Fragile Finances

Nintendo's financials are in trouble - but the company's losses don't mean it's Game Over

There are still a few months left to run of Financial Year 2011/12, but it now seems certain that this will be the year in which Nintendo marks an unwanted milestone - the first full-year operating loss ever to be announced by the company. Revised financial guidance from the firm points to a 65 billion ($843m) net loss for the full year - a harsh turn for a company which only a few years ago was one of Japan's most successful and valuable enterprises.

It's really tempting to try to fit those figures into the industry's general narrative of the moment. It's so neat and tidy to say, hey, Nintendo's made a huge loss - its first ever - just as the handheld and casual markets which have been its bread and butter are swallowed up by smartphones and tablets. The two must be connected, and the link only looks stronger when you consider that Apple's record-breaking sales and profits were announced only a few days before Nintendo's warning.

The Yen has risen so high that it has forced Japanese firms to choose between slashing their profit margins down to the bone, or raising prices and being uncompetitive

As ever, though, the situation is a bit more complex than that. We all know that 3DS struggled on the market at launch, of course, and you can assign various different reasons to that depending on your own biases. Consumers don't want a dedicated handheld when they already have smartphones. Nintendo didn't market and explain the console well enough. The launch software line-up was weak. The price was too high. In truth, the problems sprang from a combination of these factors, and no one factor can be pinpointed as the sole reason for the weak launch.

Therefore, Nintendo had a pretty horrible Q1 and Q2. It was lumbered with a system that didn't sell, forced to accelerate software development and intensify marketing (both of which cost a lot of money) in order to get it moving, and finally forced to accept a serious price drop which shaved its profit margins down to levels that the firm has probably never accepted on a hardware product before.

Those factors alone would have made life hard for Nintendo in 2011/12, but had a sucker-punch like the 3DS' launch flop come at any other time, the company could probably have absorbed it without too much damage to the bottom line. Instead, the 3DS' difficulties came at the worst possible time for the company.

Several factors made the past year a pretty fragile time for Nintendo. Some were internal - most notably, the fact that the Wii is rapidly winding down towards the end of its lifespan, causing a hefty drop in sales (not unreasonably, given that the console is within touching distance of 100 million units sold already) and the requirement to ramp up R&D and manufacturing on the Wii U.

Others, however, were external - most notably, the value of the Yen. Nintendo's financials have historically been extremely vulnerable to fluctuations in the Yen exchange rate, since the firm not only sells a large volume of products overseas, it also holds huge assets denominated in foreign currencies. As a consequence, many of Nintendo's weaker quarters in the past have actually had nothing to do with operational difficulties, and everything to do with vast movements in the value of US Dollar denominated assets which have to be translated into Yen for Nintendo's balance sheet.

This time out, though, the Yen presents a more direct problem for Nintendo - as it does for the entire Japanese export sector. The currency has risen so high, and stayed there so long, that it has forced Japanese firms to choose between slashing their profit margins down to the bone, or raising prices and being uncompetitive. Nintendo has had little choice but to follow the former option, and that's had a critical impact on the firm's profitability.

Want an illustration of how serious the Yen problems are for Nintendo? Right now, US$1 buys you about 77 - so a $169 Wii with Mario Kart bundle is worth about 13,000 (of course, Nintendo doesn't take that entire $169 back to Japan, but it's a reasonable illustration). At the start of 2010, just two years ago, the exchange rate was more like 93 to the dollar, so that $169 bundle would pull in 15,700. Back in mid-2008, before the financial crisis hit - but well into the lifespan of the Wii, so pricing and so on had already been planned for ages at this stage - the rate routinely hovered around 110, making that bundle worth 18590.

Look at a Wii console on Amazon Japan today, and you'll note that the basic Wii bundle (which doesn't include Mario Kart in Japan, but does come with an extra Wiimote and a copy of Wii Sports Resort) costs around 18500. Look familiar? That's how much Nintendo expected people to be paying for the Wii - not just in Japan, but everywhere. Currency fluctuations since then haven't just robbed Nintendo's coffers of a cent here, a Yen there; they mean that American consumers are, in effect, paying 5,500 less for their consoles than Japanese consumers are - around $71 lost on every single console sold.

