Steve Peterson Contributor/[a]list daily senior editor Friday 20th April 2012 Share this article Share

Companies in this article Nintendo

Nintendo is unveiling its next console, the Wii U, in early June for shipment this holiday season. The launch of a new console, every 5 years or so, is a crucial moment for any console manufacturer. The stakes are much higher than normal for Nintendo's Wii U launch, since Nintendo is projecting its first annual loss in 30 years, estimating a net loss of ¥45 billion (about $552 million, or £343 million, or €420 million) after previously projecting a ¥20 billion profit. The Wii, after a very successful run, has seen steep sales declines in the USA, from 7 million units sold in 2010 down to 4.5 million sold in 2011; Nintendo is now estimating only 10 million units sold for the FY 2012 worldwide.

Third-party developers have slowed development of new Wii titles to a trickle, and Wii software sales have plunged. "Everybody needs to realize that the Wii software segment is trending down 50 percent year over year, and has been for the last 12 months. That is a massive decline," said Cowen and Company analyst Doug Creutz. This all occurs at a time when overall sales in the console industry have slowed, and many analysts attribute this to the impact of mobile, social, and downloadable games. Analysts have begun to wonder if the console industry can ever get back to the size it reached in 2008, with sales dropping every year since then.

"As of March 2012, Nintendo had over $10 billion (£6.2 billion, or €7.6 billion) in cash in the bank"

The Wii U has already come under fire, even before solid information has been released. The graphics and processing capability is rumored to be about the level of the Xbox 360 and the PS3; the retail price may be $300 or more in the USA; many wonder if the tablet controller will actually add to gameplay or just become a focal point for arguments over which player gets to use it, since there can be only one. It's a tough market, and there's a skeptical crowd of analysts and consumers who are already hearing rumors of vastly more powerful consoles from Microsoft and Sony that may be released by the end of 2013. Does Nintendo have a chance?

Absolutely. In fact, Nintendo has many advantages in this battle, and if they extend some of the boldness and creativity they show in game design to their marketing and business practices, Nintendo could once again be the leader in the console business. Let's take a look at some of Nintendo's key strengths and how they could leverage them into a profitable leadership position.

Start with a fact that's not mentioned often enough: As of March 2012, Nintendo had over $10 billion (£6.2 billion, or €7.6 billion) in cash in the bank, and another more than half that again in premises, equipment, and investments. That is a huge competitive advantage over Sony, which is looking at a loss of over $6 billion for the year. Microsoft has a huge pile of cash, more than 5 times that of Nintendo, but they have many other places to spend money (such as the mobile phone business, and Windows 8). Nintendo can afford to spend a lot of money in order to grab market share, and can easily outspend Sony (Microsoft might be a different story if they feel sufficiently threatened).

"The Wii U's strategy for success is simple. It's value"

Nintendo's vast resources give it many chances to recover from mistakes, and they've shown how they can recover from severe mistakes with the 3DS. Nintendo made a number of big mistakes with the 3DS launch: They priced the handheld much too high, at $250; they didn't have any top-notch titles or key franchises available at launch; the eShop wasn't working for months; and Nintendo was so confident they didn't bother with much in the way of marketing. Not surprisingly, after a good initial sell-in sales fell off a cliff. Nintendo watched this for a few months, then surprised everyone with a bold $80 price cut. By the holiday season, when several key 3DS titles shipped, the 3DS had recovered and turned into a solid seller (though still not up to their initial projections for the year). Nintendo showed that they can recognize a problem and figure out the correct solution, and return to leadership in the handheld console market.

The Wii U's strategy for success is simple. It's value.

Think abut it. The raw power of a console is not the most important thing; it's price performance and the total value of the package to the user. Nintendo has usually tried to make money from the sales of their consoles from day one, unlike the vast amounts of money that Sony and Microsoft lost with each sale of the PS3 and the Xbox 360 when they launched (said to be $300 per unit or more). The rumors point to a hardware cost for Nintendo of $180, and suggest that Nintendo may need to price the Wii U at $300 or more in the USA in order to make a profit. What if Nintendo were to price the Wii U at $249, or even $199? This would instantly change the battle for console leadership. Microsoft and Sony would have a huge problem trying to meet that sort of price even with their current consoles; for their next-gen consoles, forget it.

How could Nintendo afford to lose $50 or $100 per unit? Remember that massive stockpile of cash Nintendo has in the bank? Time for an investment in market share. It's not as dire as it seems if you take the long view. Let's say Nintendo loses $50 for every Wii U they sell; that will in a year or two be reduced to nothing as component costs come down, and Nintendo re-engineers for cost savings (the usual pattern in console manufacturing). Let's pick some numbers to work with; say that Nintendo could sell 10 million Wii U consoles in a year at $300, but they could sell 15 million if they priced it at $249. We'll assume they break even on each sale in the first case, and lose $50 on each sale in the second case. So pricing the Wii U at $249 would cost Nintendo $750 million over the first year. That's a lot, but less than 10% of their cash on hand.

