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Corner Turned?

Fri 28 Oct 2011 6:55am GMT / 2:55am EDT / 11:55pm PDT

Nintendo's fortunes of late have been mixed - but we shouldn't take the figures at face value

It's been a week of mixed fortunes for Nintendo, with the company publishing financial results which were far worse than expected, alongside 3DS sales results which were far better than most people dared to hope. Behind those headline figures, however, a very different reality lurks.

It's tempting to look at the figures and assume that they indicate a corner being turned by the company, which has been beset with problems this year - largely focused around the lacklustre launch of the 3DS, against a background of continuing cyclical decline in the fortunes of the Wii. Rough financials are to be expected in such a climate, but the 3DS' strong sales should be a ray of hope for the future, suggesting better times to come for the venerable industry stalwart.

Taking a closer look at the figures and their context, however, suggests a slightly different picture. The reality is that Nintendo's financials aren't remotely as bad as they first appear, with the company's fundamentals continuing to be remarkably strong - but equally, the 3DS' sales aren't remotely as good as they first appear, and suggest that the new handheld is a long way from being out of the woods.

Let's look first at the financial figures, which saw Nintendo - a company which until fairly recently had never dipped into red ink in its century-long history - announcing a 70 billion loss. Fairly shocking stuff, although not remotely as bad as Tokyo-based analysts had expected - the Nihon Keizai Shimbun, Japan's equivalent of the Financial Times, had predicted a 100 billion loss.

Yet once you consider the context, suddenly things don't look so bad. One factor that's vital to bear in mind with Nintendo's financial results is that the company holds an absolutely vast treasure-chest of overseas assets - a "warchest" which essentially ensures that the company is in a position to fight back in the event of a product or platform failure, but which can also become a millstone around the neck of its financial results when currency fluctuations impact on its value. Those same currency fluctuations can also massively devalue Nintendo's overseas sales.

The company holds an absolutely vast treasure-chest of overseas assets

To describe what has happened to the Japanese Yen in the past 24 months or so as "currency fluctuations" is to understate matters. The Yen has soared to record heights, with each agonised convulsion of the world's financial systems sending more and more investors scurrying away from the beleaguered Euro, Dollar and Sterling to the relative safety of Japan's currency. The devastating earthquake in March actually drove values even higher, as currency investors anticipated that the Japanese government would have to repatriate Yen in order to pay for reconstruction (I'll let you draw your own conclusions based on that regarding the nature of human being that engages in currency speculation).

The net result is that the Yen is trading at historically high values, making Japanese exports incredibly expensive and - from Nintendo's perspective - making its overseas investments look vastly less valuable than they used to be. For a company reporting in Yen each quarter, a billion-dollar investment in US Dollars is now only worth two thirds as much as it was a few scant years ago. The dollar value hasn't changed - it may even have grown nicely - but on the balance sheet filed with Japan's financial authorities, the investment has shed around $350 million in value.

As the world's markets have writhed around like a dying animal over the past few years, that factor - the Yen valuation of Nintendo's overseas assets - has become a more important part of its quarterly financials than the performance of any of its products. Moreover, the Yen's strength in the past year or so has also hit Nintendo in a second way. The company essentially "buys" its products in Yen, acquiring components and paying for labour costs in the Japanese currency (although much manufacturing also happens in China), and then sells them in Dollars and Euros. As a consequence, while consumers haven't seen price cuts to consoles like the Wii, Nintendo has seen its revenues from sales of the console slashed. The impact is twofold; it reduces Nintendo's income while also hammering the firm's ability to remain competitive through price-cutting.

Yet, if you take the currency fluctuations out of the equation, Nintendo's fundamental figures are actually looking pretty healthy. This is an inexact science, of course - currency transactions are woven into the financial fabric of a multinational company like Nintendo at a very fundamental level - but it's possible to knock some of the currency-related charges off the balance sheet and get a picture of where the actual business of making things and selling them to people stands. It stands in fairly good stead; in fact, if you were to ignore currency charges, Nintendo would remain on track for a pretty significant profit this financial year. At heart, the company is still doing the basic things it's always done right - selling a lot of profitable hardware units and backing that up with a hell of a lot of profitable software units.

