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Japanese business feeling pressure after flop of Wii U console

Wii U console flop puts pressure on Nintendo

By Cliff Edwards
Bloomberg News

Nintendo Co. is under pressure to consider ending production of video-game machines after reporting disappointing sales of its Wii U console and forecasting a surprise loss.

Nintendo on Jan. 17 projected an operating loss for the year ending in March and cut its forecast for the Wii U’s annual sales more than two-thirds.

President Satoru Iwata should concede defeat with the Wii U, shut down production and open up Nintendo’s iconic software characters including Zelda and Super Mario to the smartphones, tablets and consoles that have made a shambles of his strategy, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles.

Nintendo should exit hardware altogether, Pachter said.

Iwata “has to take responsibility for the Wii U missing the mark,” Pachter said. “He will be under pressure to make dramatic changes. If he can do so while remaining in charge, more power to him, but they need to make some changes.”

Iwata, 54, said he’s considering changing the Japan-based company’s business model, and he’s not going to step down. To date, he has refused to offer Nintendo franchises for competing console systems or mobile devices. He offered no specifics on the new strategy during a Jan. 17 news conference in Osaka.

“Given the expansion of smart devices, we are naturally studying how smart devices can be used to grow the game-player business,” Iwata said. “It’s not as simple as enabling Mario to move on a smartphone.”

Tying Nintendo’s iconic characters to its hardware helped boost demand for the original Wii, which sold more than 100 million units and became the world’s best-selling console.

This time, delays in its own titles hurt sales of the Wii U, which debuted in November 2012. The console’s failure in the marketplace is dragging down its higher-margin software sales. The company, which had projected a 100 billion yen ($959 million) operating profit for the fiscal year, now forecasts a 35 billion yen operating loss.

“Nintendo should offer Super Mario or Zelda games on smartphones and tablets and raise money,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Holdings Inc. in Tokyo. “If such games become popular, some people may want to play it on Nintendo’s machines.”

Nintendo on Jan. 17 lowered its annual sales forecast to 2.8 million Wii U units from 9 million, and halved its projection for game sales for the system to 19 million units. The company cut its forecast for the 3DS hand-held player by 25 percent to 13.5 million units, a drop from a year earlier.

“Nintendo has a treasure trove of highly recognized characters,” said Amir Anvarzadeh, a manager of Japanese equity sales at BGC Partners Inc. in Singapore, in an email. “They could make billions in carefully devising a strategy that could exploit its strength in content without the price destruction that would come from abandoning its hardware.”

The casual gamers who made Nintendo the leader of a $93 billion industry have abandoned its stand-alone machines, including the 3DS and the Wii U, for cheap downloads they can play on a Samsung Galaxy phone or an Apple iPad. New, faster consoles from Sony and Microsoft ran away with the hardcore players still willing to plunk down $400 for a machine and $60 for a title such as Call of Duty.

Even at $300, the Wii U is doomed because it’s not popular enough for outside developers to make games for, said Ben Bajarin, an analyst with consulting firm Creative Strategies Inc.

“They need to go back to the drawing board to reinvent themselves,” Bajarin said in an interview. “The Wii U didn’t move the needle in gaming, so they need to rethink the value of tightly integrated hardware, software and services.”

Iwata should focus on delivering Nintendo’s iconic characters to mobile devices and the PlayStation and Xbox consoles, Pachter said.

Both the Wii U and 3DS handheld take advantage of touchscreen controls to play many Nintendo games, which would make it easier for the company to deliver versions of its games for smartphones and tablets, he said.

With more than 1.5 billion smartphones in consumers’ hands, Nintendo could release 10 games a year from its library of 1,500 titles, charge $5 to $10 per mobile game, and sell at least 50 million copies of each to a core Nintendo audience, Pachter said. These products alone would generate $2.5 billion to $5 billion a year in high-margin sales without the expense of making hardware.

In addition, Nintendo could keep releasing more expensive titles for consoles, Pachter said. He pointed to the approach taken by game publisher Electronic Arts Inc., which is offering Plants vs Zombies on multiple platforms.

EA sells a 99-cent version for the iPhone and will offer its latest Plants vs Zombies: Garden Warfare as an Xbox exclusive, charging $30 for the Xbox 360 and $40 on the Xbox One.

“The Wii U hasn’t sold well because of Iwata’s misjudgment,” said Yoshihiro Okumura, a general manager at Chiba-Gin Asset Management Co. in Tokyo. “He needs to show a new strategy.”

Making the transition to software maker from console hardware isn’t without risk. Sega Corp., once a leader in video-game consoles, ended production in 2001 and is now part of a company that also makes Pachinko machines and operates amusement parks, Sega Sammy Holdings Inc.

Atari Inc., the video-game pioneer that developed Pong, filed for bankruptcy protection last year seeking independence from its French parent, Atari SA.

In its most recent fiscal year, Nintendo generated the equivalent of $2.9 billion in software revenue and $4.8 billion in hardware, according to data compiled by Bloomberg. The company had 845 billion yen in cash, near-cash and short-term investments as of Sept. 30 and no long-term debt, giving Iwata a cushion to develop a new strategy.

Nintendo shares last year advanced 54 percent in Tokyo trading.

While Pachter recommends exiting the hardware business altogether, making even a temporary shift would buy Iwata time to develop a new console that leapfrogs Microsoft and Sony in three years.

“Nintendo’s console side is broken,” Pachter said in an interview. “They’re not even an also-ran there, they just don’t matter.”


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