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Will Digital Keep Nintendo in Hardware?

Will Digital Keep Nintendo in Hardware?

Wed 16 Jan 2013 3:05pm GMT / 10:05am EST / 7:05am PST
HardwarePublishing

Analysts discuss whether Nintendo may have to go platform agnostic in the next-gen console cycle

From a revenue standpoint, Wii U had a stronger launch than the original Wii. Analysts, however, feel that Nintendo's been underwhelming with Wii U so far, and that "many Wii U systems were sitting unsold on shelves at year end." From a fiscal standpoint, the last year for Nintendo was not a good one and there's no doubt that the pressure is on from investors. The argument has been made that Nintendo could fare far better with a software only approach, and it's something that RW Baird analyst Colin Sebastian believes could become a serious consideration in the new console cycle.

"In a negative scenario, Nintendo will be forced to prematurely lower the Wii U price, and over the course of this cycle, we expect consideration will be given to extending first party franchises to other platforms," Sebastian commented this week. In a follow-up email, he told GamesIndustry International, "I think the pressure is on Nintendo to deliver better momentum with consumers in the next 9 months; some view into the next holiday title lineup would help."

While it's interesting to think about how much money Nintendo might generate with a platform agnostic approach (imagine something like Pokemon on iOS and Android), is there any real chance of this happening?

"Nintendo can realize strong profits with a smaller base if Wii U (and 3DS) gamers buy more software, particularly paid digital downloads"

Billy Pidgeon

"Going the way of Sega and only doing software is simply not the best route. But if they are going to do hardware they need to do some marketing for that hardware," said DFC Intelligence's David Cole.

He added, "Nintendo's performance the last year was a disaster. It was almost like they rolled over and played dead with less than zero marketing for both the Wii U and the 3DSXL. This is something that can be changed. I don't understand what their thinking was, but in an age when consumers are clamoring for portable/tablet hardware it would seem to be a huge opportunity for Nintendo. Nintendo used to be great at marketing hardware and if they could bring that back I think there is opportunity."

Michael Pachter of Wedbush Securities doesn't believe current Nintendo management would ever let the company become a third-party software firm. "So long as [Satoru] Iwata is CEO, I don't think there is a prayer that they allow their software to show up on third-party platforms. If they are considering it, we'll see GBA software on mobile phones first... If Nintendo decides to go the way of Sega, it will be because a new CEO takes them in that direction. I don't see Iwata making a decision like that, it is not his nature," he said.

EEDAR's Jesse Divnich largely agrees, but he doesn't completely rule out a switch to software only. While Nintendo's intellectual property has been a strength, the hardware has been crucial to Nintendo's overall strategy and how they present certain IP. "Nintendo's market dominance has always come on the back of its hardware. Their hardware has been a key factor in driving the growth of their brands and products," Divnich noted.

"While I do agree that Nintendo should explore releasing products on other platforms, there holds a significant risk that it could marginalize the benefits of owning a piece of Nintendo hardware and could create a cascading impact on the health of their hardware division," he continued. "If the Wii U turns into a market failure, I'd suspect that a software only approach becomes a serious consideration; however, it would likely cut the company's valuation in half. The transition alone would spiritually kill the company for many years."

1

Perhaps the solution lies in the digital realm. Nintendo is increasing its efforts to sell games digitally, and the early feedback on the eShop on Wii U has been positive. As Inside Network's Billy Pidgeon commented to us, to remain profitable in the hardware business, Nintendo just needs to sell more software, and doing so digitally could provide a big lift. In fact, it's a likely scenario for all "big three" console manufacturers.

"I believe the console business has changed fundamentally, and there will be slow uptake and increased downward price pressure not only for the Wii U but also for the next generation from Microsoft and Sony. Hardware expectations will be overly high for all three vendors, but I don't expect the numbers to match this generation. Nintendo can realize strong profits with a smaller base if Wii U (and 3DS) gamers buy more software, particularly paid digital downloads," Pidgeon said.

"I think Sony and Microsoft will also need to sell more digital downloads to increase the software spend to base ratio. Microsoft will have an advantage here because of the lead Xbox LIVE has in PC, tablet and smartphone integration. Nintendo and Sony should both reconsider competition and potential co-operation with Android and iOS devices," he added.

