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Nintendo Struggling to Earn an Extra Life

By Daniel B. Kline – Feb 14, 2014 at 8:08AM

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Nintendo revived the videogame industry in the 1980s, but it's struggling to find a place in the current videogame console market.

While Microsoft (MSFT 6.16%) and Sony (SONY 1.02%) have had early success with their new game consoles, rival Nintendo (NasdaqOTH: NTDOY) has struggled to find customers for its Wii U. Those struggles, coupled with the fact that the company's last hit -- the Wii -- did not lead to high levels of revenue-generating game sales, has left the company needing to power up.

Nintendo President Satoru Iwata summed up the brand's struggles in a presentation to shareholders on Jan. 30. "As a platform in its second year, Wii U is currently in a very difficult position…. Obviously, under the current situation where the company has to report an operating loss, simply executing a price reduction as a way to defuse the situation is not an option."

"The whole point of a hardware play is to sell software," independent videogame analyst Billy Pidgeon told Fortune. "Nintendo does make money on the hardware while others don't, but in the end that is really inconsequential."

How bad is it?

Engadget reported that in all of 2013, Nintendo sold 2.8 million Wii Us, bringing the total unit sales for the console to 5.86 million since its November 2012 launch. That's particularly dreadful because in the couple of months its rivals' consoles were on the market, Sony sold 4.2 million PS4s and Microsoft sold 3 million Xbox Ones. Given that the original Wii was a runaway success that has sold 100 million units, these numbers are very troubling for Nintendo.

Piers Harding-Rolls, director of games research at IHS Technology, told Fortune that while Nintendo has acknowledged the poor position the Wii U is in, the company has done little to suggest that it can fix the problem quickly. Instead of lowering the price for the console, Harding-Rolls said, Nintendo plans to put an increased marketing focus on the Wii U's GamePad.

"These improvements are welcome for a platform struggling in the market, but appear 'bitty' or piecemeal and less than comprehensive," Harding-Rolls said. "There was no mention of significant further investment in marketing to actually tell consumers what the Wii U is, and to make it clear it is different to the Wii."

3DS is a bright spot

Worldwide hardware sales of Nintendo's handheld 3DS have reached 42.74 million units, according to the company. Nintendo has dominated this space, with only Sony offering any real challenge with its original PSP. The successor to that model, the PS Vita, has struggling to gain an audience.

"Being open and honest, I think we would have hoped for higher sales," PlayStation UK Managing Director Fergal Gara told VG247.com. "The market Vita entered was more complicated than it was when the console was originally thought about and designed. Games on tablets and phones have changed the marketplace and people can't carry too many things around at one time."

Though Nintendo's boss remains upbeat about 3DS sales and its prospects, that device faces all the same challenges as Sony's. The 3DS may even be more vulnerable as it's largely aimed at younger players and parents may opt for a tablet -- which has more educational uses -- over a dedicated gaming device.

"The fact remains that Nintendo 3DS was the top-selling game device around the world last year," Iwata said during the presentation. He added that independent market research company NPD reported that in the last calendar year, Nintendo 3DS became the game device with the highest share in the U.S. market with lifetime hardware unit sales exceeding 11.5 million units.

Can it be fixed?

Nintendo's bosses are not expecting a quick turnaround. The company has dramatically cut its revenue forecast for 2014, which Iwata explained in a press conference.

"We revised our full-year consolidated financial forecasts for the fiscal year ending March 31, 2014, that we announced at the beginning of the fiscal year by estimating new net sales of 590 billion yen against the initially projected net sales of 920 billion yen, new operating loss of 35 billion yen against the initially projected operating profit of 100 billion yen." (100 yen equals around $1.)

Moving from projecting a profit to projecting a loss is not good news for Nintendo, but it shows that the company understands the depth of the challenge it faces. Wii U faces a tough battle to win market share -- it's not as cool as the Xbox One or the PS4 and not nearly as revolutionary as the first Wii was. Still, Nintendo still has a powerful brand and franchises like Super Mario Bros. and Legend of Zelda maintain major fan bases.

Perhaps the future of Nintendo lies in bringing these characters to other devices?

Harding-Rolls told Fortune that this could lead to short-term revenue growth as Mario and friends move to mobile devices and tablets. But, he added, it appears that the company has already opted to stick to its core strategy.

If that's the case and Nintendo's bosses stick stubbornly with a failing console as the main delivery device for the company's games, soon there may not be anyone left to rescue the princess.

Daniel Kline is long Microsoft. The Motley Fool owns shares of Microsoft. 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.

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