With the 3DS off to a good start and the Wii U preparing to launch, it seems very likely to me that Nintendo will be back into profitability for the 2012/13 financial year

It's not just the Wii, of course - this applies to every single piece of hardware (including the already steeply discounted 3DS) and software which Nintendo sells outside Japan, with European prices being even more aggressively impacted by the currency changes than US prices, in some instances. This, more than almost any other factor, is what has made 2011/12 into a horrible year for Nintendo - not least because it denied the company any strategic flexibility. A price-cut for the Wii in light of tough sales was to be expected in calendar 2011, but to Nintendo's bean-counters, the Wii is already selling for $71 less in 2011 than it was in 2008, without any of the sales bump a real price cut would have generated. Ouch.

Of course, while the currency problems explain a lot about the financial figures, the situation with regard to missing hardware sales targets is a separate matter. The Wii was meant to sell 12 million units this fiscal year - it's now projected to manage only 10 million, although again, it's interesting to wonder what would have happened here if macro-economic conditions had allowed for a more flexible price strategy. The 3DS was expected to sell 16 million units, and will instead sell 14 million.

There are two ways of looking at those numbers. The first is that actually, the 3DS numbers are in pretty rude health for a console that was supposed to be on its deathbed only weeks after launch. The installed base right now is 15 million, and will tip well over 17 million by the end of the year. That's comfortably in the realms of being a viable platform, and even if it's not quite up to Nintendo's expectations, it's well on the way to reassuring developers that this is a good console on which to place their bets.

On the other hand, those Apple figures loom ominously over the whole affair. In the past three months, Apple sold the best part of 70 million iOS devices - with record-breaking sales of iPhones and iPads, as well as extremely solid sales of the iPod Touch. In other words, Apple's iOS sales for three months were four times greater than Nintendo's 3DS sales for the entire financial year. Even accepting that many of those iOS devices will never be used to play a game, that's a statistic that lends fuel to the arguments of those who expect dedicated handheld consoles to die out sooner rather than later.

It's not all doom and gloom for Nintendo. The company's partners will no doubt be reassured by the fact that even if the full year results aren't great, the crucial October to December quarter saw Nintendo making a profit - and on the strength of that performance, with the 3DS off to a good start and the Wii U preparing to launch, it seems very likely to me that Nintendo will be back into profitability for the 2012/13 financial year. Most importantly, the Yen doesn't really have any more shocks to deliver - any further rise in value will have to be counteracted aggressively by the Japanese government, if the country wants to retain any export economy at all.

It doesn't fit with the industry narrative, but it's important to see these figures for what they are - a reflection of a macro-economic difficulty that's impacting one of the industry's most successful companies. It's not proof that iOS is killing Nintendo faster than expected, or that the casual games sector has disappeared overnight. Both of those things might still come to pass - but anyone claiming that this week's figures prove the argument one way or another is guilty of twisting unrelated figures to prove their own biases, and nothing more.

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Latest comments (38)

Roberto Allocco6 years ago
Great analisys of the situation, i agree ^^!
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Good stuff. Its the critical analysis of the Yen impacting on the Japanese products I was looking for.

This currency issue probably also has a similar effect in various other regions eg. US/UK, US/EU but seeing as both the Yen and USD are reserve currencies, it probably causes larger effects on these two currencies alone. So all in all, its too early/easy to say Nintendo made a dramatic loss due to operational issues.
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Daniel Hughes Studying PhD Literary Modernism, Bangor University6 years ago
Good to see someone doing an in-depth analysis of the currency situation, thanks Rob! It's fascinating to see how hard the currency problems have hit Nintendo; even with the 3DS slow start and price cuts, and missed hardware projections, with more balanced currency markets it's not unreasonable to assume Nintendo would still have been on track for a healthy profit this year. Hopefully for them and other Japanese businesses, the situation won't go on indefinitely.

