There is worse to come for Nintendo.
- Nintendo issued a horrible profit warning on Friday and held a sanguine press conference but there is still worse to come.
- The problem is that Nintendo has not cut its estimates nearly hard enough and I suspect that Iwata-san will be apologising to investors again before the end of his fiscal year.
- The previous forecast of 9m for the fiscal year ending March 2014 was ludicrously high but even the adjusted figure of 2.8m is very optimistic (see here).
- Nintendo launched the Wii U late in 2012 and had 9 months of being the only new console in the market.
- In the first six months of fiscal 2014 (March to September), the device managed to ship 460,000 units just 5% of its goal (9m) for the entire fiscal year.
- This target has been moved down to 2.8m but it is obvious that that is not nearly enough.
- The issues with the Wii U are:
- First: It is horribly underpowered. Its competitors, the PS4 and Xbox One, knock the socks off it when it comes to hardware and graphics performance.
- With that kind of disadvantage, the device needs to be extremely cheap to compensate for that shortcoming.
- Unfortunately at $299, it is not nearly cheap enough with the PS4 priced at just $100 more.
- Second: It has no differentiation.
- The original Wii was brilliant.
- It opened a whole new way of interacting with a gaming console which brought the users in in droves.
- This edge has now been copied and competed away as all this kind of functionality and better is available for all of the console systems.
- This leaves users wondering what is so special about the Wii U and the depressing answer is: nothing.
- For 25% more a user can purchase a vastly superior system for which developers will write cool games. It is a no brainer.
- This is why the device is gathering dust on the shelves and I see no reason why this is going to change.
- If the device failed to ship more than 0.5m with no competition in the market, I fail to see why shipments will not fall further in the last 6 months of fiscal 2014.
- Hence, I suspect that shipments of the Wii U will be less than 1m for the fiscal year missing this new target by 64%.
- There is another warning coming.
- When it comes, I hope that Nintendo will have owned up to the realities it faces.
- This means getting out of consoles and focusing instead on software.
- It has a number of reasonable gaming brands and these could be leveraged nicely into the casual gaming market.
- However, this would mean biting the bullet on hardware which I am certain that Nintendo is very reluctant to do.
- Japanese management has a habit of hanging onto businesses for far longer than it should and I think Nintendo will be no different.
- Hence, the next time Iwata-san gets up to cut his estimates; I doubt there will be any good news.
- Sony remains the only Japanese company that has a hope of a future in consumer electronics.
Blog Comments
Andy Bates
January 21, 2014 at 12:45 pm
“I fail to see why shipments will not fall further in the last 6 months of fiscal 2014.”: You don’t see what could happen in the second half of fiscal 2014 that could lead to an increase in console sales? Really?
windsorr
January 21, 2014 at 1:03 pm
Consoles – yes absolutely.
Wii U – NO!
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Andy Bates
January 21, 2014 at 9:21 pm
The second half of Fiscal 2014 (October through March) coincides with the holiday season, where console sales traditionally increase. It is unrealistic to think that this wouldn’t apply to Wii U sales as well. Besides that, you have the release of Super Mario 3D World and Wind Waker HD, both of which were very highly rated, and the Wii U price drop which went into effect in mid-September. Again, the release of a Mario and Zelda game can only improve sales of the Wii U.
windsorr
January 22, 2014 at 11:57 am
Sales can increase by 16% in the second half of the year and still fail to ship 1m units…
The main point here is that with PS4 for only $100 more, very few people in their right minds will buy the Wii U.
Price cuts have never been able to rescue a dying platform.
Andy Bates
January 22, 2014 at 10:10 pm
The point is that you couldn’t see any reason why sales would increase in the second half of fiscal 2014, ignoring the fact that the holiday season is a huge time for game systems (even third-place ones), the Wii U was boosted by a price drop and pack-in games, and it had the launch of several top-rated games, including a new Mario game. All of those are boosts for the console.
“The main point here is that with PS4 for only $100 more, very few people in their right minds will buy the Wii U.” Spoken like a true non-gamer! If you just look at the horsepower of the system, then sure, the PS4 looks like a better deal than the Wii U. However, you’re forgetting that people buy game systems to play games.
