Nintendo Bets on App Store Model Amid New Game Drought

At the Electronic Entertainment Expo in Los Angeles this month, Sony Corp. (6758) and Microsoft Corp. (MSFT) made headlines when they unveiled new generation consoles to reach stores by Christmas. Nintendo Co. (7974)’s news at the world’s biggest gaming show: its fifth software delay since October.

That’s a problem because games sell consoles, and Nintendo’s new $300-$350 Wii U hasn’t exactly been flying off shelves. Between its November introduction and the end of March, Nintendo sold 3.45 million Wii Us. That’s far below the company’s initial estimate of 5.5 million and about 40 percent behind the original Wii in the same time after its 2006 release, according to Citigroup Inc.

The slow sales can be blamed in part on smartphones and tablet computers, which many casual players now use instead of consoles. But it’s also due to a lack of must-play titles from the company that created blockbusters like Super Mario, Zelda and Donkey Kong. While Nintendo’s website lists 108 games as available for the Wii U in the U.S., there are 1,023 for the Wii. Through March, Nintendo had sold 13.4 million Wii U games, less than half the number for the Wii at the same point after its release, Citigroup says.

Photographer: Jonathan Alcorn/Bloomberg

Attendee Jeremy Parish tests out a new game at Nintendo Co. Ltd.'s Wii U Software Showcase during the E3 Electronic Entertainment Expo in Los Angeles, California. Close

Attendee Jeremy Parish tests out a new game at Nintendo Co. Ltd.'s Wii U Software... Read More

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Photographer: Jonathan Alcorn/Bloomberg

Attendee Jeremy Parish tests out a new game at Nintendo Co. Ltd.'s Wii U Software Showcase during the E3 Electronic Entertainment Expo in Los Angeles, California.

With just a few months until it’s no longer the newest console on the market, Nintendo is turning to a network of 1.8 million programmers, including part-time hobbyists, to try and revive its game pipeline. The company has formed an alliance with Unity Technologies, a San Francisco-based maker of software that lets game creators adapt titles to different machines.

Iwata’s Pledge

“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.

While Nintendo has more than tripled research and development spending over the past decade, that hasn’t spawned a new powerhouse title. Iwata has long pledged to maintain exclusivity for Nintendo consoles by never licensing flagship games to smartphones, but the Unity deal will likely make many phone-based games available for the Wii U.

“The change in stance creates the possibility of a blockbuster title,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Holdings Inc. in Tokyo. “Casual games played on mobile devices are gaining in importance, and game makers like Nintendo haven’t been able to offer something that can compete.”

Nintendo and its software makers haven’t had any titles that sold more than 10 million units annually since the year ended March 2011, according to Tokai Tokyo Financial Holdings Inc.

3DS Mistake

When Iwata announced the Wii U last year, he said strong software development would be critical to making the console a success and avoid the mistake it made with the 3DS handheld player in 2011. Within six months of that device’s release, Nintendo cut its price after lackluster sales due to a lack of titles.

In the first full financial year after the Wii U introduction, Citigroup expects Nintendo to sell 6 million of the consoles and 31.3 million games for it. That compares with 18.6 million Wii consoles and 120 million games for it in its first year, the bank said. Though almost all Wii titles run on the Wii U, few customers will buy the new console just to play games that work just fine on its predecessor.

“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 report this month.

Working with Unity will help widen options for customers of the Wii U, and the company has no plans to cut prices, said Yasuhiro Minagawa, a spokesman for Nintendo in Kyoto.

Handheld Demand

A predicted surge in titles for the Wii U and 3DS handheld player underpinned the company’s bullish profit forecast for this year. Net income will rise to 55 billion yen in the 12 months ending March from 7.1 billion yen last financial year and a loss of 43 billion yen a year earlier, it said in April.

The company, which hasn’t changed its forecast since then, holds its annual shareholder meeting at its Kyoto headquarters tomorrow.

Nintendo rose 3.4 percent to 10,980 yen in Osaka trading. The stock has gained 20 percent this year. That compares to a more than doubling of Sony shares and a 26 percent increase for Microsoft.

Luigi’s Mansion

Nintendo said “Donkey Kong Country Returns 3D” and “Luigi’s Mansion: Dark Moon” helped increase software sales for the 3D. “Wii Fit U” and “Wii Party U” will both be released by the end of the year instead of the summer, Nintendo said this month, the fifth U.S. software delay since October.

In addition to its own delays, Nintendo has struggled to get major studios to develop games for the Wii U amid lackluster sales. Electronic Arts Inc. (EA), which produces “Madden NFL,” shows just four games available for the Wii U on its website, compared to 78 for the Wii.

Ever since it released the Family Computer System, or Famicom, in 1983, Nintendo has limited access to its system. That has meant that most games produced by other companies have come from larger studios. Through Unity, programmers get software for games and animation and other tools to adapt titles that already run on mobile devices. Unity says the Wii U kit may be released this year. It also offers software for working with the Xbox and PlayStation.

Free Games

Michael Pachter, an analyst at Wedbush Securities Inc. in Los Angeles, doubts whether the Unity partnership will be enough to reinvigorate the Wii U. People who aren’t passionate about gaming won’t rush out to buy a console simply to play Angry Birds and other diversions available on their smartphones.

“I’m not sure it will make a ton of difference,” Pachter said. “If these moves merely increase the number of casual titles, I don’t see them driving console sales.”

Nintendo says it has been contacted by more than 1,000 developers since it unveiled plans to distribute Unity’s development kit and its own software to convert Web-based games to the Wii U. The company says it’s also considering free-to-play games like those available with smartphones and tablet computers.

The shift to mobile devices “is very tough on Nintendo,” which gets almost all its revenue from games, versus less than 20 percent for Sony and Microsoft, said Masamitsu Ohki, a fund manager at Stats Investment Management Co., a hedge fund in Tokyo. “Nintendo can’t fail, because it has nothing else to earn profits.”

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

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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