Can Nintendo turn things around?

Recently, game maker Nintendo reported it’s first ever yearly operating loss.  Will it continue the downward trend, or does it have a strong rebound strategy?

For the first time in the company’s history, Nintendo has posted an operating loss for the fiscal year.  For 2011 they were down by $458 million.  That doesn’t bode well for the same company that turned out some of the most popular games in history, like Super Mario Brothers, The Legend of Zelda, and the Wii.

More powerful mobile devices have triggered a paradigm shift that represents an uncertain time for game makers.  “What is ailing Nintendo is that the casual gamer has many more choices today than even a few years ago,” said Michael Pachter, a managing director of equity research at Wedbush Securities, “a lot of these options are free.  It’s not that Nintendo doesn’t give good value—it does.  It’s just that free is always better than $40, especially for a casual gamer.”

Uncertain Times

Nintendo’s problem isn’t just with the hardy competition that smartphones, tablets, and social media offer.  For one, it failed to accurately predict the sales of the Wii for the 2011 fiscal year, comping up about 3 million units over actual sales.  They underestimated the number of 3DS systems, too.

If you’re a shareholder, then this shouldn’t come as a surprise.  Sales of the 3DS have been weak from the start, mostly because of the high entry price and the small, low quality game library behind it.  Combined, these issues scared away most of the potential buyers, but even after a price cut, sales haven’t significantly improved.

These kinds of trends have prompted Nintendo’s weak quarterly earnings.  In fact, last summer the president and CEO, Satoru Iwata halved his salary after an unusually bad quarter.

Patcher is concerned, warning that there will be more of the same unless Nintendo makes some fast changes.  Nintendo’s target demographic, kids, are getting smart phones at younger and younger ages, especially as unit and service prices drop.  “Nintendo can’t possibly build a profit if their handheld sales remain flat.”

Deeper Problems

According to Rob Enderle of the Enderle Group, Nintendo’s problems are bigger than the ubiquity of smart phones.  “Handheld gaming is on the ropes, subsumed by smartphones and tablets.  What’s worse is that Nintendo doesn’t even recognize that the Wii is a fad.”

“Fad products are problematic like that.  Only Apple has been able to serially replace one fad with another, but even they had to make dramatic changes from the iPod to the iPhone, and now the iPad.  Nintendo, like Palm, RIM, Motorola, and other vendors who lived on fads for a while—didn’t seem to understand what makes the Wii so successful initially and thus were unable to recreate that success.”

Enderle believes that we probably won’t see Nintendo last to the end of the decade.

Distribution is Key

Scott Mucci of IGN Entertainment doesn’t think it’s too late.  The next generation of consoles is some time off, and Nintendo has a large, eclectic library of games.  However, they should focus more on the distribution side of their business.

“Microsoft and Sony are making a lot of money off their respective networks.  Nintendo has to do more in this area.”

The bright side, at least for Nintendo, is that they are talking the talk about a new focus on distribution, they just need to do it.

“These earning results are definitely a wake up call for the company, but if anyone can turn it around in gaming, it’s Nintendo.”