2013 should be very telling. If Wii U struggles, Nintendo may be forced to take action. A radical price cut on 3DS did wonders for the handheld. Will Wii U get similar treatment?

21 Comments

Adam Campbell Associate Producer, Miniclip Ltd

1,218 1,053 0.9
I feel that hardware is becoming more and more irrelevant, in the sense that its becoming less important who your hardware is made by. The content is the top dog. Once upon a time consoles and PCs were flooded with exclusives and now most titles are available cross platform and increasingly on smart phones/hand-held consoles.

I feel most people would preferably choose their hardware and play anything they want on it, rather than having to purchase multiple power sucking machines to squeeze under a TV. In an increasingly more digital world, with architecture becoming ever more similar, why not?

I would still be buying Nintendo games if I wasn't forced to buy them on unimpressive hardware. I think they would also be more successful than possible in their current form, if they released titles like Mario, Pokemon and Zelda on other systems - not just Playstation or Xbox but mobiles too.

Its not just Nintendo though, I think other big games companies should be thinking hard about the future. Microsoft are already making plans to have their gaming software and multi-media platforms on multiple devices outside Xbox (or Windows PC).

I might say, for me this isn't a "Nintendo is dying" based opinion in the slightest, I just think it would be better for everyone but at the very least me :p

Posted:A year ago

#1

Matt Walker Production Coordinator, Capcom

41 23 0.6
And yet the first article below the headliners right now is titled "Nintendo still rules the Japanese charts".

Posted:A year ago

#2

Felix Leyendecker Senior 3D Artist, Crytek

184 204 1.1
Sounds like wishful thinking to me. Such a desperate move might only become necessary when they're no longer sitting on billions of cash reserves.

Posted:A year ago

#3

Daniel Hughes Studying PhD Literary Modernism, Bangor University

436 497 1.1
It's pretty obvious that Nintendo need to sell more software digitally. They are moving in this direction: as of last September, 17 million out of (then) 22 million 3DS users were online connected and buying digital content. In Japan, 500,000 units out of 2.5 million sales for Animal Crossing were digital. Those are good figures, but Nintendo need to move faster to ensure they can continue to make money on the most profitable segment of all: software. There have even been noises straight from Iwata about a new, free to play intellectual property being considered at Nintendo, but those kind of diversifying thoughts need to translate into actions in the near term to diversify how they sell their software.

Firstly, their whole pricing approach to software needs to become more flexible. Wii U titles being priced at £40 to £55 won't work when you can buy new PS3/360 games in the £30 to £40 range, and especially won't work when Nintendo's userbase on Wii could pay £20 to £40 for new games. It definitely won't work when new gamers pay nothing to pennies for new games. There's a massive difference between mobile and console, sure, but it can't be ignored that mobile and tablet gaming have radically altered perceptions of value. Stagger the retail and digital pricing across Wii U and 3DS so that 'full' boxed releases (and their digital counterparts) are available across a whole range of prices, from £20 up to £45. Launch free to play properties, experiment with episodic content. Price digital versions of games competitively rather than above the average street price.

Their renewed digital push needs to be linked to cross-platform, universal accounts, and while Miiverse is coming to tablets, smartphones and 3DS, new games for mobile and tablet are still out of the question. However, legacy content on smartphones and tablets might not, and should not, be out of the question. Nintendo are yet to relaunch their Virtual Console service for Wii U. They should take that opportunity to offer the same Virtual Console service tied into a universal account system across 3DS, Wii U, tablets and smartphones.

"Hardware expectations will be overly high for all three vendors, but I don't expect the numbers to match this generation. Nintendo can realize strong profits with a smaller base if Wii U (and 3DS) gamers buy more software, particularly paid digital downloads,"

Pidgeon has it exactly right. Nintendo have done a great job of selling 27 million 3DS systems, but they can't continue to match the explosive pace of the DS in the current market. They should obviously be concerned with continually expanding their userbase--global Pokemon proves that's still a priority--but they should be doing more to sell more software. A big deal has been made about 3DS missing Nintendo's hardware expectations, but not enough of a big deal was made about 3DS missing software expectations. If early signs from Wii U are true, Nintendo aren't hitting software targets there either. A more flexibly priced, digitally friendly software ecosystem would do wonders for software attach rates and Nintendo's bottom line. It's strong software sales that provide the biggest source of revenue for console manufacturers, none more so than Nintendo. Even when they profit from hardware, strong software sales are what really helps Nintendo's bottom line to boom, giving Nintendo the financial resources and IP exposure they need to remain competitive.

