Nintendo (7974:JP) yesterday unveiled its latest plan to get back into the game-console market. In Tokyo, as investors weighed in on the Japanese company’s attempt to keep up with Sony (SNE) and Microsoft (MSFT), the response wasn’t the enthusiastic one Nintendo President Satoru Iwata wanted. Nintendo shares dropped 2.6 percent in early trading, the most in more than a month. They closed the day down 1.7 percent, compared with a half-percent rise for the benchmark Nikkei index.
Why the underwhelming reaction? Nintendo’s announcement at the Electronic Entertainment Expo in Los Angeles didn’t really tackle the basic problem the gaming-console pioneer faces: Nintendo’s customers are giving up on the Wii. Unlike the PlayStation and the Xbox, Nintendo’s Wii has long catered to younger users who like the company’s cartoon characters, most notably Mario. As the cost of smartphones and tablets continues to fall, however, parents are less willing to fork over several hundred dollars for a Nintendo Wii when they can instead let Junior play a few online games, often for free, on a cheap Android device.
Nintendo executives “seem to think that the issue is the lack of games,” Amir Anvarzadeh, a BGC Partners analyst in Singapore, told Bloomberg Television today. However, “the real issue here is that Nintendo is focusing on the casual gamers, [while] the gamers are migrating to smartphones and tablet platforms where games are free.”
Yesterday’s announcement doesn’t address that existential issue. Instead, Nintendo said it is doubling down on the Wii U, the device that has been a flop since its launch in 2012. The company will introduce “amibo,” collectable toys that users will be able to integrate into the electronic world of Nintendo games by placing them on their Wii U GamePad, and users will be able to design their own levels for the original Super Mario Bros.
Most significantly, gamers will also soon be able to play six new games for the Wii U, including Splatoon, a multiplayer action game. Give Nintendo credit: Splatoon is certainly interesting. “Players of each team spray ink on the ground around them while blotting out the opposing team members in turf war competitions,” the company says in a statement. “Each character can turn into a squid-like character and swim through his or her own team’s ink—gliding up and down walls and under floors—with ease.”
Nintendo is hoping that sort of thing can make people give the Wii U another chance. Nintendo last month said it lost 33.4 billion yen ($326.5 million) in the first quarter of 2014, higher than the expected 27.9 billion yen, and announced it had sold only 2.72 million units of its Wii U console, much less than the original forecast of 9 million and even missing the revised target of 2.8 million it announced in January.
Given the dismal performance, “this company is throwing good money after bad” by focusing on the Wii U, says Atul Goyal, an analyst in Singapore with Jefferies (JEF) who argues that Nintendo should swallow its pride and license its games for use on Apple (AAPL) and Android devices. “Go to where the casual gamers are,” he says. “You need to take your software and your games onto those platforms.”
Short of that, adding some new games—even those with ink-spewing squids—won’t be enough. “The disruption has come from smart devices, and Nintendo has been caught out,” said Anvarzadeh. “It’s never a good idea to count out Nintendo at any stage, but this kind of disruption has never been seen before. I think Nintendo is in a lot of trouble.”