By Peter Suciu
FORTUNE -- Nearly 30 years ago, Nintendo essentially gave the videogame industry a new life, and a second chance. In 1985, when the original Nintendo Entertainment System debuted at the North American International Toy Fair, no one even wanted to think about videogames after the great crash that saw revenues fall from $3.2 billion in 1983 to just $100 million in 1985.
Fast-forward to 2013. The industry has "leveled up," so to speak, to $93 billion in 2013 -- and according to research from Gartner, that figure could reach $111 billion by 2015. The question now is whether Nintendo will still be a part of it. The company, which was founded in 1889 as a playing-card maker, has had to reinvent itself over the years. It may need to do so again as it faces declining sales of its Wii U videogame console.
Last month, Nintendo president Satoru Iwata announced that the company had revised its full-year consolidated financial forecast for the fiscal year ending Mar. 31, 2014. Its new outlook was not good: Nintendo cut its forecast for its Wii U's annual sales by more than two thirds, from 9 million to 2.8 million, and also halved the projection for game sales to just 19 million units. The Wii U, which came out in November 2012, is far from the hit that was the original Wii, which came out in 2006 and has sold more than 100 million units worldwide.
However, part of Nintendo's woes could be that the original Wii sold well, but didn't exactly result in massive subsequent software sales, which is what any videogame hardware maker wants -- and even has to see. "The whole point of a hardware play is to sell software," independent videogame analyst Billy Pidgeon said. "Nintendo does make money on the hardware while others don't, but in the end that is really inconsequential."
The original Wii did have a great install base, but that wasn't enough, Pidgeon said. "They had so much hardware out there that it should have moved a lot more software," he said. "There were far too many cases where the Wii was bought by people who just played the one game that came with it."
Since the January announcement, the question has been raised: Should Nintendo stick with its strategy and try again, or move on to a different approach? (Is the princess in the next castle?) Since the mid-January statements by Iwata, there has been chatter that the company could shift its focus to developing games for other devices. Piers Harding-Rolls, director of games research at IHS Technology, said that this could lead to short-term revenue growth as Mario and friends move to mobile devices and tablets. But it appears that the company has already opted to stick to its core strategy.
"Nintendo, similar to Apple (AAPL), Google (GOOG), and perhaps even Valve, follows its own product development path and is reticent to follow market trends where it can only make a marginal impact," Harding-Rolls noted in his market insight report. "A short-term, or marginal impact is not aligned to its long-term strategic goals where it seeks to make relatively big bets around innovation, which increases risk but offers significant rewards."
Nintendo has acknowledged that the Wii U is in a terrible position, Harding-Rolls said, but the company has ruled out any short-term fixes such as lowering the price. Instead, Nintendo may seek to concentrate on accessories such as the Wii U GamePad. But that could do little to solve the problems even in the short term.
"These improvements are welcome for a platform struggling in the market, but appear 'bitty' or piecemeal and less than comprehensive," Harding-Rolls added. "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."
While Nintendo had a year's lead over rivals Microsoft (MSFT) and Sony (SNE), which each respectively launched next-generation videogame systems last November, it isn't likely that Mario will show up on those systems anytime soon.
"For Nintendo, its game franchises and hardware are joined at the hip. Nintendo is a game maker, and hardware is the vehicle to sell its own games," videogame analyst George Chronis of DFC Intelligence told Fortune. "That is a philosophy that is directly at odds with Sony and Microsoft which are in the business to sell hardware and create first-party games to further the selling of their consoles."
Since the release of the Nintendo 64 in 1995, the company has taken a strategy that does not require it to invest heavily in high-performance hardware. "To compete with Sony and Microsoft in developing bleeding-edge consoles was seen as a costly waste of capital," Chronis added. "So with both the GameCube and the Wii, Nintendo could operate with negligible R&D and production costs compared to Sony and Microsoft. The decision taken during the development of the Wii was to target mainstream consumers that were not already Xbox or PlayStation owners with easily accessible games that were fun to play, and were novel thanks to the advent of motion control input. The Wii turned out to be a tremendous success and won the last cycle."
But that success could be misleading.
"It depends on how you define success," Pidgeon said. "What you need to look at is the active install base, and whether people are buying multiple software titles. This certainly wasn't the case with the Wii."
The lack of software sales even resulted in some third-party publishers pulling back support. Electronic Arts (EA) has all but officially pulled support for the Wii U after releasing a number of high-profile launch titles for the system as it failed to catch on with gamers. Without high-profile titles in the pipeline, sales of the Wii U hardware continue to remain sluggish.
"That is the other big issue for Nintendo," Pidgeon said. "They haven't created a compelling business opportunity for third party." Meanwhile, a new Smash Bros. and Mario Kart -- both Nintendo titles -- are under development.
