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Nintendo: No Need For Alarm

Nintendo: No Need For Alarm

Fri 01 Feb 2013 7:30am GMT / 2:30am EST / 11:30pm PST
HardwarePublishing

The Wii U might have missed launch targets - but it's too early for a funeral

Whenever the market shifts, as ours does with such regularity, we come to inflection points. Opinions invariably divide on how those inflection points will pan out - it's the nature of disruption.

This week's quarterly financials from Nintendo, which highlighted missed sales targets for the Wii U and 3DS, have brought exactly such a situation into sharp focus. When a company as big as Nintendo, which has until so recently been held up as a paragon of adaptive success and market growth, stumbles, pundits and punters alike are quick to make a diagnosis.

We're no hive mind at GamesIndustry International, so we prefer to give you both sides of the argument whenever we can. To that end, we have two pieces about the impact of both the financial results and the sales figures revealed by Iwata, each arguing from a different perspective.

Yesterday we published a piece from Steve Peterson, our West Coast Editor, giving his take on the company's prospects. Below, we have regular columnist Rob Fahey, who takes a more optimistic view.

Another nail in the coffin of the dedicated games console. Nintendo's Dreamcast moment. The vultures were out in force to greet Nintendo's latest revision of its sales forecasts, circling the Kyoto-based company with a naked and unseemly hunger. Wii U has missed Nintendo's own sales targets; the clouds are gathering, the doom-mongers are checking their funeral outfits.

The headline figure that drew absolutely everyone's attention was this - by the end of March, Nintendo will have sold 4 million units of the Wii U, which is significantly down from the 5.5 million it had originally expected to sell. 3DS sales are also down somewhat on projections, at 15 million rather than 17.5 million for the full financial year, though less attention has been paid to that stat, largely because 3DS is already solidly established in the market, with a 30 million installed base.

So here's the bleak scenario - the Wii U, with only 4 million installed at the end of what might reasonably be considered its "launch window", has failed to capture consumer imagination and isn't a viable platform for third parties. Software projects get cancelled, publishers draw back their support, sales slow down even further and the platform enters a death spiral. Within a few years, Nintendo is forced out of the hardware business and follows Sega into third-party publishing - on tablets and mobiles, most likely.

I have quite a lot of problems with that scenario (and with some of the more moderate versions of it which have also been floating around). For a start, it may not match Nintendo's targets, but 4 million units sold after a few months on the market isn't actually that bad for a new console. It's very significantly better than either the PS3 or the Xbox 360 managed; in fact, the only home console that has outperformed the Wii U's launch window, in terms of units sold, is the Wii itself.

"Nintendo's new home console is always going to be stacked up against its old home console, and that's a tough thing to measure up against."

That's what you might call a tough comparison, even if there's a harsh fairness to it. Nintendo's new home console is always going to be stacked up against its old home console, and that's a tough thing to measure up against given that its old home console was the fastest selling and most profitable home console in history. Old hands at Sony might wince sympathetically; the PS3, despite matching the Xbox 360's worldwide sales curve at almost every step on the way, has often been portrayed as a bit of a failure due to comparisons with the all-conquering PS2. The 360, by contrast, is enshrined in conventional wisdom as a triumph, because it built so strongly on the not-terribly-successful original Xbox business.

Comparisons like those are useful for building narratives - especially bull-and-bear market narratives, in which a company's actual performance is vastly less important than its trajectory. They're not, however, very useful for building an accurate picture of a product's viability. Wii U has missed its targets (Nintendo's own, so the company can't even accuse analysts of over-egging the pudding in this case) and hasn't performed as well as the Wii did; there's a bearish narrative about decline in there. On a practical level, though, Wii U has sold more units than Xbox 360 or PS3 did at launch, it's lost far less money (in fact, Nintendo will record a full-year profit, compared to multi-billion dollar losses for Microsoft and Sony's games divisions in their launch periods) and, crucially, it can't lose the support of its largest developer and publisher, because its largest developer and publisher is Nintendo itself.