I do wonder though, could we look (over the next twelve months) at the ability of the traditional handheld and the iOS markets to co-exist? I personally see no reason why this can't happen. I'd be interested to hear your thoughts on it, Rob.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
Thank you, Rob. It's good to see a fully explained article cover details that I've touched on in small doses through the year.

I tracked it once that every single quarterly loss in their history (their first coming in 2005) can be directly attributed to the appreciation of the Yen against the Dollar. Better stated, had the exchange rates not changed, they'd have made profits every single time including those quarters reported recently (Q1 and Q2 2011). Q3, as you noted, has already changed the financial direction by posting a $280 million profit.

The 4th quarter should also see further profit of ~$190 million (based on the average sales difference between Q3 and Q4). But that, along with Q3's $280 million, won't be enough to reduce the loss from Q1 and Q2 completely ($910 million). That would leave an overall fiscal year loss of $440 million (34 billion Yen).

Though Nintendo is forecasting 65 billion Yen ($843 million ) in losses for the full fiscal year. Are they expecting 31 billion Yen ($400 million) in further Yen appreciation, price cuts, capital projects (like the $212 million R&D facility), Wii U component production, etc...?
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Bruce Everiss Marketing Consultant 6 years ago
Microsoft is a software company, Sony is an electronics company, Nintendo is an entertainment company. This is what informs their every action and it is what differentiates them. It is their distinct strategic advantages.

Anyone reading the history of Nintendo will see that they have had their ups and downs as ideas were accepted or rejected by the market. Their problem just now is that they have at any one time two platforms in the market and currently both are in the doldrums. In the home console their current offering is reaching the end of its life and will soon be replaced. In mobile devices they are being destroyed by smartphones and really, really need to stick Android on the DS very quickly indeed.

Nintendo have amazing resources and an amazing IP back catalogue. So they should recover from their current position. Or they could do a Sega and enter an ever downwards spiral.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
Bruce, did you read that article at all/ Their problems aren't about competition but currency exchange fluctuations.

And "getting destroyed" by smartphones isn't exactly correct. The markets have minor overlap and the 3DS has been the best selling dedicated game device world wide every week since mid November. I fail to see how that translates into 'doldrums'.
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Francisco Javier QA Engineering & Coordination, Saber Interactive Spain6 years ago
I would add Social Network games as a Casual Game robber from Nintendo. Tons of people I know used to play casually on the Wii, but now they're playing free Facebook games. That's gona hurt Nintendo a lot. On the Other Hand, I feel a bit discouraged about the future of my daydreaming company because they're not getting the new devs that are bringing novelty to the industry due to difficulties to get a Dev Kit.

For the 3DS there's no Unity 3D, there's not Unreal, there's not Corona, not Torque... how can they get the hits being developed for other platforms if no one can test their platforms? I am a developer too and I understand very well the industry of Nintendo and I think I could do money, but instead I have been developing games for mobile and social networks for 8 years. They must do something to address this issue ASAP.

Edited 1 times. Last edit by Francisco Javier on 27th January 2012 11:21am

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Kingman Cheng Illustrator and Animator 6 years ago
That was well illustrated Rob, thanks, especially seeing the impact of the situation surrounding the Yen. Whilst yes it's been harsh times I would agree they're not down for the count yet.
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Bruce Everiss Marketing Consultant 6 years ago
@Jimmy Webb
Currency fluctuations are short term and can be beaten by offshore production.
Nintendos problems lie far deeper than that.
The DS was so badly in the doldrums that they had to knock a third off its price, further destroying their profitability. And the overwhelming majority of the hundreds of millions of people playing games on smartphones will never countenance a dedicated portable gaming device.
Saying that there is minor overlap totally ignores the facts.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
Keyword in your statement is "was" in the doldrums. You are ignoring the fact they've already returning to both great sales and profitability.

