While the rest of Japan was still celebrating Tokyo’s 2020 Olympics victory, today was a grim day at the Kyoto headquarters of Nintendo (7974:JP). Investors had hoped the maker of video game consoles would win membership in Japan’s benchmark stock index, following the merger of the Osaka exchange (where Nintendo had been traded) with the larger Tokyo exchange. Nikkei Inc., keeper of the Nikkei 225, dashed those hopes Friday by announcing that Nintendo hadn’t made the cut. “This expectation has come to nothing,” wrote Takao Suzuki, an analyst at BNP Paribas. “This appears to be the right time to sell.”
Investors agreed. Within 90 minutes of today’s opening bell, Nintendo was down more than 7 percent. As the day wore on, things just got worse. By the end of trading, Nintendo shares had lost 8.4 percent of their value.
There may be more bad news ahead for Nintendo, a company that became one of Japan’s iconic brands thanks to the popularity of kid-friendly games featuring the mustachioed Super Mario and other characters. Sure, older gamers favored the Microsoft Xbox and the Sony PlayStation, but Nintendo could long count on the under-12 set to use its Wii consoles, its handheld devices, and its games.
Unfortunately for Nintendo, that model no longer works. With so many games available for free on the iPad and other tablets, kids have less reason to bug mom and dad to buy a Wii or a DS handheld. Older gamers may still prefer to play on a console, but they turn to Microsoft (MSFT) and Sony (SNE) for popular titles that aren’t available on the Wii because Nintendo—which relies heavily on sales of its own games—traditionally hasn’t been as supportive of third-party developers.
The competition from Microsoft and Sony is heating up, with Nintendo likely on the losing end. The other two will soon be launching next-generation versions of their consoles, and the anticipation forced Nintendo to cut prices. Indeed, today’s stock plunge was a more dramatic version of the selloff last month following the company’s Aug. 28 announcement of a 14 percent cut in the U.S. retail price of the Wii U, the version of the game console Nintendo introduced last year. With consumers looking forward to the launch of the Xbox One and the PlayStation 4, Nintendo is trying to stay in the game by selling the Wii U for a suggested retail price of $300, effective Sept. 20.
Nintendo’s predicament is not unlike that of another tech pioneer that has fallen on hard times: Microsoft. Just as the U.S. company’s software was an early leader in smartphones but became an also-ran behind Apple’s (AAPL) iOS and Google’s (GOOG) Android, Nintendo has become the third-place contender in a market that may only have room for two. In a critical report published on Friday, CLSA analyst Jay Defibaugh described the “mushrooming challenges” confronting the company. “Nintendo faces a very difficult operating environment, unrealistic expectations for a major strategic change of direction and a poor medium-term earnings outlook,” Defibaugh wrote. “It will be difficult to take consumer mindshare amid the launch promotions for both PlayStation 4 and Xbox One.”
And like Microsoft, Nintendo was caught off-guard by the rise of smartphones and tablets. While Microsoft has belatedly responded with its proposed purchase of Nokia’s handset business, Nintendo is still sticking with the strategy that worked in the past. The company “has more or less refused to acknowledge the role that mobile gaming has had on latent demand,” CLSA’s Defibaugh wrote. The popularity of free mobile games “damages the value proposition of full-fledged gaming experiences like the ones offered by Nintendo.”
The competition is not just from the usual rivals but also from newcomers targeting young gamers who used to be big fans of Nintendo’s handheld devices. Toymakers LeapFrog Enterprises (LF) of Emeryville, Calif., and Hong Kong-based VTech (0303:HK) have enjoyed success with tablets for children. Samsung Electronics (005930:KS) announced last month it will start selling a kid version of its popular Galaxy tablet loaded with games and other apps for children. One feature that might go over especially well with parents concerned about their kids spending too much time playing games: a tool allowing parents to lock the device after a designated amount of time.
That leaves Nintendo squeezed at one end by traditional rivals Microsoft and Sony and at the other end by tablet makers—and there may not be enough room in the middle for the Japanese company. “Nintendo always had a soft spot for young people—they sort of did the 12-and-under pretty well, and the other guys did the 12-and-over,” entrepreneur and gaming industry pioneer Nolan Bushnell told the BBC last week. “And now I think the other [consoles] are good enough on those things, and the rush to upgrade from the 12-and-under is not nearly as important.”
Bushnell knows what can happen to a gaming pioneer that doesn’t respond to changes in the market. He was the co-founder of Atari, another company that once dominated the game business only to fall into obscurity. Nintendo, he told the BBC, now faces a “path to irrelevance.”