With its latest quarterly report and investor briefings, Nintendo (NASDAQOTH:NTDOY) has laid out plans to turn its business around. The company has suffered as a result of its disastrous Wii U console and the rising threat that mobile poses to its handheld gaming business. Nintendo's questionable viability as a hardware manufacturer has been foregrounded by superior releases from traditional rivals Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT), as well as relative newcomers Apple and Google. President Satoru Iwata, who in just the last quarterly report stated that Nintendo's business model did not need reinvention, now suggests that the company is broadening its horizons.
One of Nintendo's stated plans for remaining relevant and altering its current trajectory is an expansion into what it calls the "quality of life" business. While the company's exact plans regarding this new venture have yet to be disclosed, Nintendo's efforts will likely take the form of apps centered around exercise and diet regimens. Are Nintendo's QOL aspirations a sign that the company understands its strengths, or simply a flailing reaction to market pressures?
Nintendo's good old days
After the explosive 2006 launch of the Wii, Nintendo was one of the hottest companies in tech. The motion-gaming phenomenon that the system kicked off allowed Nintendo to sell what was otherwise last-generation hardware at a premium and reach an expanded audience. Meanwhile, the company's DS handheld was also reaching new audiences and setting a record sales pace. In many ways, Nintendo's upcoming move into the QOL space represents an attempt to make up lost ground.
While the Wii exploded out of the gate, many are quick to forget that Nintendo's DS was a little slow in establishing its market dominance. The system did not achieve megaseller status until games like Brain Training launched and pushed the handheld to non-traditional audiences. Likewise, many of the Wii's greatest success stories were titles that eschewed the traditional gaming formulas and sought to reach consumers who might otherwise never pick up a controller. Titles like Wii Fit and Wii Sports promoted the idea that gaming need not be an entirely sedentary hobby and that it could actually have beneficial health impacts.
Nintendo wants to train your body and your brain
Nintendo's ability to reach its expanded audience has deteriorated with its most recent hardware. On 3DS, titles in series like "Brain Training" and "Nintendogs" saw substantial performance declines. The Wii U is having trouble with even dedicated Nintendo fans. The legions of casual gamers who flocked to the Wii are nowhere in sight, likely having been courted by cheaper offerings on mobile platforms. The casual-oriented software market that drove the Wii and DS to stratospheric heights became the driving force behind mobile-gaming growth. Countless fitness and mental exercise apps have been released on the iOS and Android platforms. Many of these apps have taken significant inspiration from Nintendo's once-revolutionary casual software.
An expansion into the QOL business signals that Nintendo is diversifying for a future that increasingly looks to reject its presence as a hardware manufacturer. While its QOL releases are almost certain to hit Nintendo hardware, they will also be made available on mobile platforms. Nintendo is coming up on its third straight year of losses and expects to post a deficit of greater than $300 million. With the traditionally conservative company's hardware business in jeopardy, it's not surprising to see Nintendo look to a past strength for reinvigoration.
A company that hates competition enters contested space
Nintendo finding success with its QOL business is anything but guaranteed. As in the console market where Nintendo is frequently outgunned and outmaneuvered, the company's conservative nature represents an obstacle to growth. Nintendo has some of the most talented minds in the industry under its wing and it could deliver QOL apps of a higher overall pedigree than many of its competitors, but it remains to be seen if the company can thrive outside of its own hardware ecosystem.
The expansion into QOL ventures comes on the heels of the dreadful Wii U, a system that has been made largely irrelevant by Sony's PlayStation 4 and Microsoft's Xbox One and looks to kick off a protracted decline for Nintendo in the hardware space. Amidst increasingly strong and varied competition, Nintendo's high-quality software is losing its pull and ability to prop up substandard consoles. It's unlikely that the company will ever again release hardware that keeps technological pace with what Sony and Microsoft are offering or receives comparable third party support. Wii U will not be able to compete with PS4 and Xbox One, and its failure is undoubtedly an impetus for the company's QOL timeline.
Philosophy vs. results
From a philosophical standpoint, the QOL business represents a great fit for Nintendo. Unfortunately, recent practical applications of Nintendo's ideas and ideals are killing the company. If you plan on investing around potential explosions in QOL software, you would be wise to first look at companies that didn't champion the Wii U as the next big thing in interactive entertainment.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.