And your final 2 statements contradict each other. You say there are hundreds of millions of smartphone owners that won't bother with dedicated game hardware then you say there is great overlap. Well, which is it? Do those consumers consider both products or not?

But again it is irrelevant when you look at the market itself. Are you trying to tell me that the best selling dedicated gaming platform is doing badly? In what world does that even make any sense?
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Bruce Everiss Marketing Consultant 6 years ago
In a world with 250 million Android devices sold (and 11 billion downloads from Android market) mostly in the last year against 150 million DSs sold over more than 7 years.
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Morville O'Driscoll Blogger & Critic 6 years ago
@ Bruce

I've not looked at the figures for awhile, and I'm genuinely rather forgetful sometimes. Is "devices sold" the same as users? Because it strikes me that that's a way of inflating the figures so they sound awesome. I'm probably not the greatest example, but I don't treat my phone that well, so I'm wondering how many of those sold are to the same people, after their previous phone is bricked. The same could be said for Android market downloads - first thing someone does when they get a new phone is re-download all the apps they liked on their previous phone for their new one.

Contrast against DSs sold... Well, who can say what the break-rate is for DSs? *shrugs* I'm willing to bet it's less than a standard Android phone is, though.

Edited 1 times. Last edit by Morville O'Driscoll on 27th January 2012 12:11pm

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Mark Burns Programmer, Codemasters6 years ago

That's incredible, surely the total DS audience is -100 million then!
The explosion in the smartphone market hasn't come solely at the expense of the dedicated portable gaming device market. The pickup in 3DS sales, the historic DS sales, the anticipation over Vita etc. all point to a viable future for the market alongside the smartphone market albeit with some overlap.

The vast majority of the smartphone market, as you said earlier, will not buy a dedicated portable gaming device but then they would never have bought one and the devices aren't aimed at them. There are enough people who want to buy them though that there is a viable market for them. Pointing at another market and shouting random numbers isn't changing that.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
Guess we should just call the whole dedicated hardware industry off then. Let them sign away their IP's to the smartphone manufacturers because these multi-facet devices have wrapped up every gamer on the market. never mind the idea that the market pie got bigger, just look at market share with blinders on. You know, the same way people look at net loss with blinders on and miss the foreign exchange rate factor.

Bruce, I know you have a business to market but you're not selling anybody here. Your marketing bullet points that raise dollar signs in the eyes of investors and media relations people doesn't' fly here.

Tell me, what's fast? A Corvette or a Ferrari? Doesn't matter, they're both fast but you are treating the race as though the loser should sign over the title to the winner. Both are fast, Bruce. Don't ignore the forest for a single tree.
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Antony Cain Lecturer in Computer Games Design, Sunderland College6 years ago
Never a dull moment once Bruce posts on a story :)

Bruce, you make interesting points and coax out some even better replies with most of what you write, just ease up on the bias. After all, there's the very real possibility that some of those phones were bought to make calls and send texts - and that not all of those app downloads were games.
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Although this is a poor result (by Nintendo's standards!), there are a lot of factors surrounding this that indicate a return to normal results for Nintendo's future...

- Yen has risen about as much as it can, and all the write-down in inventory and assets is now done
- Nintendo increased their "investments" (not buildings or dev related) by around $500m in the last 9 months - probably leveraging off the strong Yen
- by kick-starting 3DS sales, they have put a lot of pressure on Sony & the PSV. This may turn out to be a tactically brilliant move in the future.
- most of the initial development, tooling, software dev & network infrastructure for the WiiU has now been completed (or the money spent). If this leads to a strong launch for the WiiU, this investment will be easily recouped over the next 4-6 years.
- Nintendo are still in progress with building their brand new development studio/building (due to be ready in 1-2 years?), yet again much of the big $ has now been spent.

