When a company is in trouble, everyone in the industry seemingly comes out of the woodwork to offer up advice. Unsurprisingly, following the bad fiscal report from Nintendo today and the word from CEO Satoru Iwata that the company is examining a new business structure, Wedbush analyst Michael Pachter has chimed in, commenting in his latest note to investors that it's time for Nintendo to abandon the Wii U.
"It is clear to us that the old Nintendo model of proprietary hardware supported by compelling proprietary software is broken," he said. "Nintendo's proprietary software continues to be first rate, but its console hardware is not competitive; the Wii U is under-powered relative to next generation offerings from Sony and Microsoft, and is not competitively priced (priced similar to current generation offerings from the competition). We don't think Nintendo should exit the console hardware business, but think it should consider getting out of the Wii U business, and consider going back to the drawing board on consoles. Nintendo has a console in the marketplace that isn't working, and if it continues to tilt at windmills, its software sales will suffer."
So what's the solution for Nintendo? In Pachter's opinion, the company must swallow its pride and start publishing its first-rate software on competing platforms. Then, once Nintendo is ready to bring a more competitive console to the market, it can withdraw its support from the other systems and focus on its own platform again.
"Under its current business model, if Nintendo discontinued the Wii U, it would sell no console software. We believe that it should reconsider its 'all proprietary, all the time' model, and should consider making its proprietary console software available on other platforms until it is able to release a new console. Once Nintendo has a new console on the market, we think it would make sense for the company to pull all of its software from the PS4 and Xbox One, and go back to being a proprietary software maker. In the meantime, we believe that the company has a problem that it is not acknowledging or addressing," he stated.
Additionally, Pachter believes it's high time that Nintendo give in to the world of smartphones, but only with legacy software: "The company's handheld woes are far more complicated. The handheld business is not failing, but Nintendo handhelds have lost share to mobile and tablet games, and the company will have trouble getting that back. We believe that Nintendo would benefit immensely from embracing mobile and tablet, placing GBA games on those platforms for paid download ($4.99 - 9.99) and developing a broader audience, then releasing current games on the 3DS and exploiting its larger customer base by convincing them to buy a 3DS and a more expensive game. That's hard to pull off, but we believe that Nintendo has the IP to do so."
"We don't believe that Nintendo's troubles are indicative of anything other than that it has an uncompetitive console in the marketplace and mobile is cannibalizing dedicated handheld sales. If Nintendo management addresses these problems, we think that the company has sufficiently strong IP to reverse course and become profitable," he concluded.