Nintendo (NASDAQOTH:NTDOY) has had a rough time with the release of its most recent console, the Wii U. Many declared it dead on arrival based on hardware specs and a "gimmicky" tablet-like controller. A year later, some might argue that these naysayers were correct as the console sees dwindling third-party developer support. According to the company's most recent earnings report, the console moved only 460,000 units between April and September.
Don't write off Nintendo yet. It's important to step back and realize that Nintendo has been here before. While it's entirely possible that the Wii U will continue producing lackluster sales for the rest of its product life, Nintendo has recovered from poor-selling products in the past.
A smooth recovery from the 3DS launch
Nintendo released the Nintendo 3DS handheld system in March 2011 (February in Japan). It looked like it was going to have a spectacular launch, with more than twice the number of preorders than the Wii had in 2006. The initial response was strong, with 440,000 units sold in U.S. in the first week. Unfortunately, that momentum didn't last.
A lack of must-have titles at launch, short battery life, and a too-high price point quickly took their toll. Despite its strong start, the 3DS missed the company's target of 4 million units sold worldwide by the end of March. This caused some to declare the handheld system a flop, especially with the release of Sony's (NYSE:SNE) PlayStation Vita looming. Nintendo significantly cut the handheld's price within six months of release and give away 20 downloadable games to customers in an effort to stimulate sales.
Though the move seemed desperate, it worked. Jumping forward to the present day, the 3DS is the best-selling piece of gaming hardware. Sales jumped 260% in the weeks following the price cut and have remained strong since. As of September 2013, the 3DS and its variants have sold 34,980,000 units ... that's 10 million more units than Microsoft's (NASDAQ:MSFT) original Xbox sold in its lifetime and nearly half of the life-to-date sales of Xbox 360 models. So much for dead on arrival.
The Wii U isn't the 3DS
It would be misleading to say that the Wii U is destined to succeed because the 3DS recovered from a rocky start. The 3DS is simply an example of why the Wii U isn't necessarily destined to fail. Though there are a number of differences between handhelds and consoles, there are some parallels as well.
While Wii U sales have been dismal, there has been a significant sales increase since Nintendo enacted a price cut. Sales increased by nearly 200% in the most recent quarter (and 1,500% in Japan), though the company still posted a loss on the hardware. This will likely turn around over time as hardware prices gradually go down, and isn't that uncommon for the industry. (By comparison, Microsoft took a hardware loss on the original Xbox for its entire life and for several years on the Xbox 360 as well, and the Xbox segment of the company is still down $5.5 billion over its lifetime.)
Another parallel can be found in the consoles' game lineups. The 3DS had a fairly dismal lineup at launch, but now has a number of must-haves with more on the way. Similarly, the Wii U has few of the games that people buy Nintendo's products for. This is changing, however, with Super Mario 3D World and Mario Kart 8 seeing release soon and Super Smash Bros. coming out next year. A new title in the Legend of Zelda franchise is also under development. And the company recently released Wii Fit U (an update to the popular title from the original console) as a free trial download that existing Wii Fit owners can upgrade to a full version at a discount by buying a $20 Wii Fit U accessory that is rapidly selling out.
What about next-gen?
Many say that the Wii U won't be able to compete with the upcoming Xbox One or PlayStation 4. This is almost certainly correct. It's also not the point. The original Wii outsold both the Xbox 360 and PlayStation 3 for years despite having only SD graphics and gameplay that was seen as "gimmicky." It wasn't trying to compete with the other consoles from a hardware standpoint, but was instead focused on existing as a very "Nintendo" console.
Similarly, the Wii U doesn't pose a threat to the PlayStation 4 or Xbox One. Both consoles will likely significantly outsell the Nintendo console, but not claiming the No. 1 spot doesn't make the Wii U a failure. While the rivalry between Sony and Microsoft is heated, Nintendo's offerings tend to fall more by the wayside. After all, many don't consider the original Wii to be the "winner" of the last console generation despite leading sales for most of the generation.
The Wii U has had a rough first year, but sales are improving and a number of first-party releases are on the horizon. While this won't make the console outsell the upcoming next-gen consoles from Sony and Microsoft, the Wii U wasn't designed to compete head-to-head with them anyway. Once manufacturing costs drop and gamers start picking up the console to play some of Nintendo's first-party titles, the "flopped" console will likely show that it has more life than many thought.