Nintendo's hard choices for a soft landing

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 Inc and other smartphone and tablet makers take gaming to the bathroom, the commuter bus and back to the bedroom.

Nintendo will report on Thursday its first ever operating loss, after estimating a 45 billion yen deficit for the business year just ended.

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

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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. For DS, 3DS sales vs iPhone: click here.

A year ago Nintendo expected to sell 13 million Wii consoles, 16 million 3DS handhelds and 11 million DS machines in the financial year. In January it slashed its sales target for all three, lopping 3 million off its Wii target, 2 million off 3DS and halving its prediction for the DS. Promising to return his company to profit this business term, Nintendo’s boss, Satoru Iwata, blamed dismal sales on a strong yen and economic gloom in Europe. No strategic rethink or change to plans for the new Wii console, the Wii U, was necessary, he insisted. Yet what Nintendo faces is a fundamental shift in gaming habits that analyst 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.

Mobile gaming just got Super competitive

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.

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

That should result in an operating profit of around 40 billion yen for the 12 months to March 31 - according to the average estimate of 20 analysts surveyed by Thomson Reuters I/B/E/S - back into the black, although well below the earning power it displayed during the Wii boom. 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.

Reuters