Is this to say, then, that all is rosy in the Wii U garden? No, of course not. The console clearly hasn't captured consumer imagination to the extent to which Nintendo expected, and a major push will now be needed both in terms of software and in terms of marketing and communication. The biggest risk Nintendo faces is that of failing to address the huge audience of casual consumers who bought in to the Wii, which would confine the firm to its core audience - but that core audience is itself quite significant, on the sale of 20 to 30 million consumers worldwide. Capturing additional casual consumers (or core consumers who fall more readily into the Sony and Microsoft camps, but may be swayed by certain software titles) would drive the console past those levels; even if it achieves only half the success of its predecessor at this task, it's hard to see the Wii U ending up with an installed base much south of 50 million.

"The biggest risk Nintendo faces is that of failing to address the huge audience of casual consumers who bought in to the Wii."

The stock market won't like that, and that's fair enough. Nintendo was ludicrously overvalued in the previous generation - at one point becoming Japan's most valuable company, ahead of the world's top car-maker, Toyota - and if the Wii U and 3DS don't match up to the sales trajectory of their predecessors, the next generation will see an undervaluation that may be equally ludicrous. There will undoubtedly be grumbling at this from shareholders, but Nintendo is more insulated from shareholder discontent than many other firms, thanks to the large shareholdings of former president Hiroshi Yamauchi (who owns the single largest voting bloc in the firm) and of Japanese banks and institutions, who are generally less activist as shareholders than their western counterparts.

Share price decline, however, does not equate to product non-viability, nor does it precipitate a collapse in a company's own market - or even its profits. The viability of a product needs to be considered in more solid and less sentiment-driven terms. Does it make a profit? Does it have a large enough installed base to justify continued development?

These are, of course, moving targets. Profitability rises as a console's lifespan continues, with production costs generally dropping off faster than hardware price cuts reduce revenue (although there are exceptions, the 3DS being an obvious one). Rising software sales also increase profitability - note that the Wii U, despite being Nintendo's first console to launch as a subsidised piece of hardware, is comfortably in the black after its launch, having sold 3.8 units of software for every console so far. That can be expected to rise significantly; the Wii, often decried as the console that sat unloved and gathered dust, actually has an attach rate of 8.7 software units for every console sold. Finally, foreign exchange movements also influence profitability, and after a few very tough years, the Yen is finally nudging in a positive direction for Nintendo (and Sony). After trading at under 80 Yen to the dollar for most of 2011 and 2012, it's now over 90 Yen to the dollar, a level it hasn't reached since mid-2012. It's still a long way from the pre-financial crisis levels, which rarely dipped below 100 Yen to the dollar, but it's enough to win Japanese manufacturers some breathing room in their profit figures.

Installed base viability is also a moving target. Bigger is better, but it's not as simple as that; you can't simply say "well, there are half a billion iOS devices out there and even more Android devices, so games consoles are irrelevant now", even though some commentators try to do exactly that. For many types of software, a machine with a 30 million installed base made up entirely of active gamers who are willing to spend $40 on software every few months is more viable than a system with a 150 million installed base whose users aren't hugely engaged with game software and only spend sporadically, in smaller amounts. Conversely, there are many types of software which absolutely thrive in the latter environment, and would fail utterly in the former. Development costs are also a big factor, because if your development budget soars, you must be able to address a bigger market (or somehow charge them more money) in order to counterbalance that.

"In other words, when it comes to Nintendo, stop trying to bring everything back to bull and bear market perspectives."

In other words, when it comes to Nintendo, stop trying to bring everything back to bull and bear market perspectives. Those have their place, but they're not terribly useful in attempting to predict the shape of the games industry as we proceed towards an uncertain future. They tend to give us extremes and ignore subtlety; where any individual with a shred of intelligence and insight can look at the news that "Wii U isn't doing as well as Wii" and interpret that in context as a decline but not necessarily a catastrophe or a herald of collapse, a market-led approach allows for little if any of that subtlety.