The exception to that, however, is the 3DS. I'm on record - repeatedly - as saying that many commentators have written the 3DS off far too early in its lifecycle. I remain of the opinion that the system is going to have a pretty strong Christmas which will set it up in a solid position as a viable platform for developers and publishers, albeit not a position which is ever going to match that of its older sibling, the DS. I don't think, however, that the sales figures announced this week for the 3DS indicate that the corner has been turned - not yet.

The headline figure is that the 3DS has now sold 6.7 million units worldwide - and the piece of analysis being attached most commonly to this figure is that it means that the 3DS is selling faster than the DS did in the same period after its launch. Yet this take on the figures misses out on a couple of incredibly important factors - the most vital of which is price.

The [3DS] figures aren't dreadful, but they're absolutely not enough to make the console into a viable platform yet.

The 3DS, as everyone knows, has had a massive price cut very early in its lifespan - a price cut which brings it down to the sort of levels that the DS didn't reach until much later down the line. The DS also originally launched with the black-and-grey "Fisher Price" casing which proved hugely unpopular even when the market (and the media) started to come around to the quirky dual-screen format, and the console's real sales explosion didn't start until the launch of the redesigned DS Lite.

If you compare sales of the 3DS against sales of the DS Lite, or against sales of the DS once it reached a comparable price point to the 3DS' slashed price tag, the picture looks a lot less rosy. These are far fairer comparisons to make, even if they're still not entirely comparing apples with apples. Certainly, though, there's little to be gleaned from comparing sales of the well-designed and price-competitive follow-up to the most successful handheld console of all time, to the initial sales of an unproven, experimental, expensive and very risky console - even if it did go on to become the most successful handheld console of all time.

Is the 3DS still in a terrible state, then? No - the figures aren't dreadful, but they're absolutely not enough to make the console into a viable platform yet. The focus for Nintendo must still be on the upcoming quarter, and its ability to make the 3DS into a popular gift this Christmas. In the longer term, the company is going to have to face down the challenge to its business model which is presented by the likes of iOS' App Store, but in the immediate term, Nintendo must pull out all the stops to get 3DS consoles into people's stockings this Christmas. It's too early to celebrate the 3DS' fate being pulled out of the fire - the crucial moment for the embattled system is yet to come.

18 Comments

Patrick Frost QA Project Monitor

410 207 0.5
As much as I would like to see the 3DS do very well, and I think it will over this Christmas, I'm not sure in the long run if the picture is going to get significantly better.

As of now, the 3DS has only 1 feature that makes it cutting edge. This is accompanied by an OS and lack lustre online capacity, which feels very last generation (no better than the Wii?). In the long run, I have a feeling that the 3DS will continue to look incredibly tired and old next to it's competitors, especially the ones that bring out new hardware iterations every year.

Posted:3 years ago

#1

Yiannis Koumoutzelis Founder & Creative Director, Neriad Games

363 208 0.6
Christmas will be crucial for 3DS. The price is right, the product is solid and is trying to effectively cover all the failing aspects, online functionality, eshop... The new colors amazing! And is putting a very solid effort to cover the software gap... Where the 3DS is really failing now is exactly that. Software! And there is no shortcut around that issue. Games, good games, need time to be developed and a substantial deposit of trust from the publishers towards nintendo.

imo what nintendo needs to do is break that arteriosclerotic business model on the software side... It's become too stale, and feels very unfriendly to indies! Indies are the major source of quality casual games today and they should open the door widely to them. All that filtering and due diligence on studios, the expensive sdks, etc doesn't really assure any sort of quality for nintendo. And it doesn't allow that many studios to breath a breath of fresh air in their failing eshop! Indies revere nintendo! If nintendo opened its arms they would run towards it with great ideas!

Posted:3 years ago

#2

Stephen McCarthy Studying Games Technology, Kingston University

205 0 0.0
They need to get some of the jp 3ds games over here, some of the games they are coming up with for it are just wow.

