Nintendo Needs a Hit in a Hurry

The gaming company faces big losses amid a two-year sales slump

Super Mario is proving no match for Angry Birds. Nintendo executives have watched with alarm as consumers spend a few dollars to buy apps like Birds for their smartphones or tablets—instead of spending hundreds of dollars to purchase the company’s 3DS portable handhelds, Wii consoles, and games like Mario Kart 7. On Jan. 26, Nintendo unnerved investors by boosting its projected net loss for the fiscal year ending in March from $260 million to $838 million, making this its worst year in the three decades since it began making games.

Nintendo President Satoru Iwata says the gloom is temporary, despite two years of declining sales for the Kyoto-based company. The Wii U, expected to go on sale in time for the 2012 holidays, will dispel concerns that game-focused consoles are doomed, he says. The centerpiece of the new system is a 6.2-inch touchscreen controller, roughly the size of a tablet computer, that lets users wirelessly connect to the console and shift content between a big-screen television and the device’s smaller screen. A player can use the controller to switch camera angles in a game, change the lighting, and flick the picture from the TV back to the touchscreen, should someone else want to watch the tube. Along with a slew of new game titles for the 3DS, the Wii U should “sweep away some reports that game-dedicated devices are coming to an end,” Iwata said on a conference call with investors.

So far, the numbers have shown otherwise. U.S. sales of video-game software and hardware fell 5 percent last year, according to market researcher NPD Group. Nintendo, saddled with a six-year-old console that does not offer games with high-definition graphics, bore the brunt of the decline. Sales of Sony’s PlayStation 3 and of Microsoft’s Xbox 360 rose by a combined 5 percent in 2011. The splintering of the market has hurt Nintendo’s ability to attract game developers, Iwata concedes.

To blunt competition from mobile devices, as well as games played on Facebook, Sony and Microsoft are marketing their machines as multipurpose devices that can download movies and music as well as games. With sales momentum for their consoles, they’re attracting more game makers. “It’s clear the Wii audience is slowly shifting to HD consoles or to social games, while it’s equally clear that mobile game sales are cannibalizing handheld game sales,” says Michael Pachter, an analyst at Wedbush Securities.

Iwata says the Wii U will be equipped with technology, such as a wireless credit-card reader, that will facilitate online shopping as well as downloads of new game levels. Still, Nintendo may find it hard to reprise the success of the Wii. With touchscreens on everything from computers to e-book readers, the Wii U controller may not generate the same buzz as the breakthrough motion-controller, Pachter says. Nintendo also faces a challenge to its dominance in handheld game consoles with the Feb. 22 U.S. launch of the PlayStation Vita. The new Sony console features a 5-inch OLED touchscreen, powerful graphics, built-in GPS, Wi-Fi, and 3G wireless.

The Japanese company hasn’t been helped by the strong yen. The U.S. and Europe account for almost 74 percent of sales, making it difficult to turn a profit without raising prices. The company compounded its currency woes by botching last year’s launch of the 3DS. Production problems delayed the release of sequels to popular games that might have tempted more shoppers to try their hands at playing games in three dimensions. Nintendo in August slashed 3DS prices by as much as 40 percent to spur sales. Iwata calls it “a bitter lesson.” The company will “complete the development of the entire system and prepare sufficient software so that the Wii U will be at its best at the time of the launch,” Iwata said last month.

It’s hard to say whether Nintendo can regain its footing, says Melissa Otto, director of active equity at TIAA-CREF, the manager of retirement accounts for employees of nonprofit institutions. The company’s stock has fallen so far—shares reached a 52-week low on Jan. 27—that it’s approaching the company’s cash value, she says. “They have a fantastic track record,” Otto says. “They have a wonderful brand. But the question is: Does the consumer care now?”


    The bottom line: Nintendo is bracing for its biggest loss in three decades, the result of a strong yen and competition from mobile games.

    Before it's here, it's on the Bloomberg Terminal.