Nintendo Chief Defends Console Strategy; Company Sticks to Games for Its Hardware, Resisting Lure of Mobile Devices

Updated June 11, 2013, 5:45 p.m. ET

Nintendo Chief Defends Console Strategy

Company Sticks to Games for Its Hardware, Resisting Lure of Mobile Devices

By DAISUKE WAKABAYASHI

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Nintendo President Satoru Iwata, shown with a Wii U controller, says the company will stick with a strategy of making games for its own hardware.

LOS ANGELES—Game apps for smartphones and tablet computers are selling at a rapid pace, much faster than the market for console games. But Satoru Iwata isn’t succumbing to their allure.

The president of Nintendo Co.7974.OK -1.47% is determined to stick to its three-decades-old strategy of making games only for its own hardware, despite pressures to exploit its popular software more widely.

In an interview, Mr. Iwata said the short-term benefits of going after the mobile-apps market wouldn’t be worth the potential harm to the company’s strategy of combining hardware and software in ways that make Nintendo’s offerings unique.“If I was only concerned about managing Nintendo for this year and next year—and not about what the company would be like in 10 or 20 years—then I’d probably say that my point of view is nonsense,” Mr. Iwata said during the interview at the Electronics Entertainment Expo earlier this week.

“But if we think 20 years down the line, we may look back at the decision not to supply Nintendo games to smartphones and think that is the reason why the company is still here.”

To Mr. Iwata, Nintendo’s value is rooted in its ability to bring unique experiences to videogame fans by building the company’s own hardware to do things that other devices can’t. Spreading those experiences across nearly a billion smartphones and hundreds of millions of tablets, Nintendo says, would put the company at risk of becoming like everyone else and killing its valuable game franchises—and weakening the appeal of its own devices.

Once a darling of the $66 billion videogame industry—for innovative offerings such as its motion-sensing Wii console and dual-screened portable Nintendo DS—Nintendo now faces criticism that it is out of touch. Critics say it is missing an opportunity to extend its lucrative game franchises—including Super Mario, Pokemon, Donkey Kong and Zelda—to a new generation of younger users who are carrying smartphones and tablets and skipping dedicated game machines.

Nintendo’s share price has taken the toll. Since 2008, when the company was riding high from the success of the Wii, its shares are off about 80%. In a moment rich with symbolism, the company’s market capitalization temporarily fell below that of GungHo Online Entertainment Inc., 3765.JA -4.48% a Japanese maker of blockbuster mobile game “Puzzle & Dragons” with neither the breadth of popular games nor the history to match Nintendo.

“I understand the reality that there are some in the market who are more supportive of doing things differently than the way we are doing it,” Mr. Iwata said. “If you want to make short-term profits from the stock price, then I am a very bad president. But I don’t think I’m so bad for maximizing the long-term value of Nintendo.”

Rival console makers Sony Corp. 6758.TO -2.32% and Microsoft Corp. MSFT -1.78%also make software for their own game consoles, but their games have never provided such a large proportion of major hits as Nintendo has for its hardware.

The pressure on Nintendo is exacerbated by the lukewarm reception for its latest game machines. Released in 2011, the Nintendo 3DS sold about 14 million units in the fiscal year ended in March, short of the company’s original projections of 18.5 million units. The Wii U, which made its debut last November, sold only 3.45 million units—shy of the company’s initial sales target of 5.5 million units.

Macquarie Securities analyst David Gibson estimates that Nintendo’s stock could double or even triple if the company said it would decouple its games from its hardware. But he doesn’t expect such a change. “Nintendo is not going to do smartphone games while Mr. Iwata is there. It’s not going to happen,” Mr. Gibson said. “If you can’t sell your hardware, the value of your franchises diminishes.”

Mr. Iwata, who has run Nintendo since 2002, said the basic formula that has governed the videogame industry for more than 30 years remains the same: Good games can still sell hardware. It is a belief that Nintendo will put to the test this holiday season with a barrage of new titles announced at E3, including the latest installments of past blockbuster franchises Super Mario 3D, Donkey Kong, Pikmin and Legend of Zelda.

He said the success of “Animal Crossing: New Leaf,” a Nintendo 3DS game where the player serves as a mayor of a town inhabited by cartoon animal characters, is evidence that Nintendo’s convictions aren’t wrong.

The game has been the best-selling console title in Japan, selling about four million copies since its November debut. Nintendo said the game has sparked a surge in 3DS sales in Japan. The game went on sale in North America on Sunday, and Mr. Iwata said he expects its sales to surpass those of previous “Animal Crossing” titles.

“People will buy hardware just to buy a single game if the game is really compelling,” he said. “The hurdle has gotten higher, but if we can clear it, then we think the games can still sell.”

Mr. Iwata said the company considers whether a new game machine is even necessary every time it starts development of a new console. It is part of a process, he said, that pits the advances of smartphones and other gadgets against Nintendo’s ability to create an experience that can’t be replicated elsewhere.

The tactic pushed Nintendo to add a touch screen and an extra display to its DS, as well as no-glasses-needed 3-D technology to its 3DS, motion sensors to its Wii and a controller with its own display in the Wii U.

“The capability of smart devices is growing and what a game machine can do uniquely is getting more narrow if we don’t do anything. So game machines need to expand into things that smart devices cannot do,” Mr. Iwata said. “Once we can no longer think of anything, that’s the point we can’t continue the game-machine business.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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