Aug. 11 (Bloomberg) -- In “Super Mario 3DLand,” Nintendo Co. will make its iconic Italian plumber battle turtle-like Koopa Troopas on its 3-D player. The company instead should develop titles for Apple Inc.’s iPhone, investors say.
The rift highlights the dilemma President Satoru Iwata faces as consumers shun Nintendo devices to play games on iPhones, iPads and Facebook Inc.’s website. The flop of the 3DS debut prompted the company to cut prices 40 percent in Japan and 32 percent in the U.S., the first time the games developer has resorted to such a move within six months of a product’s debut.
Iwata, who’s said Nintendo will only make titles for its own products as long as he’s in charge, should scrap that strategy to avoid further alienating investors who’ve driven the stock to six-year lows, fund manager Masamitsu Ohki said. One option may be acquisitions as the past successes of the Wii and DS helped Nintendo, the world’s largest video-game maker, build a 1.05 trillion yen ($13.7 billion) war chest in cash, equivalents and short-term investments.
“Smartphones are the new battlefield for the gaming industry,” said Ohki, a fund manager at Tokyo-based Stats Investment Management Co. “Nintendo should try to either buy its way into this platform or develop something totally new.”
He declined to identify his holdings or to name any companies that Kyoto, Japan-based Nintendo should consider as acquisition targets. Yasuhiro Minagawa, a spokesman at Nintendo, declined to comment beyond statements made previously by Iwata.
Ohki isn’t alone in saying Iwata should reconsider his strategy. On July 6, Nintendo shares jumped the most in almost four months after Pokemon Co., a former unit, said it’s developing a game for the iPhone and handsets running on Mountain View, California-based Google Inc.’s Android software. JPMorgan Chase & Co. sent a note to clients saying the move indicated Nintendo may begin making titles for products outside its proprietary hardware.
Hours later, Nintendo denied any change in strategy, and the shares surrendered gains.
“They just don’t get it,” MF Global FXA Securities Ltd. said in a sales note that day, referring to Nintendo. “Sell the stock, because a management once feted for creative out-of-box thinking have just shown how behind the times they are.”
‘Angry Birds’ Challenge
Lower-than-expected demand for the 3DS, which Iwata blamed on the lack of hit titles, prompted Nintendo on July 28 to slash its profit forecast 82 percent, driving down the shares by as much as 21 percent the following day. They fell 0.2 percent to 11,430 yen, at the 3:10 p.m. close in Osaka trading, the lowest level since August 2005.
By comparison, profits at Cupertino, California-based Apple are climbing to records, helped by downloads of games such as Rovio Mobile Oy’s “Angry Birds” on the more than 200 million iPhones, iPads and iPods sold to date. Research firm Gartner Inc. said in January it expects global sales of mobile applications to almost triple to $15.1 billion this year.
Revenue at San Francisco-based Zynga Inc., the biggest developer of Facebook games including “FarmVille” and “CityVille,” surged fivefold to $597.5 million last year.
Some traditional games companies have taken notice. Sony Corp., maker of the PlayStation video-game console, began offering the PoxNora strategy game on Facebook last year, while Microsoft Corp. makes its Windows Phone software compatible with the company’s Xbox Live gaming service.
Mario to the Rescue?
Electronic Arts Inc., the second-largest U.S. video-game publisher, agreed last month to buy “Plants vs. Zombies” developer PopCap Games for as much as $1.3 billion to extend a drive into titles played on sites including Facebook. That’s more than triple the $400 million Japan’s DeNA Co. agreed to pay last year to buy iPhone-games developer Ngmoco Inc.
Nintendo’s last acquisition was in 2007, when it bought developer Monolith Software Inc., which supplies titles including the “Xenoblade” role playing game, for an undisclosed sum, according to data compiled by Bloomberg. The companies share a similar direction when developing software, Iwata said at that time.
For now, Nintendo is betting on price cuts -- the 3DS sells for 15,000 yen from 25,000 yen starting today -- and new games to revive earnings. The company plans to introduce flagship titles such as “Super Mario 3DLand” in November and “Mario Kart” in December for the 3DS. In the U.S., the player will cost $169.99, down from $249.99 from tomorrow.
“I decided to buy because of the markdown,” said Mitsuhiro Taguchi, a 48-year-old office worker who was among the score of people lined up at Yodobashi Camera Co.’s outlet, the biggest electronics retailer in Tokyo’s Akihabara district, before the doors opened at 9:25 a.m. “I wanted it for a while, but it was a little expensive.”
Yusuke Tsunoda, an analyst at Tokai Tokyo Securities Co., said Nintendo needs to develop software that better utilizes the 3-D capability of the 3DS. For investors, the focus will center on the efficacy of the price cuts, he said.
Cheaper prices may not be enough to lure some consumers.
“There are no games I want to play on the 3DS,” said Chihaya Kaizaki, a 19-year-old college student who says he prefers to play dating games on Sony’s PlayStation Portable. “The selection of 3-D titles available is pretty poor.”
Sales of the portable 3DS machine lagged behind company expectations because of the lack of “hit software titles,” Iwata told analysts and investors July 29.
More worrying to some investors are concerns that Nintendo’s next-generation video-game console, the Wii U, will fail to replicate the original Wii’s success, which helped drive the stock to an all-time high in 2007.
$10 Billion in Cash
The new Wii, which goes on sale next fiscal year, will feature a front-facing camera, a 6.2-inch touch screen, shoulder firing pads, an expansion slot and game controls on a flat pad.
Following the Wii U’s unveiling, analysts at UBS AG and Bank of America Corp.’s Merrill Lynch wrote in notes to clients that they weren’t impressed by the next-generation console.
Iwata said last month the 3DS price cut is driving down price expectations for the Wii U, which may affect Nintendo’s plan to release the console during the fiscal year that begins in April. The company plans to announce the specific release date and price of the product next year, he said.
Given the concerns over the outlook of Nintendo’s handheld and home-console business, which account for most of the company’s profit and sales, Nintendo should make better use of its more than $10 billion cash pile, investor Tetsuro Ii said.
“Nintendo should aggressively make acquisitions or increase returns to its shareholders,” said Ii, president of Tokyo-based Commons Asset Management Inc., which held 2,200 Nintendo shares as of February, according to the company’s website. “It’s management’s task to consider how to make use of the cash.”
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