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Finance

Analysts predict tough times ahead for Nintendo

Fri 29 Jul 2011 8:55am GMT / 4:55am EDT / 1:55am PDT
FinancePublishing

Nintendo faces even greater competition, but history proves the company's resilience

Nintendo's decision to slash the price of the 3DS and drastically lower its profits forecast has prompted a surprisingly mixed reaction from industry analysts.

Nobody sees either decision as good news, of course, but with the large reserves of cash generated by the success of the Wii and DS at the company's disposal, Nintendo is in a position to carefully plan its strategy for a highly competitive next few years.

DFC Intelligence analyst David Cole told IndustryGamers that the low 3DS price-point, in particular, is a more aggressive move than it first appears.

"It is very unlike Nintendo to be willing to take such a loss," he said. "I think what it says is that they really feel the heat from the Sony Vita. I see it as a move to protect their market share and position in handhelds. I would not call it desperation but more a very aggressive defensive action by the market leader to hold on to market position."

With Super Mario 3D Land and Mario Kart 7 confirmed for the end of the year, the Vita now faces stiff competition. The 3DS will be half the price, widely available, and very likely bundled with new installments from the franchises upon which Nintendo's business is built.

"This price cut does put the Vita in a tough position," said EEDAR's Jesse Divnich. "It all comes down to the content and if the Vita can deliver a library of high quality entertainment products, it should be able to thrive at the $249 price point."

Divnich believes that this holiday season will be "one of the most important in portable gaming," and that Nintendo's track record in the market should be enough to convince people to reserve their judgement on its longer term future. More importantly, the past also indicates that the poor performance of the 3DS will have no bearing on the success of the Wii U.

"These two markets really do operate independently from each other, despite both sharing similar brands/titles," he added. "We've seen in the past where Nintendo's home consoles failed to become successful, while their portable market thrived."

With the Wii U launch price still to be confirmed, it has been suggested that the situation with the 3DS will push Nintendo to be conservative. According to M2 Research analyst Billy Pigeon, however, if the Wii U does launch at Michael Pachter's "sweet spot" of $249 it will be because of larger trends in the games industry and wider economy.

"[The economy] will effect upcoming dedicated gaming device cycles, including Wii U," he said. "Launch prices aren't too high, but we are seeing a trend in quicker price cuts that is driven by harsher market realities, including less spending on entertainment and the availability of cheap or free high quality entertainment on convergent mobile devices."

Given the severity of the price-cut and guidance correction, a significant drop in share price was to be expected. However, Asif Khan of Virtue Ventures LLC believes that it could be a real boon for any investor brave enough to bet on Nintendo bouncing back.

In an article for IndustryGamers, Khan posited that most successful tech companies would have seen stocks plummet 50 percent from such a drastic change in earnings guidance, but Nintendo's have declined by less than half of that figure.

"In my opinion, Nintendo has priced in a large part of this bad news and we are at the trough for their earnings... One would be hard pressed to find anyone in the gaming community that has a good thing to say about the company's future and that is why I think it remains a great contrarian buy."

Khan points out that Nintendo's stock was trading at $8.55 a share in May 2003, but by October 2007 that price had climbed to $78.50 – a return of 818 percent in under 5 years.

"I see a potential gain of 100 to 200 percent in a 3 to 5 year time horizon from the current levels at which the stock is trading," adds Khan. "It comes down to Wii U. If it is a failure, and doesn't sell well at all, this company could just be at the beginning of its troubles. If this stock rebounds, as I expect it will, investors could do worse than buying up a great franchise like Nintendo."

Wedbush analyst Michael Pachter sees it differently, advising investors to avoid buying any stock, "until Nintendo can demonstrate that its sales can again grow." Ultimately, the lowered 3DS price will only halt the decline of handheld sales rather than stimulate growth.

"Until the Wii U comes out, we think that Nintendo investors must resign themselves to modest earnings from the company."