The real trick is when you examine what leadership does for you in the console market. Nintendo probably takes in about $7 per unit of software sold by third-party publishers as their licensing fee. If you're selling a lot of consoles, you're going to get more publishers making more software, and each title will sell more. If Nintendo could see sales of 100 million additional third-party titles, that's $700 million in pure profit... which just about covers that expense of losing $50 on each console. And remember, once the hardware costs are reduced, they would no longer be losing money on each unit.

That basic math is why Sony and Microsoft were willing to lose hundreds of dollars per console initially, and it has proven to be a solid investment for both companies in the long run. Nintendo has had the luxury in the past of not having to make that investment, but if there was ever a time to do so, it's now. Nintendo could even make it more dramatic: Price the Wii U at $199, drop the Wii to $99, and watch Sony and Microsoft squirm as they try to match those prices.

"Nintendo could even make it more dramatic: Price the Wii U at $199, drop the Wii to $99, and watch Sony and Microsoft squirm as they try to match those prices"

This could give Nintendo a window of opportunity. Microsoft and Sony are planning on introducing their next-gen consoles in 2013, and those will likely be aiming at high power and high prices. Nintendo could have a strong market position at the low end, as they did with the Wii. The Wii U has to offer things the current consoles don't, which the tablet controller might make possible. New gameplay, 3DS connections, iconic Nintendo brands.

Pricing is only one part of the value equation, and Nintendo has plenty of ways to add value to the Wii U without increasing costs very much. Software can provide great value at a very low cost of goods. What if Nintendo offered some classic games updated with new graphics? Take some classic appearances of key brands (Mario, Link, Donkey Kong, etc.), spiff them up a bit artwise, but keep the gameplay intact. This would add value to the console and encourage users to get all of the games in the series, if the marketing was handled properly.

Nintendo shouldn't just assume that everyone knows their brands and loves them. True enough for a big fan base, but Nintendo's brands haven't been the center of kids' attention for the past decade or so. The latest kids are looking at Angry Birds more than Mario. Nintendo could make their classic brands exciting again and motivate fans to pick up new software. Tie in to big titles coming up, and use these classic games to pre-sell the latest adventures. For that matter, why not include the first levels of a new Mario game, and the intro and first dungeon of a new Zelda game? Give players hours of fun right in the package before they have to buy some software. Remember how well that worked with Wii Sports?

There are plenty of other avenues for Nintendo to explore. They could redefine the industry's business model by being the first company to make episodic content work; regular new levels of Mario or dungeons for Link to conquer. Utilize the technology advantages inherent in the tablet controller; a software keyboard can easily be put on the tablet, so social networking is a natural, and this is something we won't see for the next-gen consoles from Sony and Microsoft (at least, not that we've heard). Note also that it's possible to put ebooks and movies and music on the tablet, just like on an iPad or a Kindle Fire. Get a bestselling children's ebook on there just to completely redefine what experiences people can have with a console, and get educators on your side to boot. For a truly bold move, cut a deal with Amazon to latch on to their huge content library for digital sales. If your engineers can make it happen, Nintendo, see about using the 3DS as additional tablet controllers to get around the limit of only one tablet controller. That will not only be a compelling advantage over the console competition, it would help to sell more 3DS units.

"Use the NFC capability of the Wii U like Skylanders. What if Nintendo had a game with hundreds of cool characters where players would want to collect 'em all? If only they had such a game..."

Nintendo has been slow to embrace digital distribution, though the Nintendo Network they've announced looks like it will mean some advances in that area. Physical retail stores still have advantages, though. Nintendo can play up those advantages by making the boxes cool again. The industry has spent years trying to squeeze packaging costs, getting rid of manuals, posters, maps, all the cool stuff that used to be in there, and making the boxes as flimsy as possible. Turn that around; don't cut costs, add them. Make every game something to collect physically again. Add posters, DLC, figures, maps, books, music, video. Do collector's editions for all major titles. Give customers a reason to run to the store, and the stores more reasons to push your products. If you do all that, you can get away with offering all the titles on a download basis, and the stores won't mind as much. Customers will win both ways, and satisfaction with the platform will increase.

One last idea that Nintendo really has to implement: Use the NFC capability of the Wii U like Skylanders. What if Nintendo had a game with hundreds of cool characters where players would want to collect 'em all? If only they had such a game... Think how those figures would sell! If you really want to get that game going fast, give away a Pikachu figure usable in the game packed into every Wii U at launch, and include a playable demo with it... Sales would be incredible.

These are just some of the advantages that Nintendo can employ to make the Wii U a success. Of course, there's the whole panoply of traditional marketing campaigns, the possibilities for new and innovative gameplay that the tablet controller brings. Will Nintendo actually do any of these things? We'll have to wait until E3 to find out. Nintendo could always implement poorly, forgetting the lessons of the 3DS launch and failing to have killer games at launch time, or price the Wii U too high, or fail to muster significant third-party support. Using the tablet controller might turn out to be more of a hindrance than a help as you try to shift your attention between the controller screen and the TV. Apple could launch their Apple TV this holiday and suck up all the PR attention, and provide some steep price competition. There's a lot that could go wrong. But make no mistake: Nintendo has plenty of ways to make the Wii U a success whatever the power of the hardware may be.