If you wanted to pick up a PS4 and two exclusive games, it would cost you $620, and you would end up with Killzone (73% on GameRankings) and Knack (58% on GameRankings). $620 buys you a great system and two mediocre games.
If you spent that same $620 on a Wii U, you could get the console, New Super Mario Bros. U (84%), New Super Luigi U (76%), Super Mario 3D World (93%), Rayman Legends (93%), The Legend of Zelda: Wind Waker HD (91%), Pikmin 3 (87%), and Monster Hunter 3 Ultimate (83%). Oh, and you’d still have $21 left over.
In other words, you can spend $620 and get a PS4 with two games, or spend $599 and get a Wii U with seven games, each of which is rated higher than the best exclusive PS4 game.
“Price cuts have never been able to rescue a dying platform.” Except for the 3DS, which was failing badly after launch (doing about as well as the Wii U, actually), took an $80 price cut, and ended up being the best-selling console of 2012 and 2013.
Andy Bates
January 21, 2014 at 11:39 pm
Really, this whole commentary seems like someone who doesn’t know anything about the videogame industry, and who is basing his opinions solely on technical specifications and hearsay.
“This leaves users wondering what is so special about the Wii U and the depressing answer is: nothing.” Except for Nintendo-exclusive games, which have historically been very highly rated. (Of the top ten games of all time on GameRankings, five of them are Nintendo exclusives.)
“When it comes, I hope that Nintendo will have owned up to the realities it faces.
This means getting out of consoles and focusing instead on software.” Nintendo had the highest-selling console of 2013, the 3DS. Why would they get out of the hardware market when their portable console is selling more than every other console, including home consoles?
“Sony remains the only Japanese company that has a hope of a future in consumer electronics.” Even if Nintendo continues to rack up quarterly losses like they have this past year, they have enough money in the bank to survive for another 40 years. Meanwhile, the Sony corporation as a whole posted their first profit in five years, although their gaming division continues to post losses.
For comparison, here is the annual net profit (or loss) for Nintendo for 2009 through 2013, in billions:
2009: +279
2010: +228
2011: +77
2012: (-43)
2013: +7
Total five-year profit: +548 Billion
And here are the same numbers for Sony:
2009: (-98)
2010: (-40)
2011: (-259)
2012: (-456)
2013: +43
Total five year profit (loss): (-810 Billion)
And just looking at gaming, here are the current consoles from both companies, with their units sold so far:
Wii U: 4.3 million
3DS: 35 million
PS4: 4.2 million
Vita: 4 million
So Nintendo has a failing home console, and a top-selling portable console, and you think they should get out of the hardware business. But Sony has a top-selling home console, and a failing portable console, and you think they’re “the only Japanese company that has a hope of a future in consumer electronics.”
Tatilsever
January 22, 2014 at 2:29 am
Sony sells a bunch of goods beside gaming consoles, so it’s got a chance to keep up its brand image and create an ecosystem.
9 million may make the best selling portable gaming console, but that number pales in comparison to smartphones, iPod touches and small tablets. With far better CPU/GPU under the hood and sharper screens, these gadgets are well placed for casual gaming market that 3DS is targeting. If the only selling point to 3DS is the Nintendo’s exclusive games, it is not that difficult to foresee its market shrinking, while the casual gaming business on other mobile devices will keep on booming.
Andy Bates
January 22, 2014 at 3:59 am
Sony is also losing money almost year, and they sell their game consoles at a steep loss, at least initially. It is estimated that the PS3 division has never made a profit over the last five years. So yes, they could continue to pour money into the Playstation brand, but you have to wonder if they might decide to cut their losses (literally) at some point.
Where are you getting that “9 million” number from? The 3DS has sold 35 million consoles, not 9 million. And the 3DS wasn’t the best selling portable game console of 2013; it was the best selling game console overall. It beat out the 360 and the PS3 as well. And why do you think that Nintendo is targeting the casual gaming market with the 3DS? They are targeting the dedicated gamer, who wants a deeper gaming experience than just a one-button (sorry: one tap on the screen) UI like Tiny Wings. The 3DS has shown that there is still a strong market for a dedicated gaming device. Sharper screens are nice, but controls make or break a game, and the 3DS has controls that put iPhones to shame.