Posted:3 years ago

#3

Daniel Hughes Studying PhD Literary Modernism, Bangor University

436 497 1.1
It's important to note the DS had a Christmas season in Japan and America under its belt by this point, too--which provided an enormous early boost in those markets that disappeared in the following months. As you said Rob, this Christmas season is absolutely vital to the 3DS's future as a viable platform. Looking at Nintendo's shipments over the next couple of quarters, there's going to be a massive reduction from the previously forecast DS shipment, but the enormous 3DS shipment remains the same. It could mean that in the next three months, Nintendo are hoping to ship as many as 10 million 3DS systems around the globe, and no doubt hope to sell the vast majority of them. It's by no means undo-able--but the system would have to perform as well as Wii and DS did during their peak Christmas seasons. Doing that in its first Christmas on the market may be a tall order for 3DS, but with Mario Land, Mario Kart, new colours, bundles, new advertising and fewer DS systems on shelves, and Monster Hunter in Japan, 3DS has a shot.

Posted:3 years ago

#4

Adam Campbell Associate Producer, Miniclip Ltd

1,217 1,050 0.9
The thing that 'worries me' most is that the Wii-U could face the exact same marketing and sales issues as the 3DS if Nintendo aren't careful. I still remember the immense confusion at it's unveiling..

Posted:3 years ago

#5

Dann Sullivan Editorial Overlord, FinalBossFight

1 0 0.0
Nintendo were always going to face an uphill battle with selling the 3DS to their market over here in the UK. As someone who worked in retail previously I had heard the frustrations of customers at 'having just got X as a Christmas present, now in March/April there's a Y coming out!" which is how a lot of consumers I met viewed Nintendo handhelds.

Following the DSI new models and colours flooded the market, while it certainly didn't numb people to the new features it completely removed all edge from the 3DS -- which should have been pitched as the next-gen successor to the DS, rather than containing the DS name. It only left people assuming it was an avoidable upgrade.

@Adam Campbell, is perfectly right to worry too. The WiiU risks a staggered expansion across the market as less 'in-the-know' consumers will assume it is simply an avoidable upgrade or, even worse, will misunderstand and attempt to purchase the Wii-U's tablet component assuming it is the only difference between the two SKUS.

Posted:3 years ago

#6

Terence Gage Freelance writer

1,289 126 0.1
I'm sure Nintendo will have learnt some valuable lessons from the 3DS - namely, to launch with good software and at the right price point.

However, considering that some more senior Nintendo staff after the E3 announcement still seemed a bit uninformed about it, it doesn't seem likely that iterations of series like Smash Bros. or Super Mario will be showing up for a good couple of years yet.

EG - <em>http://www.computerandvideogames.com/310... -
"Nintendo was extremely secretive about Wii U prior to the console's E3 reveal last month.
Even long time Nintendo designer Yoshiaki Koizumi, producer of the Super Mario games and head of the team that makes 3D titles like Galaxy, was unaware of the console's full feature set.
"As a developer at Nintendo, I had some information about the new system, but I didn't really have all of the information prior to the announcement at our presentation," he told Wired.
"I only knew some of the things that were considered to be safe," he added.
Koizumi went on to confirm that his team will make a 3D Mario game for the console, but that it's still in the early stages."</em>

I wouldn't be surprised if at launch or soon after launch the Wii U gets some kind of 'Triforce Edition' port of Skyward Sword to serve as its must-have launch title. I also suspect Retro Studios have been hard at work with a Wii U game as well - hopefully a new IP.

One other thing about the 3DS though - since the reveal of that unsightly second analogue stick add-on for Monster Hunter Tri, I wonder if many 'core' gamers will be waiting for a (perhaps inevitable) twin analogue stick relaunch.

Posted:3 years ago

#7

Terence Gage Freelance writer

1,289 126 0.1
By the way GI, the edit function doesn't appear to be working today.

Posted:3 years ago

#8
Maybe its sudden death season, whereby you cant edit what you say....on GI

Posted:3 years ago

#9

Andrew Fisher Writer

20 0 0.0
The key will undoubtedly be how much software sells per 3DS unit, since software is where the profits really lie. And it did take a while for the "must have" titles to appear on the original DS, but then they all had long shelf lives.

Posted:3 years ago

#10

Andrew Clayton QA Weapons Tester, Electronic Arts

150 8 0.1
You can spin this any way you want, the fact is that Nintendo has lost $350 million. That's going to hurt any company no matter what the size. Making that up with new products is alright, but starting out that far in the red is painful.