10 Comments

John Blackburne Programmers

41 0 0.0
I doubt Nintendo are feeling any heat from the Vita, unreleased without even a release date, which after the debacle that was the PSP will take time to establish itself. I'm sure instead they're looking at smartphones with some trepidation as both the iPhone and Android are now well established gaming platforms, and unlike Sony or MS they don't have their own phone or OS.

Give it a couple more years and pocket gaming consoles will go the same way as dedicated handheld GPS devices and PDAs. People won't want to carry around a DS, 3D or not, if their phone plays thousands of games (and makes calls, sends texts, takes photos, does Facebook, ...).

Posted:3 years ago

#1

Greg Wilcox Creator, Destroy All Fanboys!

2,196 1,176 0.5
I disagree, as I DON'T give a rat's ass about taking calls, texts, pictures OR Facebook when I'm gaming. What's missing here is the immersion factor found in solo play for those who want a NON social game experience and don't feel the need to have others poking around in our privacy or wanting credit card numbers for transactions and so forth and so on.

Hell, I still whip out a Neo Geo Pocket, Game Gear, Atari Lynx or Turbo Express every so often and none of those have any of that stuff you mentioned. I'd say there will always be room for a dedicated gaming device for dedicated gamers, period. Yeah, we're a dwindling number, but sometimes. less is more to us dinosaurs.

If anything, the RIGHT way to go in the future would be an inexpensive handheld that users could tailor to their needs. If they want only a game machine, it's a game machine out of the box. Everything else (except a camera/dual camera which would be standard) could be added as downloadable applications and paid for according to what was added to the unit.

Or something like that. I tend to prefer bigger screens anyway for most of my gaming needs (and no, I don't want a damn iPad)...

Posted:3 years ago

#2

Curt Sampson Sofware Developer

596 360 0.6
The Vita may not have an exact release date, but it would be wise for Nintendo to assume that it's like to be out for the Christmas season in at least some markets, as Sony claims. (Sony may not manage this, of course, or may not have enough units available at release; both are major risks for Sony.)

I'm not sure why the PSP having had issues should affect the Vita; does the fact that the PSP only had one joystick make the Vita's two not work as well? Regardless, the PSP still sells very well, at least in some markets; over the last few months it has frequently been outselling the 3DS here in Japan.

I thnk Nintendo should be very, very worried about the Vita; aside from the somewhat controversial 3D display, the Vita has, in about twice the quantities, everything that the 3DS has (CPU and GPU power, pixels on screen, joysticks, touch surfaces, wireless communications, etc.) The 3DS certainly didn't look very attractive in comparison at the same price point; a major price cut was a good move.

You don't want to try to use dedicated hand-held GPSes to try to support your argument that dedicated gaming devices will disappear, since the former still have a thriving market in any serious application where the cheap, casual-use GPSes in phones just don't measure up.

Posted:3 years ago

#3

Daniel Hughes Studying PhD Literary Modernism, Bangor University

436 497 1.1
It's a gamble, make no mistake about that. But it's a gamble Nintendo can afford to make, and the language they're using with regards to this price cut and the 3DS's rocky start shows they've learnt the lessons of the unsuccessful launch very quickly. They've built up an enormous pile of cash during the Wii and DS years, and they can afford to take a short term hit to establish the 3DS. Make no mistake--even if it doesn't hit the heights of the DS, 3DS will build momentum quickly with a much lower price point and two huge Mario titles on the horizon, not to mention the other first party titles coming along.

Look at what happened to the successor to the PS2--during 2007 and even into the middle of 2008, there were serious questions about the viability of the PS3 as a platform. Despite formidable competition from both Nintendo and Microsoft, an incredibly tough start, and the recent online hacking scandal, the PS3 has still climbed to a 50 million install base and is going from strength to strength, with there being a good chance of it overtaking 360 sometime within the next few years.