Some quick figures put Mario Kart 7 at 5m sold, Super Mario Land around 6m & Zelda around 3m (all sell-through to consumers, not shipped). Even if Nintendo makes $20 on each sale, thats close to $300m. Thats ignoring future sales, back-catalog, hardware and more.

I can't see any argument saying that Nintendo can't be profitable going forward, or that the physical shipped/dedicated hardware model can't be successful. One year of Nintendo's revenue easily exceeds the total, lifetime revenue from both the AppStore & Android stores...
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Tommy Thompson Lecturer in BSc (Hons) Computer Games Programming., University of Derby6 years ago
Thanks again Rob for another informing and well-researched article. It's a tough time in the market and Nintendo have done well to roll with the punches. However given the strong sales toward years-end for the 3DS plus the impending release of the WiiU, I can imagine they will be back in top form next financial year.

*Goes back to playing Skyward Sword*
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There is a silver lining to a strong yen. M&A and acquisitions. Now would be the perfect time to undertake Nomura like consolidation of foreign studios or western market penetration if liquid cash were available (and maybe with some help of "felix felicis")
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Brian Lockhart Senior Producer, Microsoft Studios6 years ago
Good article. Nintendo got caught in a perfect storm that would've crushed a lesser organization.
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Tony Johns6 years ago
The rise of the Yen and the Japanese people still recorvering after a horrible year of environmental disasters as well as the threat of North Korea are all things that have made Nintendo's stock fell as well as many other Japanese companies who had shares in the US market to float their profits.

That is perhaps the only real reason why Nintendo's market value has fallen,

Oh and also the releases of the 3DS as well as the development on the Wii U as well.
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Ove Larsen6 years ago
"3DS has been the best selling dedicated game device world wide every week since mid November. I fail to see how that translates into 'doldrums"

@Jimmy Webb
Unless I'm misjudging the situation entirely, it's similar to that of the PS3. Nintendo is bleeding money on this record selling thing.
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Brian Smith Artist 6 years ago
Great article. Whether through world economic issues or their own mistakes it would be disastrous to lose them. Being an Xbox fan I selfishly wish they'd just become a software company but I've gotta say I was well loooking forward to the Wii U. If they aren't still booting out Mario to market in ten years times it'll be a much duller world.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
Ove, I also posited other information very relevant to your observation.

Q3 (Oct 1 - Dec 31) saw profits of $280 million, not losses, as I noted in my posts above. Therefore, given that their current run of chart topping sales having begun in mid November and lasted well beyond the end of December, the correlation of high sales and losses is incorrect.

The losses, which were largely attributed to the Yen to Dollar exchange rate, had their largest impact during Q1 (Apr 1 - June 30). Q2 (July 1 - Sept 30) saw the losses reduced. And now Q3 shows a return to both profits and high sales.
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Zachary Green6 years ago
A very well written and informed article. Good to get some professional insight into Nintendos financial year.
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Teut Weidemann Consultant Online Games, Ubisoft Germany6 years ago
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Also check their cash reserves. Nintendo is pretty rich and can finance their running costs just with cash investment businessess. In other words Nintendo can afford to have patience, which is typical for a japanese company. They don't care if they "win" this year or the next decade.

Everytime the console change people underestimate Nintendo and are surprised when they come out with something everyone else said "its crap".

The weakness of Nintendo being a japanese company is the online component/social network experience. Thats where the others have the lead and Nintendo need to catch up - fast.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
Good points, Teut. I had planned to bring up their liquid capital as well. Most people that talk of Nintendo being in financial trouble and going the way of Sega don't realize that Nintendo has more liquid capital than Sony does. A few bad quarters with unfortunate exchange rates is nothing more than a firecracker trying to sink an aircraft's going to take a whole lot more.