Nintendo has a lot of work to do on Wii U, but we've been here before - it had a lot of work to do on the 3DS as well. While 3DS' price cut helped a great deal, much of the real work was done through significantly improving and bulking out the console's software line-up, and a similar process is underway with Wii U. One need only look to the rapt response which the recent Nintendo Direct broadcast received from media and Nintendo fans alike to see the truth of Nintendo's situation. This is a software company at heart. Its consoles are enabling hardware for its software, and as such, they sell in parallel with major software launches. Of course, this is a valid argument in favour of Nintendo's ultimate destiny outside the hardware market entirely, but for now, the company isn't willing to give up that level of control - and for now, it doesn't look like it needs to. I don't expect Wii U to match the success of Wii, in the medium or long term - but equally, I don't count myself among those who expect it to be Nintendo's last console. Sentiment is negative right now, but fundamentals aren't, and for a business like Nintendo, it's the latter that counts.

22 Comments

Caspar Field
CEO & Co Founder

39 89 2.3
Popular Comment
Good stuff again, Rob. Great to read a perspective that puts things in context.

People think 'Nintendo' and remember its huge successes and brands, but they tend to forget the struggles it had with the N64 and GameCube (which had worldwide installed bases of around 30m and 20m units respectively). At the time, Wii surprised everyone I knew in the industry with its success. Smooth the trend and you get a calmer perspective. But a headline saying 'Wii U hits 20% of GameCube's lifetime sales in launch quarter alone!' doesnt fit the fashionable narrative that the console business is kaput. Not every system can see a NES or Wii -level of success but that does not make them a failure.

Edited 1 times. Last edit by Caspar Field on 1st February 2013 8:28am

Posted:A year ago

#1

Daniel Hughes
Studying PhD Literary Modernism

436 496 1.1
"The biggest risk Nintendo faces is that of failing to address the huge audience of casual consumers who bought in to the Wii, which would confine the firm to its core audience - but that core audience is itself quite significant, on the sale of 20 to 30 million consumers worldwide."

This is one of the key points often being over-looked as people scramble to predict the demise of Nintendo. It's the possible demise of the structures that built the Wii and DS that those in the industry, and particularly Nintendo themselves, need to be concerned about. By turning around to appease a vocal minority, Nintendo have alienated a large market that can bring Nintendo wider install bases that the 'core' market will never support, particularly not for Nintendo devices. The N64 and GameCube conclusively proved that Nintendo can't go toe to toe with Microsoft and Sony. The market for the blockbuster Nintendo experience is enough to build a small install base on, big enough to profit on, big enough to survive on--but it's not big enough to thrive on and ensure the company is still around in a decade or more. If Nintendo can't move outside of that base in the next few years, then there'll be a need for another revolution, which is no small ask.

"note that the Wii U, despite being Nintendo's first console to launch as a subsidised piece of hardware, is comfortably in the black after its launch, having sold 3.8 units of software for every console so far."

Very close to Nintendo's prediction of an attach rate of 4 units per machine. Encouraging that despite getting every other estimate wrong, Nintendo were close to the ball on this one, and those insisting on attach rates of one or two titles per machine, were very wrong.

It's most definitely an uphill struggle from here, but at the very least, Nintendo will build a profitable base and be in a position to launch another machine when necessary. Time to settle in and see what happens.

EDIT: Also, again, thanks GI for articulating this from both sides of the fence. It'd be great to see a similar approach to other publishers and manufacturers in future.

Edited 1 times. Last edit by Daniel Hughes on 1st February 2013 10:41am

Posted:A year ago

#2

Yiannis Koumoutzelis
Founder & Creative Director

358 187 0.5
the effort is appreciated, but that is meant to be a "positive" side article?
definitely a better balanced one. but not exactly on the other side.

ok. so they said 5.5 they sold 4 and instead of 17.5 they sold 15.
and that is reason for all this doom and gloom?


of course they did miss their prediction, that is a fact, however a prediction is just that.
IF instead of 17.5m 3DS they had sold 5m and instead of 5.5m wiiU they had sold 800k i would understand all this, and would even be the one offering condolences, but such numbers can easily be covered and superseeded in other quarters given the titles coming out next for both devices. far from a fall, number wise, this is not even a stumble. perhaps a sneeze, (i would call it a hiccup, but 1/5 off for wiiU is not as negligible as in the case of 3DS.) if there is an impact on stocks, this time and again the press plays a major role. investors are humans. they read news, and posts. they are affected. so if everyone in the press is overeacting about one of people's most favourite game manufacturers and major players in order to draw attention and increase advertisement exposure, this has an impact on the very subject that is covered by said press! and eventually as a result, to the press itself.

i would strongly suggest press goes back to mentioning the facts avoiding any oppinion and analysis. good or bad. the oppinion could be shared as a friendly discussion in the comments section.

