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.
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