That being said, Nintendo has a history of making something out of what seems like nothing. I'm not really enthusiastic about the Wii U. Actually, I told some of my friends that it was one of the dumbest gaming products I've seen in quite some time. But I said the same thing about the Wii and that's turned out to be a huge success.

I'm definitely not going out to buy Nintendo stock right now, and if I were an investor I'd be looking at other companies with stronger portfolios, but that doesn't mean I'd sell Nintendo's stock short either.

Posted:3 years ago

#11

Art C. Jones Writer / Blogger

62 91 1.5
Losing $350 Million actually isn't that uncommon. EA lost $340 million last quarter, which was more than usual, but not very uncommon for the company.
...and EA isn't spending money building hardware or doing R&D on new hardware.

The bigger point is that this is the first time ever that Nintendo is looking at a yearly loss (though the year isn't over yet). The question is why? Most analysts point to Nintendo losing its way, which may be true. Others, including this well-written article point to the value of the Yen being the culprit, which is really the case and should stop a lot of the 'sky is falling' thinking (but isn't!). I think a good way to think about it is that during the GameCube years, when Nintendo was selling less Cubes then than they are selling Wiis now (even with Wii doing poorly), Nintendo was still making a profit! Put another way, Nintendo is selling a lot more hardware and software now than they have during many poor selling profitable times. The main reason they are seeing red at the moment isn't poor sales, it's currency issues.

Posted:3 years ago

#12

Daniel Hughes Studying PhD Literary Modernism, Bangor University

436 497 1.1
Just to expand on my earlier thoughts now I have the time...

It's also only fair to point out the DS had a big advantage in that it launched in the Christmas season in Japan and the US, giving it a big early boost that wore off fairly quickly. I'd say that cancels out the boost from the price cut, as 3DS was terribly overpriced, whereas DS launched at a reasonable price in every territory. Both devices have gotten off to a slow start, but 3DS has a chance to accelerate its growth earlier than DS did.

Things aren't terrible for Nintendo in the long-term--but they are terrible in the immediate context of their success with Wii and DS. However, as one of the analysts pointed out, so much of the loss of money can be put down to the absurdly strong yen and the weak Euro/Dollar impacting Nintendo's bottom line. The 3DS's price cut came halfway through the quarter, and sales tripled over the previous quarter, without any hit games (by Nintendo's own admission). If sales triple in half a quarter at the new price point without a hit game, then with a full Christmas quarter, with Mario Kart and Land in the West, a Nintendogs bundle, the new price point and Monster Hunter in Japan, surely 3DS is going to get a massive kick up the arse this Christmas??

And what's more important is that at least one of those titles is a long-term seller, the kind of ever-green hit that drove the DS--Mario Kart 7. It's exactly the title Nintendo needs to push the 3DS onwards and upwards not just this Christmas but through next spring and beyond. Add to that the fact they're getting serious about dlc and firmware updates for the eShop and online multiplayer with Kart, and it's pretty clear Iwata and co are responding quickly and seriously to the criticisms leveled at the 3DS. The line up of games in the long term is very good--Resident Evil, Metal Gear, Animal Crossing, Mario Tennis, Paper Mario, Luigi's Mansion 2, Fire Emblem, Mario & Sonic, Professor Layton and Kid Icarus undoubtedly the highlights. Animal Crossing is potentially another ever-green seller, as well as a title positioned to take advantage of SpotPass and StreetPass. The 3DS should do very well for the next 12 months at least--the longer term future of both it and Vita is up in the air. There simply isn't enough data to speculate as to whether or not the handheld market can exist alongside the smartphone market, but I'm hoping it can--even as the smartphone boom lures hundreds of millions of consumers into gaming, tens of millions (in years to come, as Vita and 3DS become cheaper and more established) may be lured into or back into the traditional portable fold. The long-term aim of Nintendo is to create experiences akin to Nintendogs and Brain Training--experiences unavailable on any other piece of hardware, genres not yet exploited by videogames that will draw the masses in (Iwata has stated that details of such games will be revealed in the coming months). That's a bigger ask than ever, given the shape of today's portable market, but this comes from the man who stood proud at E3 2005 and promised a revolution on the back of a commercial failure of a console and near irrelevancy in the home console space, and then went onto deliver exactly what he promised.

