The Rough Play in Video Games

Nintendo beefs up its arsenal to fend off Sony and Microsoft

With the video-game business in the midst of a bruising fight, Nintendo Co. is beefing up its arsenal. Its latest weapon is Metal Gear Solid: The Twin Snakes, an action thriller featuring sword-wielding ninjas, antiterrorist commandos, and body parts flying in all directions. That's quite a departure for a company better known for characters such as the mild-mannered plumber Mario and Pokémon's lovable "pocket monsters." But without some blood and gore, Nintendo risks being picked off by archrivals Sony and Microsoft.

The company could use a secret weapon. Sure, the once-undisputed King of Gameland remains the world's largest game-software publisher, and it dominates the handheld game market with its hugely successful Game Boy Advance. But Nintendo has sold just 9.6 million GameCube video-game consoles since its launch in September, 2001, far short of its 13.8 million target. Market researcher NPDFunworld estimates that GameCube and Microsoft's Xbox each has a 15% share of the global market, while Sony's PlayStation 2 (PS2) rules with 70%.

GameCube's disappointing debut is shooting holes in Nintendo's bottom line. For the fiscal year, ended on Mar. 31, Nintendo's net profit is expected to fall 38%, to $574 million, on a 10% decline in sales, to $4.3 billion. Final results were slated to be released on May 22. Nintendo President Satoru Iwata concedes that the year he has been in the job has been a challenge. "But then, that's what I enjoy," says Iwata, 43, a former game developer who joined Nintendo in 2000. "We need to feel a sense of crisis to bring out the best in us."

That sense of crisis has led Iwata to rethink Nintendo's business plan. Since taking over as president, he has moved to sharpen Nintendo's lineup of titles, moving into the more rough-and-tumble content the company once eschewed. The new version of Metal Gear Solid, developed exclusively for Nintendo by Japanese gamemaker Konami Corp. and expected to be released by yearend, is a first step. To maintain the momentum, Iwata has lined up a Star Wars epic from Lucas Arts Entertainment Co., a futuristic F-Zero car-racing game from Sega Corp., and dozens of other sports and action titles that will push Nintendo's software lineup from the current 180 to 320 by yearend.

But don't expect Nintendo to add too much blood and guts. Iwata says the company will never depict Mario as a criminal, along the lines of Grand Theft Auto: Vice City, a top-selling PS2 title that follows car-swiping crooks. "I'm not saying others shouldn't make such games, but Nintendo isn't going to," he says.

Yet if Nintendo hopes to attract more of the boys and young men who are flocking to PS2 and Xbox, Iwata needs to come up with a more thrilling lineup of sports and adventure games, says HSBC Securities Japan Ltd. analyst Ben Wedmore. "Nintendo has to give the market more of what it wants," Wedmore says. "Today's 11-year-olds aren't going to buy Mario."

Nintendo seems to think those 11-year-olds will buy multiplayer games. At this year's Electronic Entertainment Expo (E3) video-game conference in Los Angeles in mid-May, Nintendo introduced 10 titles controlled by Game Boys hooked up to GameCubes. While the players battle it out on the TV screen, their Game Boys give them secret strategy information that opponents can't see. To boost console sales, Nintendo will now toss in a free Game Boy adapter with every GameCube. That should be good for software sales, too, Iwata says, since 1,200 titles are now available for the Game Boy.

At least Game Boy doesn't need the same boost as GameCube. The handheld player is the brightest star in Nintendo's firmament. The company has sold more than 120 million Game Boy and Game Boy Advance units and effectively owns the portable game machine market. Software for the players is jumping off the shelves, too: A new Pokémon series for the Game Boy has sold 3 million units in the U.S. and Japan since its release in March.

But even the Game Boy could end up being cannon fodder for Sony. On May 13, Sony surprised the industry with an announcement that it plans to launch the PSP, a handheld capable of playing PS2 games, by late 2004. "The PSP has the potential to eat into Nintendo's monopoly" on handhelds, says Jay Defibaugh of Credit Suisse First Boston in Tokyo. Investors apparently agree. Nintendo's share price has fallen by 15% since the Sony announcement.

Sony isn't the only threat. Although the GameCube is neck-and-neck with the Xbox globally, the Microsoft machine has an edge in the key U.S. market and offers more processing power than the Sony or Nintendo consoles. Another concern is that Nintendo continues to stay clear of online gaming, while Sony and Microsoft are taking the plunge. "Consumers aren't ready to pay for such services, so how do you make money?" asks Iwata. Microsoft thinks it can make plenty of money with Internet games, and so far, it has attracted 500,000 subscribers who pay $50 a year for its online-gaming service, Xbox Live. "I don't think Nintendo is here for the digital-entertainment revolution," says Robert J. Bach, Microsoft's Xbox chief. "They are a toy company."

Iwata firmly believes Nintendo has a future in digital entertainment, and he aims to prove it. He's investing some of Nintendo's $6 billion cash hoard to develop successors to both the GameCube and Game Boy. And Nintendo's army of creators is hard at work on next-generation stars to replace the company's aging lineup of Mario and Pokémon. With his experience on the creative side, Iwata may just have the skills to do that. But he'll have to pack plenty of firepower if he hopes to fight his way back to the top of the video-game business.

By Irene M. Kunii in Kyoto, with Jay Greene in Seattle

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