Posted:A year ago

#3

Ben Board
Senior Product Lead

7 18 2.6
"Nintendo...has until so recently been held up as a paragon of adaptive success and market growth"

Well, let's not forget that after NES's 62m sales each successive console sold far fewer than the one before. The Wii bucked that trend to say the least, and I love them for it; but a 'paragon of adaptability' needs to have done this more than once. And to have noticed, you know, the Internet.

(Edit: in other words, 'what Caspar said'.)

Edited 1 times. Last edit by Ben Board on 1st February 2013 11:58am

Posted:A year ago

#4

Bruce Everiss
Marketing Consultant

1,692 594 0.4
Nintendo is an entertainment company. Playing cards and a love hotel are in their heritage. They are not a marketing company (Apple) a software company (Microsoft) or a consumer electronics company (Sony).
So their whole culture is based about their blockbuster titles. Their duty to their shareholders is to maximise profit from these. The best way to do this in recent times has been by using bespoke gaming hardware.
However the entire industry and its business models are at a tipping point. Nintendo's management know this. So they will adapt with the times to optimise the commercial outcomes of its amazing IP.

Edited 1 times. Last edit by Bruce Everiss on 1st February 2013 2:35pm

Posted:A year ago

#5

Caleb Hale
Journalist

150 221 1.5
Popular Comment
It seems everyone forgets the gaming audience was a lot smaller prior to this generation. With the Wii, Nintendo roped in a bunch of new consumers who typically don't buy video game consoles. This was always destined to be a one-off success, because they simply weren't going to convert every one of those new customers into hardcore gamers.

Posted:A year ago

#6

Kieren Bloomfield
Software Engineer

92 79 0.9
@Caleb - Agreed. Those same consumers seem to be asking the same worrying (for Nintendo) questions about WiiU:

1) I don't get it, what does it do?
2) Is this an add-on for Wii?

Posted:A year ago

#7

Art C. Jones
Writer / Blogger

58 78 1.3
in fact, the only home console that has outperformed the Wii U's launch window, in terms of units sold, is the Wii itself.
I think this is really significant.
...and I think the biggest issue facing Nintendo is negative press. Honestly.
I think people buy into what the press says, which makes it very hard for Nintendo to get ahead when even the casual video game enthusiast sees what has been an avalanche of negative articles about Nintendo going back for years.
That said, the rest of the home console market is starting to feel a similar pinch, and Nintendo is very aware of what they are facing.
I hope they can build off of that core of 20 million and continue to make great games b/c it would be sad for the industry to lose Nintendo making its own hardware to push the industry into different experiences (from analog to motion control, 2 screens to the swiss army knife WiiU asymmetric enabling controller, each has made different experiences available to the industry than was possible before it).

Edited 1 times. Last edit by Art C. Jones on 1st February 2013 9:06pm

Posted:A year ago

#8

Caleb Hale
Journalist

150 221 1.5
@Russell,

The recent ramp up of Nintendo Directs seems to be the company's attempt to combat that negative press. The most recent video, I think, was the first set of announcements to really get people excited about the Wii U. Nintendo's style doesn't really jibe with the way people expect video games to be marketed these days. The culture there in Kyoto is one where people have their noses to the grindstone working on projects. They don't really come up to toot their own horn. The matter-of-fact way in which President Iwata presents upcoming games is a little off-putting when you compare it with other executives, who think their game announcements should be treated like rock shows.

While I'd like the Nintendo Direct videos to be a little more engaging (more game video footage and less one man front-and-center in front of a white backdrop interspersed with bullet points), I'm not sure how I'd respond if Nintendo started marketing itself a little less humbly.