Tatilsever
January 22, 2014 at 5:27 am
I don’t think anybody said Sony is in good shape now, it is about potential to right the ship.
Sorry, 3DS sales are forecast to be 13.5 million, not 9, for this financial year, my mistake… The point is the same though. Best selling console business is still tiny compared the volumes in other mobile computing gadgets. A small revenue per unit over almost 100x larger market might more than make up for the loss of large revenue per unit available on 3DS hardware and games.
Andy Bates
January 22, 2014 at 10:45 pm
Yes, the volume of game consoles is small compared to the volume of other mobile computing gadgets. A specific-purpose device will sell less than a general-purpose device. Your mistake is in thinking that, since a game console plays games, and an iPhone plays games, that the games on the two are equivalent. They aren’t. A game console has specialized controls, and has games tailored for play on that system. Those games could not be ported well (if at all) to a touchscreen device without significantly compromising the gameplay.
Secondly, you are greatly exaggerating the market for, and profitability of, mobile games. Current estimates are that there are about 200 million App Store users. Meanwhile, there are 35 million 3DS systems sold. The problem is that the iPhone market is flooded with games, and almost all of them sell for low prices. In fact, 88% of the games downloaded on iOS are free. That means that as you price your games higher, sales drop off drastically.
Let’s take some examples of blockbuster iOS games, and see how much they made:
Infinity Blade made $10 million in 7 months, and in January of 2012, the Infinity Blade franchise had reached $30 million in revenue.
Cut the Rope was an incredibly high-profile launch, and they managed to sell 3 million copies in 6 weeks, which means $3 million (minus the 30% cut for Apple), or $2.1 million in revenue.
Order and Chaos made $1 million in 20 days for a $6.99 game, which translates to about 7000 downloads a day (excluding in-app purchases).
But what about smaller games? Tiny Wings was a huge success, with an estimated 6.5 million downloads over its lifetime. At $1 each, that’s $4.5 million in revenue (after Apple’s cut).
So how does a 3DS blockbuster compare to this? The Pokémon X and Y games sold 4 million copies in the first two days they were released. Let me say that again: 4 million, in two days. Even assuming manufacturing costs of $5 per cartridge (I’m estimating high here to make a point), that means that Nintendo made $140 million in revenue in two days.
In other words, in two days, Nintendo almost 5 times the revenue that Infinity Blade 1 and 2 made over their lifetime. Nintendo made over 60 times more in two days than Cut the Rope made in six weeks. Nintendo made 140 times more in 2 days than what Order and Chaos made in 20 days. And Nintendo made more on Pokémon in 2 days than Tiny Wings made over its entire lifetime.
And those are the iPhone blockbusters.
windsorr
January 22, 2014 at 12:07 pm
I didn’t say Sony would succeed. I only said it has a chance. I am not a buyer of Sony…not yet anyway.
windsorr
January 22, 2014 at 12:05 pm
This commentary seems like someone who only looks at the gaming industry and ignores the bigger picture.
The volumes are misleading. PS4 has shipped in two months almost as much as WiiU in over a year. Furthermore Wii U shipments have crashed to almost nothing and the developers will be deserting the platform in droves.
The long-term endgame is about the ecosystem. This means having fingers in many pies from phones to tablets to phablets to computers to consoles to TVs. The ecosystem needs to offer good access to Digital Life across all of these platforms if it is to have a chance. Nintendo has none of that. Sony does have it and most importantly of all its management know what they have to do. By comparison Nintendo is bumbling along in the dark and shareholders will pay the price for that.
As you righty point out, Nintendo has some valuable assets which are the gaming brands. Biting the bullet on hardware and making these available on iOS and Android has far more scope to make the company money. What the Japanese cant let go of is hardware. It happened again again and again. The problem is that revenues will be much lower. However I would rather have profits at low revs than huge losses.
Andy Bates
January 22, 2014 at 11:59 pm
You’re acting like things are suddenly getting worse for the Wii U, when the fact is that shipments started bad and have stayed bad. Developers aren’t deserting the platform in droves, because developers never flocked to the platform in the first place. Basically, the Wii U is surviving on first-party titles, which were scarce in the first year, and are just now starting to pick up.
