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Nintendo faces hard choice after first loss

Apr 26 2012 11:22 Reuters

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Tokyo - In 2006 Nintendo took video gaming out of the kids’ room and into the living room, as its hit Wii created a new niche as the console the whole family could share.

But with that Wii boom waning, the successor being prepared by the creator of Super Mario looks like a losing proposition as Apple and other smartphone and tablet makers take gaming to the bathroom, the commuter bus and back to the bedroom.

Nintendo on Thursday reported its first ever operating loss with a deficit of 37.3 billion yen ($458 million) for the business year just ended, just marginally better than the consensus forecast for a 41.4 billion yen loss.

“They have been beaten by smartphones and tablets, in particular, for consumers spending and, more importantly, time,” David Gibson, an analyst for Macquarie in Tokyo said before the results announcement.

The company, which began in 1889 making playing cards in the back streets of Kyoto, has been hammered by a precipitous drop-off in sales of its Wii, DS handheld console and its new 3DS version.

A year ago Nintendo expected to sell 13 million Wii consoles and ended up selling 9.8 million. It had a target for 16 million for its new 3DS handhelds but ended up offloading only 13.5 million last business year. It managed to shift only half the 11 million DS machines it wanted to sell.

Weak demand forced Nintendo to slash the price of the new 3DS by about a third in August following its launch six months earlier. For the current business term Nintendo is aiming to sell 18.5 million of the devices.

New Wii

Later this year the company is expected to release its successor to the Wii, the Wii U, which features a tablet controller.

Forecasting a return to profit this business term, helped in part by a weakening yen that is boosting repatriated overseas revenue, Nintendo’s boss, Satoru Iwata, acknowledged his company’s lacklustre performance.

“Our target this year is not one I am satisfied with,” he said at a briefing in Osaka, in western Japan. “Sales of the 3DS in Europe have not been as buoyant as those in Japan,” he added. Iwata, however, did not offer any strategic rethink or discuss any possible change to plans for the Wii U.

Yet what Nintendo faces is a fundamental shift in gaming habits that analysts argue may require it to shrink its hardware business and instead chase profits for Super Mario and other game titles on devices built by other firms.

Its emerging foe is Apple, already the nemesis of flagging Japanese titan Sony Corp, whose seamless go-anywhere devices - the iPhone, iPad and rumoured plans for a games controller and “iTV” - are positioning it to grab swathes of the gaming market where Nintendo once held sway.

In a report this month, Macquarie’s Gibson pointed to a recent survey by mobile gaming site MocoSpace. It asked 15,000 gamers where they gamed; 53 percent said they played in bed, 41 percent in the living room, 72 percent commuting and 5 percent on the toilet.

Yet a game started on a Wii can’t be continued on a DS on the way to work or school. The Wii U, slated to go on sale in time for the year-end shopping season, does not address that convergence hurdle.

Nintendo will have to sell the new console for as much as $350 to break even, estimates Nanako Imazu, an analyst for CLSA in Tokyo. That is $100 more than it charged for the Wii in 2006 and would outstrip both the Playstation 3 and Xbox 360, which can be picked up for less than $300.

Back in the black

Imazu said Nintendo, which earns about four-fifths of its revenue overseas, should also get a boost this business term the launch of popular game titles including Mario Party 8 and the latest instalment of Dragon Quest from Square Enix due out in August.

For the year starting April 1, Nintendo expects operating profit of 35 billion yen, compared with a consensus estimate of a 40 billion yen profit based on forecasts by 20 analysts surveyed by Thomson Reuters I/B/E/S.

Nintendo will also likely have a year’s grace to woo core gamers to the Wii U, say analysts, before Sony’s anticipated launch of its PlayStation 4 and Microsoft’s updated Xbox at the end of 2013. Nintendo, nonetheless, will still have to contend with the rising flood of smartphones and iPhones.

“Nintendo has to deal with the change and let Mario games be played on non-Nintendo devices,” said Imazu. “I think it will take at least couple of years to see that.”

Any drastic strategy shift that would dispatch the Mario brothers into the realm of Android and Apple’s iOS operating system would likely require a change at the top of Nintendo, said Macquarie’s Gibson. And that likely won’t happen for a couple of years until the Wii U is shown to be a clear failure, he added.

Unlike money-losing Sony, where time is running out to counter the pounding it’s getting from Apple and South Korea’s Samsung Electronics, Nintendo, sitting on oodles of cash it made selling the Wii - about $14 billion - at least has time to mull its choices.

“With its 8,000 yen a share in cash, it can afford to still make a bet that its hardware will sell,” said Gibson.
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