It's absolutely true that software sells systems, and that when push comes to shove, Nintendo need big software to get consumers to buy their systems. It's true that some of 3DS's modest performance in the West is down to the lack of a consistent software schedule. I don't doubt that Nintendo have big Wii U plans for the end of 2013, but in the meantime, they need to make the software already out more attractive to existing users and potential users, by lowering prices and introducing more flexibility across the board. If Nintendo do that, they take some of the sting away from Wii U's high price, because the price of buying into the system and getting a game or two lowers, even if the actual hardware price doesn't move down drastically in the short term. It's all well and good believing that the right games will sell the hardware, and to an extent, that's very true; but when there are more and more games and services competing for consumers money, you need to make sure that 'value' (a subjective quality) has as broad an appeal as possible, and you do that by changing the objective factor, the price. I'm not saying make the Legend of Zelda free to play, but I am saying that smaller, mass-market titles like Brain Training and Nintendo Land don't need to command a £30 or £40 price tag. In fact, it's Nintendo's, and the target audience of that kind of software, best interests to make sure those titles are priced more attractively.

Edited 1 times. Last edit by Daniel Hughes on 16th January 2013 3:47pm

Posted:A year ago

#4

Bruce Everiss Marketing Consultant

1,692 594 0.4
Sony are a consumer electronics company. Apple are a marketing company. Microsoft are a software company. Whilst Nintendo are an entertainment company. This is the true roots and philosophies of these companies. Their DNA. What informs every decision.
Nintendo's roots are in anything to do with entertainment. They were a big manufacturer of playing cards and they even ran love hotels.
To them the important things are their entertainment intellectual properties. Zelda, Mario, Super Smash Bros, Metroid Prime, etc etc.
The hardware is truly incidental. It is just a way to maximise the profit from their IP. If they went on other people's platforms they would only make a fraction of the money. This does matter.
So it will be very interesting to see how Nintendo evolve when the market for dedicated game consoles collapses.

Posted:A year ago

#5

Jason Pullara Podcaster

29 70 2.4
Popular Comment
This is such a strange conversation. We're talking about ecosystems, and software distribution and all sorts of other shit that doesn't really matter, because at the end of the day Nintendo doesn't make dedicated console hardware. Nintendo makes toys that, incidentally, other companies can make toys on as well (as long as you pay the tax).

We can keep talking about how Microsoft and Sony are trying to pivot and become the big black box in your home, Apple is going to dominate every single sector of technology and displace everything ever (you Apple fans are completely out of your minds, by the way), the PC market will completely collapse and be replaced by the Tablet market, PC gaming is dead, and how Nintendo needs to jump ship and move to become Sega 2.0 ... but it's all utterly meaningless, because the Nintendo ship sails under one direction: "make great toys."

Seriously, there's a lot of ignorant bullshit being spread in these articles and comments sections, and it's all based on one assumption: you're not successful unless you sell the iPhone or Galaxy S phones. It's because of this assumption that everyone basically leaps to the conclusion that all forms of hardware are DOA and everyone should just give up and become an IP circus - unless you're Oouya and you have the love and support of every hipster on the planet.

If you got a business degree your professors would be utterly ashamed to call you a student. Do your damn homework.

Of the top 10 dedicated gaming devices ever sold, Nintendo has sold 5 of them - NDS, GB, Wii, GBA, NES. SNES and N64 stand outside the top 10 at 11 and 12 respectfully. The "failing" 3DS has roughly 30m units shipped. The WiiU stands at just over 2.5M shipped units.

In about a year the 3DS accomplished exactly what the Wii accomplished: shipped more units than the GC shipped in its lifetime. It's an incredibly fast rising star set to surpass the Genesis and N64 later this year in total units shipped. Next year it may very well pass the NES, PS3, X360, and PSP in total lifetime shipments. The year after that the 3DS is on pace is catch up the GBA and Wii. Assuming shit just doesn't collapse for no discernible reason (and no, Bruce, because you REALLY BELIEVE HARD doesn't count), Nintendo has yet another cash cow that can sustain their company and business model for at least 5 years.

