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Does the Wii U spell doom for Nintendo’s console business?

Following Nintendo Co., Ltd’s (Nintendo) latest results announcement, the media has become focused on the sorry state of the company’s latest home console release: the Wii U. Billed as a successor to the stratospherically popular Wii, a console that broke down perceived barriers between experienced and novice gamers, the Wii U released in Q4 2012. Unfortunately for Nintendo, sales figures have been less than promising, and its latest results confirm an operating loss for the last three months.

So what went wrong with the Wii U? Despite having a novel application, and beating both the PlayStation 4 (PS4) and Xbox One to market by a whole year (both Microsoft and Sony’s next generation consoles are slated for a Q4 2013 release), it has struggled to gain momentum, and the 160,000 units sold worldwide in the three months ending June, 2013 is a less than promising number. To compound the misery for Nintendo, unit sales of the Wii U’s older, much less advanced and less expensive predecessor, the Wii, were 50,000 higher in the same period.

Although the Wii U is far from obsolete – it has been in the marketplace for less than a year, after all – it is a worrying sign that Wii sales are outstripping its latest offering by such a margin. However, all is not lost for Nintendo: the situation has many parallels with the launch of its current superstar, the 3DS, which sold 1.4 million units in the quarter. The company’s flagship handheld platform also had a lackluster launch before a price drop some six months later.

A price drop could turn the console’s fortunes around, but the result of unofficial price drops that have already been initiated by retailers do not bode well. ASDA, for instance, a leading UK supermarket chain, has dropped the price of the Wii U twice all the way down to £149.99 (approximately $237.67), a mark down of £100 (approximately $158.46) from the recommended retail price (RRP) stipulated by Nintendo. However, the measure does not appear to have reversed the console’s fortunes, and the retailer has subsequently removed it from the shelves of its physical stores.

There is no doubt that the Wii U is dramatically underpowered in comparison to its impending next generation competition in the form of Sony Corporation’s (PS4) and Microsoft Corporation’s Xbox One, both due for release in Q4 2013. This, coupled with the fact that both competitors have seen significant consumer interest prior to their release, will strike a further blow to the console’s future potential.

Nintendo will, however, hope to differentiate its offering through first party exclusive software releases in order to bolster sales of the Wii U to reluctant consumers. In fact, following the release of Pikmin 3 in Japan in mid-July, sales of the console saw significant growth, with the game also experiencing strong sales figures. This offers a glimmer of hope for Nintendo, although it still has a long way to go.

Nintendo therefore occupies a somewhat precarious position within the marketplace, and places a large degree of expectation on the success of its first party software offerings. Although using its own titles to bolster hardware revenues is not fundamentally wrong, it does beg the question of whether the company would be better off concentrating on software, rather than its loss making home console operations.

The potential for Nintendo as a third party publisher is dramatic: its pedigree in games development would surely attract significant sales if its software was offered on Microsoft or Sony’s new machines, and the potential for expansion into the burgeoning mobile gaming market on platforms such as iOS and Android is also significant. However, this would lead to the cannibalization of the company’s share of the handheld console business, in which the 3DS is firmly ahead of Sony’s rival the PSVita. As such, Nintendo will be extremely reluctant to follow this path. However, the option of keeping its handheld console business afloat while operating as a third party publisher on home consoles is also not really an option open to the company, as it would effectively lose its prestigious exclusivity.

Nevertheless, Nintendo’s future lies firmly in its own hands: strong software may be able to offset the challenge from Microsoft and Sony, but it will have to be a frequent, sustained effort. If the company fails to deliver on this front, there is a danger of it having to follow Sega in bowing out of the console race in favor of software production.

To read more on Nintendo’s Wii U, and what the console still has going for it, check out the case study Nintendo Co., Ltd: Innovating in a reactive market.

For more updates on the technology and telecoms sectors, follow me on Twitter:@Matt_MarketLine

Posted in Gaming.

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