Nintendo Cuts Forecast as Smartphone Games Hurt Console Demand

Nintendo Co., the world’s largest maker of video-game machines, cut full-year profit and sales forecasts as free titles on smartphones and tablets dissuade consumers from buying separate gaming devices.

Annual sales of Nintendo’s flagship 3DS handheld player, introduced last year, will be 17.5 million units, 5.4 percent lower than previously estimated, the company said in a statement today. Nintendo also lowered its forecast for 3DS software sales 4.1 percent and said it will sell its new Wii U model at a loss.

Chief Executive Officer Satoru Iwata, 52, reduced the full- year net income forecast 70 percent as demand slumped and a stronger yen eroded earnings from overseas sales of titles such as “Super Mario Bros. U.” The Kyoto-based company, Sony Corp. (6758) and Microsoft Corp. (MSFT), the world’s three-biggest video-game console makers, face increasing competition from devices including Apple Inc. (AAPL)’s iPhone and iPad, which are capable of downloading and playing games, some for free.

“Consumers are content to use their smartphones and tablet computers to play games,” said Makoto Kikuchi, chief executive officer at Myojo Asset Management Japan Co., a Tokyo-based hedge fund advisory firm. “The 3DS is really failing.”

Net income may be 6 billion yen ($75 million) for the year ending March 31, compared with Nintendo’s previous estimate of a 20 billion yen profit, the Kyoto, Japan-based company said in a statement today. The outlook compares with the 10.6 billion-yen average of 21 analyst estimates compiled by Bloomberg.

FarmVille, CityVille

Nintendo fell 1.7 percent to 10,290 yen in Osaka before the announcement, extending its decline this year to 2.9 percent.

U.S. sales of packaged video games have fallen for almost two years as buying shifts to digital downloads, and games such as “FarmVille” and “CityVille” are played on websites including Facebook Inc. (FB)’s social-networking service.

Retail sales of video-game hardware, software and accessories in the U.S., the world’s biggest video-game market, fell 24 percent last month from a year earlier, led by a 39 percent plunge in game-console sales, NPD Group Inc. said Oct. 11. That followed a 20 percent drop in August, according to the Port Washington, New York-based researcher.

“The chances of consumers buying our software would be less and less if what we make isn’t so much different” from games offered for smartphones and tablet computers, Iwata told reporters today. “We have to make games that smartphones or tablets can’t do.”

IPad Mini

Apple, the world’s biggest maker of tablet computers, has sold more than 100 million iPads since co-founder Steve Jobs introduced the device in January 2010. The Cupertino, California-based company unveiled a smaller, cheaper iPad mini Oct. 23 to keep customers from buying low-cost tablets from Microsoft and Google Inc. (GOOG)

Apple’s AppStore has more than 400,000 applications, which have been downloaded more than 35 billion times. While some versions of games such as “Angry Birds” are free, customers will have to pay for other titles, or upgrades.

In comparison, titles for Nintendo’s Wii U gaming device start at about 5,000 yen.

The company cut its full-year software sales target for the 3DS to 70 million units from 73 million, the statement said.

Nintendo, which got 72 percent of its revenue from the Americas and Europe last fiscal year, booked a 23 billion-yen exchange-rate loss in this fiscal year’s first half after the Japanese currency was stronger against the dollar and euro than Nintendo projected.

First-Half Loss

The company posted a 43.2 billion-yen loss last fiscal year, its first since going public in 1962, as it cut the price of the 3DS amid slow demand.

Nintendo’s net loss for the fiscal first half ended September 30 narrowed to 28 billion yen from a 70.3 billion-yen loss a year earlier, the company said today. That compared with the 22.3 billion-yen loss average of four analyst estimates compiled by Bloomberg.

First-half sales fell 6.8 percent to 201 billion yen from 215.7 billion yen a year earlier, Nintendo said today. The company had an operating loss of 29.2 billion yen, compared with a year-earlier loss of 57.3 billion yen and the 22.4 billion-yen loss average of analyst estimates.

Iwata is counting on the Wii U home gaming machine, to be released in the U.S. next month, to revive sales. The machine, set to go on sale in Japan in December, features a 6.2-inch touch-screen controller that lets users wirelessly connect to the console and shift the display between a TV and the device.

“The company needs to introduce something interesting, so that consumers would use both the iPhone and other game devices,” said Koji Toda, chief fund manager at Tokyo-based Resona Bank Ltd., which oversees about $188 billion. “If the Wii U turns out to be more fun than people expect, it will make everyone want to buy one.”

Wii U

Nintendo aims to sell 5.5 million Wii U consoles this fiscal year, it said in a statement today. The device will cost from 26,250 yen in Japan and $300 in the U.S., the company said last month. The machine will sell at a loss, Senior Managing Director Yoshihiro Mori said today at a press conference in Osaka.

“Manufacturing costs are expensive, and we priced the machine at a level customers would accept,” Iwata said at the press conference. “It’s important for us to develop a healthy business next fiscal year by combining sales of hardware and software.”

Last month, Sony introduced a smaller, lighter version of the PlayStation 3, priced from 24,980 yen in Japan and $249 in the U.S. Microsoft’s Xbox is priced from 19,800 yen in Japan and $199.99 in U.S. stores.

“The Wii U could see a strong start,” Haruka Mori, a Tokyo-based analyst at Barclays Plc, said in a report this month. Nintendo’s profits next fiscal year “hinge on the sustainability of the Wii U’s momentum after the new year.”

To contact the reporter on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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