What about the WiiU? Estimated Worldwide shipments place it at 2.5m units. It was literally just introduced this last November. Nintendo has hardly any marketing spend (relative to other console manufacturers) and they still managed to push out that many units. If that pace keeps up (it won't) Nintendo will have pushed out 12m WiiU's by the end of next year, with an attach rate of just over 2 (I'm estimating it'll be closer to 8m units, which over a 5 year lifespan is roughly 40m units, putting it well ahead of the Gamecube and just behind the SNES).

Let's not forget the plethora of Mario, Zelda, and Pokemon games to come out in the next 5 years. Let alone everything else Nintendo R&D is going to pump out.

That all translates into a lot of money for Nintendo.

So I ask again: where in the living hell did any of you earn your business degrees from? Nintendo should abandon the hardware platform and go IP only is speculation based on what insanity - because they stumbled last year and had to repair the damaged trust between their customers and themselves at the same time spending an enormous amount of money on a new R&D building that's the size of a city block, and the exchange rate really hurt a lot of Japanese businesses, not just Nintendo?

Please. Nintendo's game plan is 10 years long, at least. Unless we see a dramatic overnight pivot we're not going to see Nintendo give up the hardware game THAT easily just because some analysts have an enormous Apple erection.

Posted:A year ago

#6
honestly every thing you wrote is only good for you not that its a bad thing

Posted:A year ago

#7

Benjamin Crause Supervisor Central Support, Nintendo of Europe

86 45 0.5
@jason: One of the best comments I have ever read here. Thank you. ;-)

Posted:A year ago

#8

Mariusz Szlanta Producer, SEGA Europe

16 13 0.8
@Jason, you made my evening.

Posted:A year ago

#9

Neil Millstone Director, White Bat Games

32 12 0.4
@Jason, I completely agree. Nintendo is the company that most needs to be making their own hardware. What would the Wii be without motion control? The Wii U without the tablet? analysts have been down on Nintendo for as long I can remember, but it never stopped them making huge amounts of cash anyway.

Posted:A year ago

#10
Nintendo should almost certainly get back to a healthy profit this year (including last qrt). If this doesn't happen, who knows what we'll see - although dropping hardware is extremely unlikely. People forget that hardware is usually a large chunk of the profit. If anyone is going to bite the bullet, Sony will be first.

Compared to last year:
- Wii is still selling hardware & software
- WiiU bringing in lots of new revenue
- 3DS a lot stronger (esp. in Japan), with a huge lineup coming this year
- Digital sales starting to take off
- Distractions like the new building finishing

The only unknowns are:
- How MS & Sony will respond, and when they plan to launch (& with what)
- How much 3rd-party support will the WiiU get

The other question, is what happens to the economies this year - and how the Yen responds. The new Japanese leadership has already committed to devaluing the Yen, and nothing could be better for companies like Sony & Nintendo.

Posted:A year ago

#11

Nicholas Pantazis Senior Editor, VGChartz Ltd

1,021 1,470 1.4
@ Jason You're the best person.

I don't get when we got to this idea that if you're not first you're last in ANY industry. Do you guys realize Nintendo, selling 20 million Gamecubes, made more profit than Sony did selling 150 million PS2s? This industry is not so simple that you can boil it down to success at #1 and failure at 2 and below. I guarantee you the day Nintendo stops making hardware is the day they declare complete bankruptcy and choose to sink, not the day they sell their games on other platforms.

Posted:A year ago

#12

Steve Peterson West Coast Editor, GamesIndustry.biz

111 73 0.7
The Wii U is not contributing to profits yet; each one is sold at a loss, according to Nintendo. The profit lie in software sales for the Wii U, and currently the attach rate is very low (just over 1). Eventually this will change as Nintendo lowers manufacturing costs through process improvement and (hopefully) volume, and when more compelling Wii U software comes out. The 3DS hardware is also not profitable after the price cut, but the software situation is much better. Nintendo needs to return to profitability at some point, but it's not clear when that may be. One path to that might be taking old titles and porting them to smartphones; I don't see how that would do anything but help Nintendo, by spreading the brand, generating some direct revenue, and acting as a marketing hook to get people to buy the new hardware and software ("if you enjoyed Mario in this game, check out the latest version on the 3DS!").

