Nintendo recovery may hinge on Wii U sales

Facing threats from all corners, firm pins hope on new game console

Bloomberg

Nintendo Co. President Satoru Iwata is convinced the future of gaming still centers on handheld and TV-based machines. He’ll get his answer by Christmas, in the number of new Wii U consoles that get bought.

Iwata can’t afford to be wrong. Nintendo, the world’s biggest maker of video game machines, last year cut prices on its 3DS handheld device after shipments missed forecasts, handing the company its first annual loss.

Like a character in one of Nintendo’s “Super Mario Bros.” games, Iwata is battling a storm of life-sapping obstacles: shrinking hardware sales, more people playing on smartphones and the Internet, and uncompetitive costs.

“The Wii U’s performance will be a gauge of whether there’s still a need for consoles to exist,” said Makoto Kikuchi, chief executive officer of Myojo Asset Management Japan Co., a hedge fund advisory firm. “If it doesn’t go well, Iwata may have to find a new business model.”

That’s something Iwata, 52, has vowed he won’t do, making the entrance of the new Wii console a pivotal moment for the Kyoto-based company.

As the first home-gaming machine introduced by any global player since 2006, the Wii U also provides a marker for the industry as a whole.

Nintendo is holding a media event Thursday to preview the machine in New York. While no date has been set for the Wii U to go on sale, Nintendo said it wants to introduce the device in time for the yearend shopping season.

Nintendo forecasts a return to profit this year as it introduces the Wii U, which will feature a 6.2-inch touch-screen controller. Net income will be ¥20 billion, reversing last year’s ¥43.2 billion loss, the company projects.

The company also predicts a 37 percent jump in 3DS sales. It sold 13.5 million 3DS machines last fiscal year, compared with an initial projection of 16 million, it said in April.

Iwata has said software titles will help drive sales of the new console. The 3DS, which cost ¥25,000 in Japan before the price was cut as much as 40 percent in August, was hobbled by a lack of attractive titles, he said in April.

Lackluster demand for the 3DS, which can beam images in 3-D, and a stronger yen that eroded overseas earnings, led to Nintendo posting both operating and net losses in the year that ended March 31 — the first time that’s happened since the company went public in 1962. The Americas and Europe accounted for 72 percent of sales, according to its earnings statement.

“We failed to prepare a software lineup which could satisfy our customers,” Iwata told analysts in Tokyo on April 27. “We have learned the lesson that we have to make that kind of preparation for the Wii U.”

The new machine will probably come with blockbuster game titles, including one featuring “Super Mario,” said Hiroshi Yamashina, a Tokyo-based analyst at BNP Paribas.

“Nintendo should be able to fare well against smartphones and tablets with its software lineup, which would differentiate its product from other devices,” Yamashina said. “Nintendo wants to avoid losing a lot of money this time, after the 3DS experience.”

The machine is being released in the midst of an industry slump as consumers abandon consoles in favor of games played on smartphones and social-networking sites, including Facebook Inc. When Nintendo introduced its last home game console, the Wii, in 2006, Apple Inc.’s iPhone hadn’t yet gone to market, the game “Angry Birds” didn’t exist and social-gaming company Zynga Inc. hadn’t been founded.

Winning customers with its motion-sensor controls, the original Wii sent Nintendo’s shares to a peak of ¥73,200 in November 2007. The shares closed at ¥8,740 in Osaka on Tuesday and are down 18 percent this year, compared with a 64 percent year-to-date gain for Apple.

Retail sales of game hardware, software and accessories in the U.S., the top video game market, fell 20 percent last month from a year earlier, led by a 39 percent plunge in hardware sales, NPD Group Inc. said Sept. 6. That followed a 20 percent drop in July, according to the researcher.

“The console market is shrinking, without a doubt, because of smartphones and tablet PCs,” Myojo’s Kikuchi said.

To make a profit from hardware sales, the Wii U would need to be priced close to $300, based on estimated costs, said Satoru Kikuchi, a Tokyo-based analyst at Deutsche Bank AG. To overcome competition from the many other devices on the market and be embraced by families and children, and not just hardcore gamers, it would need to be priced closer to $200, he said.

The new console may sell for ¥25,000 to ¥30,000 in Japan, said Yamashina at BNP. Mizuho Investors Securities Co. estimates the machine will cost ¥25,000.

The current Wii initially sold for ¥25,000 in 2006, before the price was cut to ¥20,000 in 2009. In the U.S., it sells for $149.99 after the price was cut in May.

Sony Corp. sells its PlayStation 3 game console from ¥24,980 in Japan and $249 in the U.S.

Microsoft Corp.’s Xbox is priced from ¥19,800 in Japan, or $199.99 in U.S. stores. Apple’s iPhone starts at $199 and the iPad is sold from $499.

“They need to price it below $300 and they need third-party software support to be successful,” Michael Pachter, a Los Angeles-based analyst at Wedbush Securities Inc., said of the Wii U. “I don’t know about the former, and am skeptical about the latter.”

Nintendo sold 9.84 million Wii machines in the year that ended March 31, compared with 13.9 million PlayStation 3 consoles in the same period. Microsoft sold 14.9 million Xbox units in 2011.

The Wii U screen on the console’s controller will provide extra information to players as they manipulate games on their TVs, and can become the primary screen when they move around. The machine includes new social-networking features so players can interact with each other.

Still, Iwata has ruled out the possibility of making Nintendo’s characters available for gaming devices other than its own.

By contrast, Sony will introduce the PlayStation Mobile service later this year, offering titles for HTC Corp. devices as well as its PlayStation Vita portable player and Sony Xperia smartphone, it said in June. At the E3 trade show in June, Microsoft Corp. unveiled an application called Xbox SmartGlass that will link the console to phones, tablets and personal computers from Microsoft and rivals.

“We are doing everything that we can do and have prepared ourselves well,” Iwata told shareholders in June, discussing plans for the Wii U. “It is now a matter of showing the results.”