backdrop, Nintendo has a few things going for it, though. It has a first-to-market advantage again this year, beating its slower-moving competitors, who look ready to sit this holiday season out. And with the holidays to itself in the console wars, the company expects to sell 5.5 million Wii U consoles, powering sales of over 20 million games. Nintendo says that initial preorders appear strong, and that production capacity will be the limiting factor for sales this season.

Foolish takeaway
Still, investors shouldn't expect a great holiday for Nintendo or for console gaming. Despite another head start, Nintendo doesn't look prepared to stir a gaming revival this year. Unfortunately, cost and production issues will limit the upside potential on this season's only new console launch.

And with new tablet devices like the iPad mini coming onto the market, I don't see Nintendo sparking anything like the broad realignment of the industry it led in 2006. In terms of gaming devices, this is one more holiday that appears to belong to mobile leaders Apple and Co.