Right now, though, Nintendo is struggling to get profitable again, and just staying the course may not be the quickest way to reach that goal.

Posted:A year ago

#13

Nicholas Pantazis Senior Editor, VGChartz Ltd

1,021 1,470 1.4
@ Steve one game plus a Wii U is a profitable sale according to an article I read on this site just a month ago. Also that attach rate is only the attach rate in America, and it's also the attach rate NOT including pack-ins (i.e. Nintendo Land).

The 3DS is now manufactured at a profit as of this holiday, and the 3DS XL was profitable on release. I suspect we'll see profitable quarters from Nintendo all of the upcoming fiscal year, and probably for this holiday as well. Sure, they aren't in the strongest position of their history, but they're hardly in the weakest either, with more than $10 billion in liquid capital they are likely to be making game consoles far longer than Sony and probably even Microsoft.

Posted:A year ago

#14

Carlos Bordeu Game Designer / Studio Co-Founder, ACE Team

77 115 1.5
I seriously doubt we need another canabalt clone with Mario. It would be a shame and having Nintendo games on the iPhone would be a failiure, not only for Nintendo, but for our entire industry.

Posted:A year ago

#15

Matt Walker Production Coordinator, Capcom

41 23 0.6
Full disclosure: I'm a Nintendo fanboy.

That being said...

@Jason
That was an awesome comment.

Posted:A year ago

#16
I believe WiiU "Basic" models may be sold below cost (or essentially at cost) - but the "Premium" model is profitable. Its also close to 80% of the sales (based on the stats I have heard). I have no doubt that the overall ecosystem is very profitable.

Posted:A year ago

#17

Robin Clarke Producer, AppyNation Ltd

343 812 2.4
"imagine something like Pokemon on iOS and Android"

Yes, Nintendo should damage their core business for the sake of something that could in an ideal case net them a rounding error of the revenue the franchise earns them through their own platforms.

Even the other professional guessers ('analysts') can see the flaw in this logic.

Posted:A year ago

#18

Paul Jace Merchandiser

955 1,449 1.5
I don't see this happening. The thing with Nintendo is this: they can fail with their hardware(theoritically) as much as they want. As long as they have profits from their handheld division it will all be balanced out in the end. The same is true with Sony, only in reverse. The Vita and any other handhelds they produce can fail and it won't put that big of a dent into the company because of the profits they make from their console division. Now if either of those two companies have an entire gen where both their console and handheld fail then we can have a serious talk about them going console agnostic.

Posted:A year ago

#19

Peter Dwyer Games Designer/Developer

482 293 0.6
@Jason

I tend to have these kinds of arguments (read some of the windows 8 threads). The comment sections were full of nonsense about windows 8 killing PC gaming, yet every PC game ever made in the last 10 years runs flawlessly on it. Then it was how windows RT was a mistake yet RT's app centric targeting (minus the useless fake desktop) is pretty much 100% what apple and android do. Apparently it was OK for them but, must be nonsense if Microsoft do it.

Now here we are telling Nintendo to give up the ghost. How about we instead tell Nintendo to step up their game. Make their next console on par with the competition. Bring an advanced wand to the party. Have a dreamcast style low power screen on your controller (honestly have none of the big three looked at a galaxy Note and thought "Hey that's the perfect screen for a light, ergonomic controller!").

At worst none of the big three will be in the console market in five years time. At best there will be a one box runs it all approach where we simply grab the games we want regardless of creators, from the cloud. The market will decide not some journalists who have nothing better to do than spread badly researched nonsense.

Posted:A year ago

#20

Nicholas Pantazis Senior Editor, VGChartz Ltd

1,021 1,470 1.4
@ Paul Sony had that this generation. The PS3 was a net loss of over $1 billion for Sony and the PSP earned them next to nothing as well (it was sold at a loss until 2010, around the time that it died). Really so did Microsoft. The Xbox 360's initial costs were so high that even with its late-life success it barely made a profit.

Posted:A year ago

#21

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