The 3DS gives Nintendo some time but it must act now.
- Given, its awful performance to date, Nintendo’s results surprised me but they do nothing to avert the issues that the company currently faces.
- Nintendo sold 1.95m Wii U units during Q4 which combined with reasonable sales of the 3DS allowed the company to make a profit but this is not going to last.
- I had expected much worse results given the system’s shortcomings (see here) but clearly I underestimated the loyalty of the fan base.
- Q4 is the big quarter for these systems and Nintendo itself only expects to ship 339,000 Wii U units this quarter.
- This number looks achievable given the lift in Q4 but it is worth noting that in the 6 months preceding last quarter the Wii U sold just 460,000 units.
- Hence Q4 is going to be bloody with a thumping $323m operating loss expected.
- For fiscal 2014, Iwata-san faces a real dilemma.
- Nintendo fans are much closer to being casual gamers and therefore could be easily satisfied by having Nintendo software on their smartphones and tablets.
- Hence software sales could easily skyrocket if Nintendo was to make its games available on iOS and Android.
- However, there would then be no reason to buy a 3DS meaning that sales of this unit would immediately collapse.
- With 11.6m units sold year to date and 5.96m in the last quarter, this is a product that has an installed base to which software can be sold.
- That software prices much higher than the $1 games on the app stores, meaning that Nintendo could suffer worse if it pulls the 3DS and puts its software on iOS and Android.
- The installed base is big enough for Nintendo to make reasonable revenues but it is nothing compared to the 1bn+ smartphones that are in the hands of potential customers.
- Hence, the company’s survival depends on what it decides to do now.
- For the Wii U the writing is on the wall.
- It is underpowered and overpriced and no developer in its right mind will prioritise developing software for it over the Xbox and Playstation.
- If Nintendo scraps this product now, cuts costs and focuses everything on the 3DS it should live to fight another day.
- However, even the 3DS’s days are numbered.
- In the same way that smartphones have destroyed the mid-range digital camera market, they will also destroy the handheld gaming market.
- Nintendo needs to act now to ensure its future as a software publisher as stubbornly sticking to hardware will ensure precious reserves are depleted that should have been spent on developing software.
- Radical moves to avert disaster are not a strong feature of Japanese management and I fear a half-baked solution that solves nothing will result.
- This is a small breath of relief for Nintendo but I can see Iwata-san apologising again unless things immediately and radically change.
Blog Comments
Andy Bates
February 11, 2014 at 2:56 pm
It’s amazing to me that you can admit being wrong on your prediction, yet stick to the same mistaken conclusions you made previously.
“Nintendo sold 1.95m Wii U units during Q4”: They sold 1.95m Wii U units during Q3, not Q4.
“which combined with reasonable sales of the 3DS”: And by “reasonable sales,” you mean that the 3DS was the best-selling console (not portable console—the best-selling console overall) of both 2012 and 2013.
“I had expected much worse results given the system’s shortcomings (see here) but clearly I underestimated the loyalty of the fan base.”: No, as I pointed out in the other article, you underestimated the fact that people buy consoles during the holiday season! I honestly can’t believe you’re making recommendations about console manufacturers when you don’t understand this simple fact.
“Hence Q4 is going to be bloody with a thumping $323m operating loss expected.”: Nintendo has $14 BILLION in the bank, and can suffer such losses for an estimated 40 years at this rate. Meanwhile, Sony posted an operating loss of $820 million for FY2012, which is better than the $2 billion it lost in FY2011. In fact, just the Consumer Products and Services division (which includes gaming) lost $2.8 billion in FY2012. In other words, Sony’s gaming division in 2012 lost over EIGHT TIMES what you expect Nintendo to lose this year. And yet you think that Sony has a better chance in the gaming market than Nintendo.
“Nintendo fans are much closer to being casual gamers and therefore could be easily satisfied by having Nintendo software on their smartphones and tablets.”: Uh, no. Not at all. If that were true, the 3DS wouldn’t have been the top console for the past two years.
“Hence software sales could easily skyrocket if Nintendo was to make its games available on iOS and Android.