As for the online factor, they seem to be addressing it as we speak with the announcement of the Nintendo Network for 3DS and Wii U. Not many details are known yet (E3 will have much more) but the early information is definitely a shift in the right direction.
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Zan Toplisek6 years ago
@ Jimmy Web: Don't know if you've read the latest news (you probably have), but Iwata recently revealed the WiiU download service probably won't be up and running by launch which is worrying, to say the least.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
Zan, I believe Iwata is merely stating that they are not finished finalizing certain aspects of it; namely how their relationship with brick and mortar retail companies will be affected, market conditions and what the final internal and SD storage capacities will be.

The latter is of greatest importance. Since games will come on a medium developed to hold 25 GB's per layer (multiple layers intended), if SD cards are their main form of mass storage again, digital sales of full retail titles won't make any sense. I think they do plan to include a larger internal mass storage system (very large classic HDD or more modestly sized SDD) and the flooding Thailand as well as the increasing capacity and decreasing cost of SDD's are delaying their decision on which means to include with the system.

The decision could affect billions in costs depending on how those factors play out so it's wise of them to take their time and not commit to anything that may change prior to initial mass production.
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Zan Toplisek6 years ago
Well, let's hope they get it (online-wise) together this time around. We'll see at E3.

Edited 1 times. Last edit by Zan Toplisek on 29th January 2012 12:48am

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I would love to see the WiiU use an external hard disk, USB (or custom?) connected for its storage (as long as this doesn't affect their anti-piracy solution). The concept of unplugging a portable hard-disk, and taking it to a friends place to access all your accounts/games/saves/content would be great. (it would have to be linked to a specific account, rather than a machine... or maybe some mix).

The hard disk could be completely optional (machine may either have some internal storage, or a SD card slot for basic saves). This would keep the cost of the machine down, and allow Nintendo to sell a range of WiiU branded hard disk peripherals.
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Ste Hickman Writer 6 years ago
Excellent analasysis.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
Michael, they did state that individual accounts will be part of the Nintendo Network (at least for Wii U) so access to your account from a machine you don't own will be possible.

You know what would make a nifty way to handling accounts? The Near Field Communication protocol. Say each console comes with up to 4 personal NFC devices like an ID card. You link your account to one of the NFC devices. Now no matter which Wii u you are playing on, you can instantly log into your account. And being a physical device, it helps deal with piracy and account hijacks.
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Patrick Frost QA Project Monitor 6 years ago
Until someone nicks it :p
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Andrew Goodchild Studying development, Train2Game6 years ago
Last year Ninty made noises last year indicating they may let third party stores on the network, which was taken to be a move towards EA, but possibly also Steam.
If they do this they could get round their disadvantages with online stores by setting people like Valve and EA help sort it out. Wonder if it's still on the cards.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
Andrew, this statement from Nintendo on the new service seems to suggest it may still be in the cards.

"we are aiming to establish a platform where various services available through the network for our consumers shall be connected via Nintendo Network service"
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Patrick Frost QA Project Monitor 6 years ago
I personally bet that on being one of Nintendo's hidden aces for the Wii U. A system with an area that is a relatively open platform for publishers and digital stores to do stuff in their own right. Sounds like a nice compromise between an open platform and a closed one but then again you could just end up with the same situation as the iOS App store.
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Andrew Goodchild Studying development, Train2Game6 years ago
I would say if they get Steam on board, they suddenly become the console with the best or second best store front, depending on your view of Steam vs XBL. I've only used PSN on PSP, but my experience was that whilst better than the Wii store, it is still really clumsy, Steam, and to a lesser extent origin would definitely in my opinion give Nintendo the usability edge over PSN.
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@Jimmy: I like the NFC idea a lot, it might also explain how Ninty plan to integrate NFC into the system. Cards would also be linked to Miis - taking a card to a friends place would add your Mii to their system. Its also how payments would probably work - the card acts as a login, or even stores encrypted credit card data (it may have a PIN or password, and allow people to lock it out if its lost). Cards could even have an amount of credit on them.

Stored value NFC cards are only a couple of dollars each as well, and give Ninty something else to sell at shops.

E3 just got a lot more interesting IMO...
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