Game Marketing Tips, Analysis, and News

Saturday, July 30, 2011

Nintendo's Real Problem

Nintendo has some serious troubles right now, and the future looks more than a little grim. Since their apocalyptic announcement yesterday, a few more facts have emerged.

Item: Nintendo stock dropped 12% yesterday after the news hit, to end at 12,290 yen (about $160 per share). This is the lowest level it's been since 2006, before the introduction of the Wii. Now today it dropped to 11,100 yen, for a total drop of about 20% for the week; shares have dropped 50% since the beginning of the year. Not surprising since Nintendo slashed their earnings forecast for the fiscal year by 82%, with profits expected at the lowest level in 27 years.

Item: Nintendo's market capitalization dropped to an astounding 1.7 trillion yen, or about $22 billion US at the current exchange rate. Which is about in the low end of the range where Zynga's IPO is expected to bring in.

Item: The exchange rate for the yen hit a 4-month low today at 77.45 yen to the dollar, which only makes it harder for Nintendo to make money on products it sells in the USA.

Item: Iwata-san cut his salary in half, and cut other executive salaries by 20-30%.

Item: The price cut on the 3DS may mean that Nintendo is selling each unit at a loss. Reports on this are mixed, so take this one with some salt added. It's certainly true, though, that Nintendo is making far less on each unit sold than it was before the price cut. That $80 price cut means that Nintendo will have to sell at least 3 or 4 of its own software titles to make up the profit differential, and more of third-party titles.

Item: 3D is falling out of favor in the game industry. Here's what EA said yesterday, in a Gamasutra article:

Electronic Arts has seen poor returns when allocating its resources to displaying its games in 3D, according to CEO John Riccitiello, who says that the company would prefer to use those resources focusing on social features.

Speaking to company shareholders in a meeting remotely attended by Gamasutra, Riccitiello said that EA's business responds to the needs of consumers, and from what it has seen, consumers are not asking for 3D.

What does this all add up to? A very uncertain holiday selling season for Nintendo. They've pretty much fired off all their big weapons for the rest of the year, at least as far as price cuts are concerned. They certainly can't afford to cut the price on the 3DS any more, not when they are losing money on each one (or near enough to that). They have to sell enough volume of the 3DS to get volume discounts on the components, and perhaps do some re-engineering, to get the price down further. That couldn't really happen until 2012 sometime, and only if sales pick up significantly will Nintendo get some volume pricing.

Nintendo has one more price cut left for the Wii, to $99, and they may well play that card for the holidays. Wii sales have not been juiced much by the price cut; news of its replacement may already be affecting the desire to pick up the Wii. More importantly, though, is the complete drop-off in third-party Wii development. Basically, for interesting new Wii software it's Nintendo or nobody.

Can Nintendo rush the Wii U out the door? Not if they want to have a successful launch. Even if the engineering was far enough along, there's the little matter of launch software. Surely Nintendo learned from the 3DS launch how important it is to have some gotta-have-it titles when you launch new hardware. That whizzy 3D-without-glasses feature you that was enough to move hardware at a premium price turns out to be a gimmick with low appeal to gamers. Perhaps that may change, if someone releases an awesome piece of software that really shines in 3D and shows why it is a useful feature in a game. I doubt that will happen, though.

I don't expect 3DS sales to reach the levels Nintendo is hoping for; I would be astonished if they managed to reach their goal of 16 million units sold by the end of March 2012. I expect they'll fall short by millions. The Wii U will launch next year sometime, but I hope for Nintendo's sake they do a sensational job on the launch software. Even if they do, success is still iffy. The markets have changed; certainly 3 years in a row of falling console software sales should be enough to tell us that. The market for retail packaged software will never recover to its previous heights. This may not hurt a company like EA that is busy transitioning to digital distribution, but a company like Nintendo has come out repeatedly and says it doesn't think online anything is worthy of a big investment. That's not a winning strategy for the future.

No comments:

Post a Comment