Nintendo have made serious errors with 3DS, but they've reacted strongly and reacted quickly. They remain a company that, despite their reputation for relying on their true and tested franchises, take massive risks that few other companies would even contemplate. Slashing the price of their newest portable system by a third (globally) only months after launch is an enormous risk, in an increasingly competitive portable market, but it shows serious balls.

Hats off to Iwata and co for being so humble about it, too. Sony responded to PS3's initial failings with a mixture of incompetence and arrogance. Hopefully things will get better for 3DS and its players from here on out.

Posted:3 years ago

#4

Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.

2,287 2,507 1.1
Most of the analysts in this article aren't suggesting tough times ahead so I don't quite get the headline. This is a trade site with no need for melodramatic headlines to catch views.

I personally see this as an excellent opportunity for investment. I doubt it will reach the peak levels of 2007 value but it most certainly will gain value through at least September when TGS takes place. I expect more Wii U to be announced and investors will have another chance for big bull or bear action depending on the news. I suspect it will continue to go up.

But I've noticed Nintendo investors tend to also be social gaming sector investors. Anything Nintendo does that doesn't steer toward social gaming rocks their stock. I'm hopeful this new low in stock price will attract investors not quite to tied up in the social gaming sector to better isolate the value.

As for bouncing back, this is Nintendo we are talking about. They always bounce back or break down barriers. This is not a roll over a die company. You don't operate a business for over 100 years and have no more than 3 quarterly losses in history (all grounded in unfriendly currency exchange rates) just to tuck tail and run at the any sign of trouble.

Posted:3 years ago

#5
Nintendo and the 3DS will be measured by the sales success and/or failure of Mario Land & Mario 7 this Christmas. If the 3DS ends up leading to lower-than-usual sales for these franchises, it will have been a disaster. Higher than usual (or typical) sales - and you watch the analysts turn around, and call the 3DS the best thing ever in gaming.

I think it speaks volumes that *I* still haven't got a 3DS: the two main reasons being the lack of games, and the small screen (its *tiny* compared to the PSP, smart phones, and even the DS XL). Price was always secondary to me - its not *that* expensive (and since I'm getting "older", I tend to game mostly at home now...).

On the other hand, I can't wait for the WiiU - I'll be lining up midnight to pick one up, just like I did when the Wii launched...

Posted:3 years ago

#6

Richard Pygott Level Designer

40 13 0.3
The main selling point of the 3DS is the 3D Gaming without glasses, but this cannot be demonstrated in marketing or advertising. You have to actually hold the console in your hands to see the benefit. I don't think the Sony Vita is a threat at all, Nintendo will not see it as threat.

As far as a bad Launch, Sony had a bad launch with a drought of Software for the PS2 and PS3 & we all know how that faired, 130million plus, and nearing 50million plus.

Posted:3 years ago

#7

John Blackburne Programmers

41 0 0.0
I think this makes the point about the competitive threat from phones rather well

[link url=http://www.penny-arcade.com/comic/2011/8/1/fire/
]http://www.penny-arcade.com/comic/2011/8...[/link]

The comparison with the PS3 is also interesting when you consider the competition: many people thought it stood little chance against the 360 which cost less and launched first. But it's now outsells the 360 both in hardware and software, mostly due to mis-steps from MS (launching too early and cutting corners). I can't see Apple making the same mistakes - or if they do it will be Google who benefit, not Nintendo.

Posted:3 years ago

#8

Martyn Brown Managing Director, Insight For Hire

141 56 0.4
Musing analysts in wise after the event shocker?

Posted:3 years ago

#9

Tony Johns

520 12 0.0
Nintendo needs to abandon Region Locking, because with the Kinect and the iPhone apps stealing the casual market from Nintendo that they won over back 5 years ago, Nintendo needs to appeal more to the import gamers as well as to their hard core Nintendo fans that will always buy a 3DS or Wii U when it comes out.

Posted:3 years ago

#10

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