Having an ecosystem is a nice theory, and that’s certainly the tack that Sony and Microsoft are trying to take. Sony is a media company, so naturally they are trying to sell Blu-rays and digital distribution and phones and tablets and computers and TVs. And Microsoft certainly wants to pattern themselves after Apple, where they sell computers and tablets and a media store. Both companies are pushing so hard for the ecosystem model that they are willing to lose money on their consoles at launch, hoping that they will make it up over time. Meanwhile, Sony is bleeding cash, and Microsoft is trying desperately to succeed in the tablet and phone business.
And while all this is going along, Nintendo is sitting quietly by, with their $10.5 billion dollars in the bank, making game systems and actual games which continue to be critically and financially successful. Your mistake is thinking that Nintendo is losing the “Digital Life” game, when in fact they are not even playing.
And yes, Nintendo has the most valuable gaming brands in the business. And the quickest way to devalue those brands is to put them out on a device with substandard controls and sell them for 99 cents each.
windsorr
January 23, 2014 at 11:10 am
I am not saying that things are going to get worse. They are already beyond the pale of sustainability. They have to get radically better. a $10.8bn cash pile is a nice cushion but it does not belong to management. It belongs to the shareholders and management has a fiduciary duty to protect and grow that money.
Blindly blowing it on overpaid and useless suits to sustain a dead platform is not a viable use of that cash in my view. It should be returned to shareholders or invested in something that has a chance.
The WiiU is dead and a big lift in H2 volumes is not going to fix that because the volume are already tiny.
Andy Bates
January 23, 2014 at 1:44 pm
Clearly you have already decided that the Wii U is dead, and choose to ignore any facts that conflict with that narrative. Once again, the Wii U is not the only console that Nintendo makes. The 3DS was the top-selling console for both 2012 and 2013, and the Wii was the top selling console of the previous generation. Meanwhile, Sony has the PS3 (tied for second on the previous generation) and the Vita, which has been out a year longer than the Wii U but has sold fewer consoles.
Also, Sony is almost certainly taking a loss on every console sold, which they always do with new consoles in order to remain price-competitive with Microsoft. In fact, their PS3 console (which launched in 2006 at $599) on started making a profit in 2013. Meanwhile, Nintendo always sells their consoles at a profit, so even if sales are lean (as they were in the Nintendo 64 and Gamecube years), they continue to make money on each console sold.
So again, let’s compare the two companies, and see if we can spot an inconsistency in your analysis:
Sony: Has the PS4 which is selling well, the Vita which has sold 4 million consoles since 2011, and the PS3 which was the second-best home console of the previous generation. They have also lost money for four of the last five years.
Analysis: Sony remains the only Japanese company that has a hope of a future in consumer electronics.
Nintendo: Has the 3DS which was the top-selling console of 2012 and 2013, the Wii U which has sold 4.3 million consoles since 2012, and the Wii which was the best-selling home console of the previous generation. They have also made money for four of the last five years.
Analysis: Nintendo’s money should be returned to the shareholders.
Andy Bates
January 23, 2014 at 1:47 pm
Two more things:
“For 25% more a user can purchase a vastly superior system for which developers will write cool games.” The PS4 costs 33% more than the Wii U, not 25% more. $399 is 33% more than $299.
I’m going to bookmark this page and come back after the FY14 results have been reported. Care to make a gentleman’s wager that the Wii U will not sell 1 million units in FY14? I think that it will beat that number.
windsorr
January 24, 2014 at 11:02 am
OK…you are on….If more than 1 million will write a blog post saying I was wrong…
Andy Bates
January 29, 2014 at 11:13 pm
“Hence, I suspect that shipments of the Wii U will be less than 1m for the fiscal year missing this new target by 64%.”
Nintendo just announced their Q3 sales numbers, and reported sales of 1.95 million consoles between October and December. So not only did they beat the 1 million number you were predicting for FY2014, but they almost doubled it in just one quarter.
I’m looking forward to the blog post saying you were wrong.
windsorr
February 7, 2014 at 1:54 pm
I will post one when I have a day without anything to write.
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