However, there would then be no reason to buy a 3DS meaning that sales of this unit would immediately collapse.
That software prices much higher than the $1 games on the app stores, meaning that Nintendo could suffer worse if it pulls the 3DS and puts its software on iOS and Android.”: I like how you make a suggestion for what Nintendo should do, then immediately point out how that would make things worse for Nintendo.
Again, because it bears repeating: Nintendo’s revenue (approximately $6 billion per year) is about the same as the money that Apple pays out to developers each year. In other words, Nintendo makes as much money as EVERY iOS APP COMBINED. Putting out an iOS app would be pocket change compared to Nintendo’s normal revenue.
“In the same way that smartphones have destroyed the mid-range digital camera market, they will also destroy the handheld gaming market.”: That’s what people said when the Nintendo 3DS came out in 2011, and it was competing with the iPhone which came out in 2007. And yet the 3DS was the top-selling console of 2012 and 2013. Gamers have already demonstrated that they are not satisfied with the shoddy controls that touchscreen devices provide.
“Nintendo needs to act now to ensure its future as a software publisher as stubbornly sticking to hardware will ensure precious reserves are depleted that should have been spent on developing software.”: Nintendo makes a huge portion of its profits on hardware. Abandoning that platform means giving up those profits, and losing more of its software profits by publishing them on other systems.
Saying that Nintendo should switch to software makes as much sense as the people who said Apple should make Mac OS for PCs in the late ’90s. In other words, no sense at all.
I look forward to your backpedaling again once Q4 results are announced.
windsorr
February 11, 2014 at 3:04 pm
The fact that they sold more consoles than I thought has NOTHING to do with the long term outlook and does not change a thing.
Nintendo has $5bn in the bank not $14bn and when has having lots of money been an excuse to urinate it up the wall? That money belong to shareholders is not there to prop up stupid, head-in-the-sand strategies.
The 3DS will keep Nintendo going for only so long before demand for those devices is killed off by the changing environment. It has no choice but to change with the times. It has a breathing space with the 3DS nothing more. Software is the only answer but if it continues to waste its resources it will be too late.
Feel free to buy or hold the stock if you want. You will regret it. Maybe not this year but in the long run.
Andy Bates
February 11, 2014 at 10:24 pm
You said that Nintendo is in trouble because you predicted that Wii U sales would continue to fall, and that they would not meet their adjusted estimates. It seems odd that your predictions were wrong, and yet you argue that your conclusions are the same.
“Nintendo has $5bn in the bank not $14bn”: Technically, Nintendo has $5.5 B in cash, and another $5.5 B in securities, for total assets in excess of $11 B. And that money is there for the purpose of running the company, including developing new hardware and software which will increase profitability.
“The 3DS will keep Nintendo going for only so long before demand for those devices is killed off by the changing environment.”: This same argument was made five years ago when the App Store launched, and people predicted that the handheld market would be killed because of the proliferation of iPhone games. And yet, as I keep pointing out, the 3DS was the top-selling console for both 2012 and 2013, so clearly there is still a market for dedicated handhelds.
Now, you could argue that the videogame market as a whole is shrinking, and there is evidence to indicate that that’s true. However, that would mean trouble for all console makers, not just Nintendo. Yet you seem to think that Nintendo is going to be “killed off,” while you remain positive about Sony and Microsoft in the same space. Nintendo posted their first-ever annual loss in 2012, while Sony has been posting losses for years, and people are recommending that Microsoft sell off its gaming division. I fail to see how Nintendo is in the worst shape of those three.
“Software is the only answer”: At least we agree on something! Here are review scores from GameRankings:
Super Mario 3D World: 93%
Fire Emblem: Awakening: 93%
Legend of Zelda: A Link Between Worlds: 91%
Wind Waker HD: 91%
Pokémon X/Y: 88%
Animal Crossing: New Leaf: 87%
Pikmin 3: 87%
Luigi’s Mansion: Dark Moon: 86%
Great games sell systems. My prediction was that well-reviewed new games would contribute to increased sales over the holiday season, while your prediction was that Wii U sales would continue to fall. Since my prediction was correct and yours was wrong, can you at least concede that maybe Nintendo’s plan of coming out with great games could work? Or are you going to stick to the same “Nintendo is falling and nothing can stop it” mantra?
tatilsever
February 11, 2014 at 8:53 pm
>”Nintendo’s revenue (approximately $6 billion per year) is about the same as the money that Apple pays out to developers each year.”
