At the Electronic Entertainment Expo in Los Angeles last month, Sony (SNE) and Microsoft (MSFT) showed off new consoles and games scheduled to reach stores in time for Christmas. Nintendo’s big news at the world’s largest gaming show: its fifth round of game launch delays since October. Games drive console sales, and Nintendo’s latest system, the Wii U, hasn’t exactly been flying off the shelves. Between its November debut and the end of March, the company sold 3.45 million Wii Us, priced between $300 and $350. That’s 37 percent below its initial estimate of 5.5 million and about 40 percent behind the original Wii in the same period after its 2006 release, according to an analysis by Citigroup (C).
While the sales slump can be blamed in part on smartphones and tablets chipping away at the $58 billion global market for traditional video games, it’s also due to a dearth of must-play titles from the company that created Super Mario Bros., Donkey Kong, and the Legend of Zelda. To change that, Nintendo is doing something once unimaginable for a Japanese company: crowdsourcing game development to a network of 1.8 million programmers, including part-time hobbyists, to boost the size of its library. The company has allied with Unity Technologies, a San Francisco-based maker of software used largely to adapt casual smartphone and tablet games to various platforms. “As digital business expands, there will be even more opportunities to do business with small, independent software developers,” Nintendo President Satoru Iwata said in a presentation at the E3 show.
That’s quite a reversal for a company that’s been fanatical about policing its development licenses, partly by filing lawsuits against companies that sold games for Nintendo’s consoles without approval. Most games produced for its systems have come from larger studios. While Nintendo has more than tripled research and development spending in the past decade, it hasn’t created a new hit character. With the Unity deal, the company is casting a wider net, and its game library may overlap with the iTunes Store. “Casual games played on mobile devices are gaining in importance,” says Tomoaki Kawasaki, an analyst at IwaiCosmo Holdings, “and gamemakers like Nintendo haven’t been able to offer something that can compete.”
Although almost all Wii titles run on the Wii U, few customers will buy the new console just to play games made for its predecessor. Through March, Nintendo had sold 13.4 million Wii U games, less than half the number for the first Wii at the same point after its release, Citigroup says. The Wii U’s game pad, which has a touchscreen embedded between twin joysticks and a dozen buttons, has turned off casual players who liked swinging the original Wii’s motion-sensitive remote. Nintendo’s latest delays are for Wii U editions of its Fit and Party series, both now scheduled for release by the end of the year instead of this summer.
The company has long struggled to get major software studios to develop games for its systems. Historically, its consoles are less powerful than other companies’ hardware and have incompatible control schemes. That means it’s tough for developers to transfer their work for Nintendo to other systems, as it is for app makers trying to port their iPhone software to phones made by Nokia. Sports game kingpin Electronic Arts (EA) has released just four games for the Wii U, compared with 78 for the Wii; an EA spokesman said in May that the company doesn’t have more Wii U games in development.
When Iwata announced the Wii U last year, he said a strong game lineup would be critical to avoid the mistake Nintendo made with its handheld 3DS system in 2011. Within six months of the 3DS’s game-starved launch, the company cut its price because of lackluster sales. It may be forced to do the same with the Wii U: Citigroup expects Nintendo to sell 6 million consoles and 31.3 million Wii U games by the end of the system’s first year, compared with 18.6 million Wiis and 120 million Wii games in that system’s first year. (Nintendo says it expects to sell 9 million Wii Us in fiscal 2013.) “We think Nintendo will find it hard to truly escape from weak demand without a big price cut,” Citigroup analyst Soichiro Fukuda said in a June report.
Nintendo spokesman Yasuhiro Minagawa says Unity will help widen options for Wii U players, and the company has no plans to cut prices. But Unity already offers development software for Sony’s PlayStation 3 and Microsoft’s Xbox 360, and casual gamers won’t rush out to buy a console to play Angry Birds and other diversions that are available on their smartphones and don’t take advantage of the Wii U game pad, says Wedbush Securities analyst Michael Pachter. “I’m not sure it will make a ton of difference,” Pachter says. “If these moves merely increase the number of casual titles, I don’t see them driving console sales.”
If it can’t make inroads before this year’s launch of the $400 PS4 and $500 Xbox One, Nintendo is likely to miss the advantage it had against pricier rivals when it rolled out the first Wii at $250. The stakes are also higher for Nintendo, which derives almost all its revenue from games, compared with less than 20 percent at either of its rivals, says Masamitsu Ohki, a fund manager at Stats Investment Management in Tokyo. (Also better diversified is Google (GOOG), which the Wall Street Journal reports is making its own game console.) “Nintendo can’t fail, because it has nothing else to earn profits,” Ohki says.
Nintendo’s Iwata told shareholders at an annual meeting on June 28 that the company will also redouble efforts to roll out its own titles, according to an e-mailed statement. He said sales momentum will make the Wii U more appealing to other gamemakers, and there’s no plan to cut jobs. Barring endless delays, new Mario Kart and Super Smash Bros. games are likely to be hits, and the Wii U may well roar to life in its second year, as the 3DS did with Nintendo franchise games such as Donkey Kong Country Returns 3D and Luigi’s Mansion: Dark Moon. Still, says shareholder Masao Katsuura, who attended the meeting: “The only way to improve earnings is to sell good software titles. I’m worried whether the company can release games as it plans.”