Posted:A year ago

#9

Nick Parker
Consultant

279 143 0.5
It's a good debate but we end up preaching to the converted. I think we have to realise that there is a cultural issue with Nintendo based upon Yamauchi's (some may say xenophobic) legacy of failing to westernise the company. Unlike Sony who likes to think it was the first CE company to think global and act local, Nintendo has made slower attempts to strategise beyond its local home grown thinking. This has lead to a reluctance to embrace online opportunities fast enough despite some success stories but worse still, it may have created an arrogant refusal to recognise the threat of similar gaming experiences and rewards from online and mobile games.

From a games catalogue point of view, this is one of its enormous strengths; neither Sony nor Microsoft have such a high number of 1st party exclusive titles where quality seems to be assured on each iteration. Nintendo deploys this catalogue, as it always has done, on a simple plug and play platform with gaming not cluttered with other media offerings. This is what Nintendo gamers expect. Wii U is not so readily comprehended as a pick up and play device. Education and compelling games are what is needed to accelerate adoption.

Just a note on software to hardware tie ratios; I have not seen attach rates higher than 2 so far on the Wii U at consumer level (global average is between 1.5 and 1.8). Even if the free game in the Deluxe version is included, the rate does not reach the 3.8:1 quoted by Rob which is a Nintendo released figure so most likely produced, on the water, or in both Nintendo and retailers warehouses. Furthermore, there is also some hardware inventory around as about 2.15m units of Wii U has been sold through to consumers to end of December from the 3.1m produced and sold by Nintendo according to its recent earnings release.

Edited 1 times. Last edit by Nick Parker on 2nd February 2013 11:55am

Posted:A year ago

#10

Preet D Bass
student

92 13 0.1
I would like to say that 4mil to 5.5mil & 15mil to 17.5mil is closer to there prediction than sony's 3mil to 13 mil prediction. As for Nintendo themselves have been in the console business since the beginning.

Posted:A year ago

#11

C. Bruner

4 3 0.8
"I have not seen attach rates higher than 2 so far on the Wii U at consumer level"

As a Wii U owner, I have purchased 2 games other than the pack-in at retail. However I have purchased another 2 games online from the Eshop and am likely to purchase the majority of my software that way (subject to price and tying to person, not console) as it is hellishly convenient to not have to get up off the couch to switch disks.

I know ... lazy ... but I suspect I'm far from alone :)

Posted:A year ago

#12

Bruce Everiss
Marketing Consultant

1,692 594 0.4
Gaming is booming like never before. This is the golden age of gaming. Vastly more people are playing games than even a year ago. Vastly more new games are published each week than ever before. This is nothing short of a revolution.

This has happened because of the decline of the console. In 2008 consoles were the dominant gaming device. It has been downhill for them ever since and gaming has benefited enormously.

The root cause of the revolution is that gaming has moved from dedicated devices to general purpose devices.
So the number one gaming device in the world, by a huge margin, is the smartphone.
Number two and number three are the PC and the tablet.

So if we know this then so do the platform holders. Microsoft and, to a lesser extent Sony, have reacted to this by making their home consoles into general purpose devices. With the next generation they will take a further huge step in this direction. Next Xbox and next Playstation will be information and entertainment hubs that just happen to play games. Apple will probably create a device that does likewise.

But Nintendo are completely out of step. Perhaps blinded by the huge success of the Wii and the immense power of their franchises they have gone for a dedicated gaming device. Maybe this is arrogance, maybe they know something that nobody else does.

And a final note. The Dreamcast had lots of really great Sega IPs. But one of the major blows that helped kill it off was when it was deserted by EA.

Posted:A year ago

#13

Yiannis Koumoutzelis
Founder & Creative Director

358 187 0.5
EA although big, doesn't have the power it used to have. Nowadays, EA and Activision, although they do support and produce some of the best games out there, have lost the importance they used to have, especially since a publisher in the old context doesn't apply in the same manner anymore. In fact, old school publishers have to try twice as much to stay relevant in this new business world, which doesn't necessarily need them OR does not need the type of expertise they have to offer.

Posted:A year ago

#14

Daniel Hughes
Studying PhD Literary Modernism

436 496 1.1
@ Bruce

Sega had some great IP, yes, but they didn't boast IP that had the kind of selling power Nintendo's IP does. For example, the most successful Sonic (Sega's most successful IP) licensed game is... Mario & Sonic at the Olympic Games. A telling statement when you want to consider the selling power of Sega's IP and argue that Nintendo are somehow in the position Sega found themselves in 12 years ago.

