Nintendo Brings the Games to the People

The Wii has a user-friendly controller and games, costs less, saves energy, and fans say it will outsell higher-tech Sony PS3 consoles

In 2003 about two dozen video game designers and engineers gathered in a room at Nintendo's (NTDOY) Kyoto headquarters to divine the future of the video game console. The company was three years away from launching a new machine, but hadn't decided on any of its core technologies yet. Naturally, the talk was heavy on chips, graphics, and software. Then someone mentioned moms.

Though kids had long been the main audience for Nintendo's consoles and games such as Super Mario Bros. and The Legend of Zelda, discussion quickly turned to what the company could do to woo mothers. After all, this critical constituency signs off on major purchases by its kids, and the idea of extending a console's franchise beyond hardcore gamers to novices had an obvious business appeal.

"When that happened, we talked about basic concepts and goals, not about the technical specifications of the console," recalls Shigeru Miyamoto, who heads Nintendo's entertainment analysis and development unit and is the mastermind behind some of its best selling games. Among the items up for consideration were affordability, low energy use, a wireless controller free of unsightly cords in the living room, and simplicity of use that even Mom or a younger sibling could jump in once in a while.

High-Performance Option

Hundreds of miles away, at Sony's (SNE) Tokyo offices, games chief Ken Kutaragi was taking a starkly different approach to designing the company's next-generation gaming platform.

Convinced that consumers wanted a technologically superior console, Kutaragi envisioned an entertainment system that would feature a high-definition DVD player and an ultra-fast processing chip for multitasking over a high-speed Internet link. "By then, plans for the chips and DVD player were already in the works," says Shinichi Okamoto, who was chief technology officer of Sony's games unit until late 2003.

The battle of the gaming consoles will commence in November, when Nintendo launches the Wii and Sony its PlayStation 3. The contest will pit two competing ideas about the future of the $30 billion video game market against each other. But industry execs and analysts are already calling a winner: Nintendo's Wii (pronounced Wee).

On a Fast Track to Victory

Analysts at NikkoCitigroup are forecasting that sales of the Wii could top 6 million by the end of the current fiscal year (March, 2007) vs. 5.5 million for Sony's PlayStation 3. And while the Tokyo brokerage thinks it's unlikely the Wii can catch Microsoft's (MSFT) Xbox 360, which got a 12-month head start, Nintendo may yet widen its lead over Sony. If so, this would be a painful setback for Sony, whose PlayStation 2 was a mega-hit when it debuted in 2000 and grabbed 70% of the game console market at one point.

Nintendo has been on a tear. Its stock has nearly doubled in the past year, to more than $200. On Oct. 3, the company raised its full-year earnings forecast, saying it expects net profit of $843 million, up 1.6% from last year. A favorable exchange rate has helped. But its DS portable consoles and Brain Age games also have been a huge hit. (On Oct. 27, Nintendo said operating profit tripled in the April-September quarter to $565 million, from $165 million in the previous year.)

Nintendo's strong game software lineup—where the serious money is made—backing the Wii could mean another earnings windfall. "This is a software story," says Macquarie Securities analyst David Gibson. "They're making 35% to 40% operating margins on software." Gibson thinks the average Wii owner will buy more than three games a year—and the bulk of the games will be made in-house by Nintendo.

Blame It on the Delay

To create the Wii, Nintendo had to buck the industry's conventional wisdom. Every new generation of gaming consoles has brought faster chips and more realistic graphics. That has come at a price. Skyrocketing R&D costs have made profits from consoles harder to come by. Microsoft's Xbox hasn't made a dime since the company entered the business in 2001.

Sony, meanwhile, said on Oct. 19 that delays in the launch of the PS3 would translate into a $1.68 billion loss for its games unit this fiscal year, and analysts expect the red ink to keep flowing for at least another year. The company is struggling with a number of financial pressures. Sony has had to issue a global recall of batteries used in laptops, which could cost the company hundreds of millions of dollars (see, 10/2/06, "Sony's Battery Exchange: A Huge Price Tag"). And on Oct. 31, the company revealed that the U.S. Justice department is investigating it as part of an industry-wide inquiry into the sales of memory chips.

In contrast to Sony's unprofitable debut with the PS3, Nintendo execs say the Wii will be profitable from day one. That's because CEO Satoru Iwata imposed strict budget caps, all with the goal of creating an affordable gaming machine. That may seem like common sense. Yet console makers traditionally have spent lavishly on hardware and offset the cost by selling their own games or licensing rights to independent game makers.

The Greening of Gaming?

It took a software guy to question the math. The 46-year-old Iwata took the helm at Nintendo in 2002, only two years after joining the company from game creator HAL Laboratories. Iwata thought the market needed a low-budget option. He ordered engineers to come up with a model that wouldn't jack up a household's electricity bill. On top of that, he laid another tough condition: The new console must be able to play every Nintendo game made over the past two decades.

So instead of loading up on the latest hardware and technology, Nintendo's engineers married energy-saving chips with a standard optical disc player. The result: At $250, the Wii will cost half what Sony will charge for its PS3, and will be cheaper than the standard Xbox, which retails for about $400. (Nintendo says later versions of the Wii will come with a DVD player.)

But Iwata challenged his engineers to do more than control costs. He wanted the company's new machine to appeal to as wide an audience as possible. To accomplish that, the designers at Nintendo would have to shatter video games' rep as a refuge for loners and make games easier to play. One way to meet those goals was to attempt a radical makeover for the game controller.

Don't Touch That Dial

Cell phones, car navigation remotes, and touch panels were among the prototypes that got scrapped. "We were after something that would feel natural playing with and didn't look complex," says Ken'ichiro Ashida, who led the redesign effort.

The winning idea resembled a TV remote but with far fewer buttons. Hardly your typical channel-changer, Nintendo's wand-shaped controller relies on wireless tech, built-in motion sensors and a gyrometer to translate action directly onto a TV screen.

It can be swung like a bat, yanked like a fishing rod, or pointed at the screen like a gun, and has a separate "nunchuk" with the same tech and a manual stick. "With the Wii remote, the learning curve for most games is 15 minutes or less," says Michael Pachter, an analyst at Wedbush Morgan Securities in Los Angeles. "I think that will eliminate the intimidation factor and will attract a broader audience."

Development of the Wii took place behind an absolute shroud of secrecy. When Sega finally got a sneak preview in early 2005, it immediately offered Sonic the Hedgehog and Super Monkey Ball for the Wii's launch, says Sega of America Chief Operating Officer Simon Jeffrey. France's Ubisoft and a half-dozen other studios excitedly signed on, too. All were required to take extreme measures to prevent leaks.

Timing Is Everything

Says Xavier Poix, head of Ubisoft's Paris and Montpellier studios, "In our Paris studio, Ubisoft built new walls." None of the developers seemed to mind that the Wii was no supercomputer. In fact, that made it cheaper to program games for the console. "It's not unusual for games to have $15 to $20 million development budgets," says Sega's Jeffrey. The Wii's games cost less than half that.

The air of mystery that enveloped the project had its drawbacks. It took months after a public unveiling last October for analysts to stop writing off the Wii controller as an unsophisticated toy, a piece of inferior hardware that wouldn't be competitive at all with Xbox 360 or PS3. These days, the reviews are mostly favorable.

In May, game critics at the annual Electronics Entertainment Expo in Los Angeles gave the Wii top honors. Even so, it's unlikely the Wii will lure loyal PlayStation and Xbox fans. Those hard-core gamers will prefer Microsoft's Xbox Live online service, or Sony's dazzling graphics and stereo sound. But for the industry, Nintendo's machine could be a real game changer.

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