"These new initiatives are unlikely to provide an immediate or significant financial turnaround, but they will consume research and development budgets in quick time," Harding-Rolls said. Nonetheless, "this dependence on innovation and individuality is core to the company staying relevant beyond the short term and protecting the Nintendo brand value."
Shelve the Wii U, plow ahead with mobile, and more.
FORTUNE -- If Nintendo (NTDOF) isn't desperate by now, it should be.
The hallowed videogame hardware and software maker is estimating a net loss of $240 million for the fiscal year ending March 2014, largely based on poor sales of its current home console, the Wii U. It slashed Wii U sales estimates from 9 million units to 2.8 million and lowered MOREJP Mangalindan, Writer - Feb 5, 2014 5:00 AM ET
The one-time king of consoles is increasingly banking on computer games.
By John Gaudiosi
FORTUNE -- Back in the 1990s, Sega was on top of the video game world. Its Sega Genesis was giving Nintendo a run for its money thanks to a blue hedgehog that could run at supersonic speeds and a library of addictive arcade franchises like Golden Axe, Streets of Rage, and Outrun. But a series of console MOREAug 8, 2013 11:18 AM ET
The Kickstarter darling has a long way to go before it upends gaming.
FORTUNE -- Given my disappointment over the Wii U and the traditional gaming industry's trend toward iterative games with bigger budgets, I wanted to love the Ouya because it stood for everything the company and competitors like Sony (SNE), Microsoft (MSFT), and Nintendo did not. But after some time with the indie console, I realize it too has MOREJP Mangalindan, Writer - Jul 12, 2013 12:08 PM ET
Can the popular 3DS handheld become a reading device? One publisher thinks so.
By Michael Fitzpatrick
FORTUNE -- Can Nintendo's 3DS handheld become a powerhouse e-reader? Japan's biggest printer, Dai Nippon Printing, thinks so. The company, which is a big player in domestic publishing here, announced it will launch 300 titles for young readers this fall for Nintendo's popular portable console.
Dai Nippon is already selling e-books and manga through conventional e-readers, MOREJul 8, 2013 10:53 AM ET
The world's largest electronics manufacturer does have other clients.
FORTUNE -- If something sounded familiar about Lorraine Luk's headline in Tuesday's Wall Street Journal -- As Apple Feels Bite, Hon Hai Looks to Diversify -- it may be because we've heard that tune a lot lately.
Just in the past three weeks, journalists have attributed to Apple's (AAPL) loss of "steam" everything from Harvard's divestiture of a few hundred Apple shares to the structure of Sharp's survival plan. MOREPhilip Elmer-DeWitt - May 28, 2013 3:45 PM ET
Flush with $15 million from Nvidia and Kleiner Perkins, the $99 Kickstarter success story keeps making waves -- and it's not even out yet. Julie Uhrman talks to Fortune about fast-tracking Ouya, those harsh early reviews, and a rumored mobile device.
Still, when early units began shipping to some Kickstarter backers this past March -- just nine months after raising money on the site -- several tech blogs got their hands MOREJP Mangalindan, Writer - May 9, 2013 7:04 AM ET
Households with broadband Internet access are increasingly piping Internet video to their TV sets, through a variety of devices.
FORTUNE -- We can examine the strategies of Netflix (NFLX) and Comcast (CMCSA) all we like, but the speed at which television moves off of cable and onto the Internet will be determined largely by what people decide to do in their living rooms. Now that they have the hardware and software MOREDan Mitchell, contributor - May 3, 2013 6:36 AM ET
Chipmaker AMD hasn't had it easy. Now three of tech's most powerful companies have embraced it for the long-term.
FORTUNE -- With its processors in 83% of PCs, Intel (INTC) overwhelmingly dominates traditional personal computing. But there's one area where the chip giant won't be winning any time soon: game consoles. If reports prove correct, Advanced Micro Devices (AMD) could manage what its competitor hasn't: getting its chips into all three of MOREJP Mangalindan, Writer - Apr 11, 2013 7:14 AM ET
With profits down, the company that spawned Mario desperately needs a hit. But is the Wii U it?
FORTUNE -- Can Nintendo do with the Wii U what it did with the Wii? When Nintendo launched that console in 2006, the oddly named system changed the way millions of players interacted with games with a controller that recognized gestures. This time, Nintendo aims to repeat that success, this time by including a MOREJP Mangalindan, Writer - Nov 20, 2012 5:00 AM ET
|Regulators pave way for Internet "fast lane" with net neutrality rules|
|GM's $1.3 billion recall cost wipes out profit|
|Female gun instructors in hot demand|
|Apple shares soar on increased buyback|
|Premarkets:Buoyed by Apple, Facebook (but not GM)|