While you often post insightful commentary, consistently arguing that the Wii U is Nintendo's Dreamcast, just doesn't make sense. IP aside, Nintendo have far more cash than Sega ever had. Sega only ever launched one seriously successful product--the Genesis, which eventually finished up behind SNES--and it took numerous hardware missteps (Mega CD, 32X, Game Gear, Saturn) for Sega to completely negate the success of Genesis and put themselves into a crippling financial position. Nintendo, while facing severe challenges, are coming off the back of their most successful hardware generation yet, with billions in cash, and have a profitable handheld business to absorb the shocks of launching the Wii U. Nintendo's least successful home console yet (GameCube) sold more than Dreamcast and Saturn combined while turning a profit and boasting an attach rate of 8 to 1, and their only failed piece of hardware, the Virtual Boy, came out in 1995, not even slowing down the Game Boy brand, which prospered for another decade.

While it's absolutely true that Wii U may yet fail, Nintendo have more powerful IP and far more money than Sega had when they launched the Dreamcast--meaning Nintendo have far more ammunition to fire to build up momentum for their new system, and that if Nintendo absolutely have to, they have the resources to launch another console. They are by no means in a battle for existence right now. A battle to sustain wider relevance is not the same as a battle to survive.

Finally, EA can no longer make or break systems the way they used to be able to. They were hardly instrumental in the success of DS or Wii. Wii U will succeed or fail based on what Nintendo do, regardless of whether or not EA support the system.

Posted:A year ago

#15

Justin Biddle
Software Developer

149 456 3.1
I distinctly remember Bruce a few months before WII-U launch saying Nintendo were the only one of the big three consoles that was likely to succeed and singing WII-U's praises. I have ask what changed Bruce's prediction apart from sales figures because nothing about what the WII-U's feature has changed since then?

Edited 1 times. Last edit by Justin Biddle on 4th February 2013 1:12pm

Posted:A year ago

#16

Bruce Everiss
Marketing Consultant

1,692 594 0.4
@Justin Biddle

I often change my mind when the underlying facts change.

It is now clear that Microsoft and perhaps Sony are not making next generation consoles. Instead they are making general purpose consumer media devices that just happen to play games. And it looks like they will be joined by Apple. So the nature of the competition for consumer spend has changed somewhat.

Posted:A year ago

#17

Justin Biddle
Software Developer

149 456 3.1
Fair enough

Posted:A year ago

#18

Justin Biddle
Software Developer

149 456 3.1
By the way, although I don't agree consoles are dead I do agree they need to be and will be more than just a pure console (which to be fair the current models have slowly been shifting that way).

Edited 1 times. Last edit by Justin Biddle on 4th February 2013 7:23pm

Posted:A year ago

#19

John Scalzo
Editor-In-Chief

9 21 2.3
"I have not seen attach rates higher than 2 so far on the Wii U at consumer level (global average is between 1.5 and 1.8)."

The 3.8 number comes direct from Nintendo: http://www.nintendo.co.jp/ir/en/sales/hard_soft/index.html

And the 1.5 number is almost surpassed just by using Nintendo's published sales figures for New Super Mario Bros. U and Nintendo Land (which don't seem outlandish when compared to user numbers on the Nintendo Network). I'm not sure it's reasonable to assume that every other Wii U game didn't sell a single copy or for Nintendo to be exaggerating their sales numbers in a financial report.

Posted:A year ago

#20

Adam Campbell
Associate Producer

1,137 914 0.8
Daniel Hughes echoes my mind. As I once said myself, lots of cash and some of the most powerful IP in history is something that completely separates Nintendo from SEGA.

As for the current situation, the Wii U seems to be doing really well the only problem so far is a few overambitious sales projections making people worry as usual.

As for the future, that will be quite interesting...

Posted:A year ago

#21

Paul Johnson
Managing Director / Lead code monkey

800 998 1.2
Nintendo. I'm not alarmed.

Posted:A year ago

#22

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