That's only going to happen if Nintendo address one key weakness--software pricing. It's quite telling they've drastically cut their 3DS software shipment forecast. People aren't buying the games because they are, by and large, over-priced. I will pay up to 25 or 30 for a top-notch handheld game, but asking 30 or 40 for every retail release is absolutely absurd. I want 3DS to succeed--but I also hope Nintendo struggle to meet their revised software estimates, and in turn decide to take a closer look at their software pricing strategy for 3DS, both at retail and on the eShop.

As for Wii U, it's still far too soon to call. Valuable lessons have been learnt from 3DS, not least on software, which Nintendo have said will be far more robust, hence the 'delay' (if there can be a delay when no release was committed to) of the launch. Marketing will also have benefited--too many people thought 3DS was just another revision, so Nintendo will want to market Wii U as the next generation Wii, not a simple extension. Hopefully Nintendo will have learnt valuable lessons from the online troubles too, and have robust online features from day one with Wii U, as opposed to a month or more later as with 3DS. And finally, Nintendo must be willing (if necessary) to take a hit on price in order to keep the machine affordable. Wii U cannot have an inflated tag as 3DS did, or it will die before it has a chance to prosper.

3DS's troubles may be the best thing that could have happened to Nintendo. They've experienced success beyond their wildest dreams with Wii and DS, trumping even their most optimistic Wii sales estimate of 60 million lifetime by at least 30 million units. To stumble so badly so soon after so much success has forced Nintendo to look inwards and outwards for the causes of their failings, and react quickly to a competitive market. They're reacting far quicker and with far more intent than Sony did when the PS3 floundered on arrival, and now Sony are going from strength to strength. Hopefully something similar will happen here--the road might be tough, but if Nintendo are up to it, we should all benefit from their current troubles.

Posted:3 years ago

#13

Jason Young Software Engineer, ngmoco :) / DeNA

7 0 0.0
I've seen it reported in some places that the 100 billion loss prediction was pretax and other places make no mention of it being a pretax prediction. Can anyone provide a definitive answer for me?

Posted:3 years ago

#14

Ashley Gutierrez Animator

21 13 0.6
I hope this keeps happening to them; I really do.
Maybe they'll finally get their head out of their butt and make good consoles with good games...and stop rehashing the same old stuff and pretending it's new.

Posted:3 years ago

#15

Andrew Goodchild Studying development, Train2Game

1,254 421 0.3
When I have heard before about the over strong yen, I was only thinking in terms of sales. This would have been very worrying as it would be failing to take a factor into an account that meant they were bringing in less than they were spending. However the fact that it seems it is actually in investments is interesting, it seems to me to be a whole different matter. IF the dollar picks up in 2 years, and the exchange rate goes back to near where it was, then suddenly they will show a massive profit as the value of American assets converted to Yen jumps back in value. Of course, that is assuming the balance does return.

Posted:3 years ago

#16

Tony Johns

520 12 0.0
I would suspect that Nintendo have been though many important christmas seasons when regarding their console and handheld business.

Their standout christmas moments have been the 1986 christmas period, the 1994 christmas period, the 1998 christmas period, the 2006 christmas period as well as their 2007 and 08 and 09 christmas periods.

Seems like for the future of Nintendo, their 2011 and 2012 christmas periods are going to be vital for the successes of the 3DS and the WiiU systems.

With Apple focusing on their own Christmas sales of their new Apple iPhone G4 system, and their downloadable iOS games, it seems that Nintendo are going to have to do better than Apple in order to survive into the future of the handheld market.

Posted:3 years ago

#17

J S Artist

7 2 0.3
The economy is less than swell these days. Nintendo was relying on the new casual market, which seems to be dominated by middle-class families that are probably watching their budgets.

The real problem, is that the Wii didn't get third party developers on board. This is partially Nintendo's fault, and partially the fault of the industry itself.

Let's face it, developers were totally blind-sided by the success of the Wii, they were geared up for another humdrum console cycle based on the pattern set by the Playstation. They just couldn't adapt to the possibilities latent to this new control scheme. I think that we should all be a little embarrassed about it, if we possessed the open-mindedness to have adapted to the Wii, the industry would probably have been able to adapt to this recession much better.

Posted:3 years ago

#18

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