It is meaningless to compare hardware and software revenues. The latter does not have any variable costs to be deducted before profits start accruing, but hardware has production and royalty costs for every unit sold in addition to the fixed development costs.
Struggling companies almost never have two great options to chose from. Slow slide into oblivion or painful transition into new business models are usually the only alternatives. Switching from low volume high price sector to a high volume low price field cannot be easy, but smartphones have decimated the casual digital camera business. It is difficult to imagine the future being vastly different for the casual gaming industry.
Nintendo’s portable consoles are not at the cutting edge of technology now, whether it is the screen quality or CPU power. They will fall further behind with each new smartphone generation before a new generation of DS is released. This does not make a growing market. If there is not any growth on the horizon, it will be difficult to stay profitable, as the costs are clearly higher than income at the moment. Where is the money to fund the next gen Wii or DS development going to come from?
Andy Bates
February 11, 2014 at 10:56 pm
“It is meaningless to compare hardware and software revenues. The latter does not have any variable costs to be deducted before profits start accruing, but hardware has production and royalty costs for every unit sold in addition to the fixed development costs.”: Software has fixed development costs as well, but that’s not the point. I am not saying that Nintendo’s revenue from software and hardware is exactly equivalent to the revenues that iOS developers get from their software. I’m saying that Nintendo’s revenue numbers are so large that they are comparable to the amount of revenue earned by EVERY SINGLE APP on iOS put together!
In other words, when people say that Nintendo should develop for iOS because of the amount of money that developers are making, they fail to realize that even the most wildly successful iOS games makes very little compared to what Nintendo makes from a single Pokémon game.
“Struggling companies almost never have two great options to chose from.”: The 3DS was the best-selling console for the past two years. If Nintendo is struggling, then the entire videogame industry is struggling.
“Switching from low volume high price sector to a high volume low price field cannot be easy”: It would be more like switching from a low volume high price sector to a low volume low price sector. Even if the number of iOS devices is ten times the number of 3DS devices in use, basically every 3DS owner is interested in Nintendo games. I would be surprised if even a tenth of iOS users are interested in paying for Nintendo games.
“It is difficult to imagine the future being vastly different for the casual gaming industry.”: Again, you mistakenly assume that fans of Nintendo games are casual gamers. Casual gamers play Angry Birds in line at the supermarket; Nintendo gamers spend 100 hours tracking down the 150th Pokémon so they can complete their set. Casual gamers use one finger to tap or swipe; Nintendo gamers use a thumbstick, a D-pad, face buttons, shoulder buttons, two screens, a touchscreen, and sometimes gyroscopic controls and a microphone. Those are two different markets. Nintendo is marketing to gamers, not people who balk at paying 99 cents for a game.
“Nintendo’s portable consoles are not at the cutting edge of technology now, whether it is the screen quality or CPU power.”: The top app in the App Store is Flappy Bird, a game with pixelated graphics that would not tax the CPU power of a pocketwatch. Casual gamers do not care about hardware specs, and gamers who care about specs aren’t going to be happy with a device that has no dedicated controls. Gamers care about games, which is why the 3DS (and the DS before that, and the Game Boy Advance, and the original Game Boy) continues to be a top seller. Gamers don’t say, “I want to play a retina display with an A6 processor!” They say, “I want to play Pokemon!”
Apple has proven that you can be profitable by targeting the high-end market, instead of fighting for the customer who doesn’t really want to spend money. That’s the market that Nintendo is going after. They want people who are willing to pay for dedicated hardware and games, not people who only want free casual games that they spend five minutes playing each day.
Nintendo – Edge of darkness | Radio Free Mobile
May 8, 2014 at 10:23 am
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