Nintendo New Wii to Face Games Landscape Reshaped by Apple

Nintendo Co. (7974) trounced Sony Corp. (6758) and Microsoft Corp. (MSFT) five years ago by developing a motion-sensing console simple enough for kids and grandmothers to play. The Wii’s successor may face a new rival: Apple Inc. (AAPL)

The world’s biggest maker of video game consoles will begin selling the next version of its Wii in 2012 and show a playable model in June at the E3 Expo in Los Angeles, Nintendo said in a statement yesterday, without elaborating. The stock fell to the lowest level in more than four years in Osaka today after the Kyoto-based company reported its smallest annual profit in seven years and forecast earnings that missed analysts’ estimates.

President Satoru Iwata is counting on the next Wii and its new 3DS, which allows users to see 3-D images without the need for special glasses, to revive earnings and fend off competition from new motion-sensing controllers released by Sony and Microsoft. Nintendo will also contend with $0.99 games on the iPhone and free titles offered on social networking sites, such as Zynga Inc.’s CityVille simulation game for Facebook users.

“Nintendo’s current situation is very different from when the company introduced its first DS players and Wii,” said Mitsushige Akino, Tokyo-based chief fund manager at Ichiyoshi Investment Management Co. “People these days choose mobile-phone games over the DS and Wii because they’re cheaper, easier to access and play, without having to buy expensive game players.”

Photographer: Jonathan Alcorn/Bloomberg

Satoru Iwata, president of Nintendo Co., introduces the new 3DS game at the Electronic Entertainment Expo (E3) in Los Angeles, California, U.S., on Tuesday, June 15, 2010. Close

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Satoru Iwata, president of Nintendo Co., introduces the new 3DS game at the Electronic Entertainment Expo (E3) in Los Angeles, California, U.S., on Tuesday, June 15, 2010.

HD Wii

Nintendo shares fell as much as 4.9 percent to 19,330 yen, the lowest intraday level since July 3, 2006. The stock has fallen 18 percent this year, triple the benchmark Nikkei 225 Stock Average’s drop, amid concern earnings are deteriorating in the face of mounting competition. Nintendo has tumbled more than 70 percent since peaking at 71,900 yen on Oct. 31, 2007.

While Iwata declined to provide details on the next Wii yesterday, he ruled out the use of 3-D as the next Wii’s main feature because consumers haven’t widely embraced 3-D TVs. The new system may feature a controller with a touch-screen display, support high-definition pictures and sell for $350 to $400 each, trade publication IGN reported this month, citing unidentified people familiar with the project.

“Sony and Microsoft are unlikely to be able to release their next generation consoles in time” for the new Wii’s debut, said Jay Defibaugh, an analyst at MF Global FXA Securities in Tokyo. “By waiting until E3 to demonstrate the new machine, Nintendo effectively prevents rivals from copying its ideas.”

Photographer: Noah Berger/Bloomberg

Satoru Iwata, president of Nintendo Co., discusses the Nintendo 3DS handheld video game-player during a keynote speech at a game developers conference in San Francisco, California, U.S., on Wednesday, March 2, 2011. Close

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Photographer: Noah Berger/Bloomberg

Satoru Iwata, president of Nintendo Co., discusses the Nintendo 3DS handheld video game-player during a keynote speech at a game developers conference in San Francisco, California, U.S., on Wednesday, March 2, 2011.

Apple Threat

Apple, the biggest technology company by market value, is expanding into games, introducing a Game Center feature last year to iPhone and iPad users to play multiplayer games. The Cupertino, California-based company has sold more than 15 million iPads in the past year and more than 90 million iPhones in its four-year lifespan, according to Apple this month.

Jill Tan, an Apple spokeswoman in Hong Kong, didn’t immediately respond to e-mail and phone message seeking comment.

“The booming gaming activities on Apple devices is more of a threat to handheld consoles,” said Jia Wu, an analyst at researcher Strategy Analytics. “Casual gamers may be reluctant to spend a few hundred dollars for a new console and another $50 for a game as they can get 99 cents games on Apple devices.”

Pricing Pressure

Games on social networking websites are also gaining in popularity. Zynga’s top five most popular applications on Facebook attracted more than 200 million monthly active users, according to researcher AppData.com. The company’s free CityVille game ranks as the most popular Facebook application with 88.3 million users logging in at least once a month, according to the researcher.

“These games are a source of downward price pressure,” Iwata said at a briefing in Tokyo today. “Our job is to convince people that there is value in paying money for games. If we can clear that hurdle there is more growth ahead.”

Five years ago, Nintendo shunned the lifelike graphics, faster processors and high-capacity memory pursued by the competition. Instead, it opted to develop intuitive controls that allowed players to swing the controller as a sword or golf club with games such as “Wii Sports” and “The Legend of Zelda.”

At its debut, the Wii cost less than a half of the price of PlayStation 3 and was about $50 cheaper than the most basic Xbox 360 because it doesn’t have a hard disk drive and cannot display high-definition images. The PS3 has a Blu-ray high-definition DVD player and the Cell processor that is 40 times faster than the chip used in the PlayStation 2.

Mounting Competition

Nintendo’s strategy paid off. Nintendo said yesterday it sold more than 86 million Wii consoles since its 2006 debut. By comparison, Sony estimates it sold its 50 millionth PlayStation 3 late last month, while Barclays Plc estimates Microsoft had sold about 52 million Xbox 360 consoles as of the end of March.

Still, the competition is catching up. In November, Microsoft introduced its Kinect motion-sensing controller, whose sales reached 10 million units within four months. Tokyo-based Sony, whose PlayStation player dominated the previous generation of game consoles, began selling its own motion-sensing Move device, a black controller with a colored ball in front, for the PlayStation 3 in the U.S. in September.

With handheld game players, a market Nintendo has dominated since the Gameboy in 1989, the company is seeking to defend its lead against Sony’s latest PlayStation Portable.

Profit Falls

The $250 3DS, which went on sale in the U.S., Europe and Japan in the past two months, also faces competition from the iPhone and iPad, as well as smartphones and tablets that run on Google Inc.’s Android software, which have attracted gamers with third-party applications.

Sony, the world’s second-largest maker of portable game players, in January said it will offer the new model of the PSP by the year-end holiday season. The device, code-named NGP, will offer access to third-generation wireless networks and have front and rear touch pads, it said.

Nintendo yesterday reported profit tumbled 66 percent to 77.6 billion yen ($949 million) in the year ended March 31 as demand for the DS and Wii slumped. While the company forecast sales and profit will rise this fiscal year, the projections fell short of analysts’ expectations.

“Anticipation of the announcement of a strong concept for its next generation console at the E3 trade show in June will need to support the stock,” MF Global’s Defibaugh wrote in a report yesterday. “Nintendo needs to put forth a convincing plan for reigniting interest in its newly released 3DS handheld, which is off to a sluggish start.”

To contact the reporter on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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