Nintendo Mulls New Business Model After Forecasting Loss; Nintendo’s Woes Don’t Mean Game Over For Its Consoles

Nintendo Mulls New Business Model After Forecasting Loss

Nintendo Co. (7974) President Satoru Iwata said the maker of video-game machines is considering a new business model after forecasting a surprise 25 billion-yen ($240 million) annual loss because of tepid demand for the Wii U.Nintendo fell the most in more than 12 years in the U.S. yesterday. The company had previously projected profit of 55 billion yen for the year ending March as it counted on Christmas shoppers to revive sales of the Wii U console featuring games with iconic characters Mario and Zelda. Nintendo cut its forecasts for Wii U console sales to 2.8 million units from 9 million and for Wii U game sales to 19 million units from 38 million.

The family-focused content of Nintendo is losing its appeal as titles were delayed, casual gamers migrate to mobile devices, and hardcore players opt for the faster Sony PlayStation 4 and Microsoft Xbox One. The owner of Pokemon and Donkey Kong also refuses to offer games with its characters on mobile devices, limiting its ability to profit online players’ surging demand.

“We are thinking about a new business structure,” Iwata said at a press conference yesterday in Osaka, Japan. “Given the expansion of smart devices, we are naturally studying how smart devices can be used to grow the game-player business. It’s not as simple as enabling Mario to move on a smartphone.”

Nintendo American depositary receipts fell 17 percent to $14.90 yesterday New York, their biggest decline since September 2001. Each ADR equals 0.125 underlying shares.

Nintendo declined 2.8 percent to 14,645 yen yesterday in Tokyo, before the announcement. The shares advanced 54 percent last year.

Apple, Samsung

The new forecast for the Wii U is less than the 3.45 million units sold the previous fiscal year. The Kyoto, Japan-based company also cut its forecast for operating income to a 35 billion-yen loss from the prior 100 million-yen profit.

Projections for sales of its handheld 3DS player were cut to 13.5 million units from 18 million, and for sales of 3DS games to 66 million units from 80 million.

Nintendo posted a quarterly loss of 8 billion yen in October after cutting the price of the console in the face of new machines from Sony Corp. (6758) and Microsoft Corp. Iwata is trying to lure consumers who prefer playing games on mobile devices from Apple Inc. and Samsung Electronics Co. (005930)

More Pressure

“The video-game market has moved into smartphones and tablets,” said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management Co. in Tokyo. “Nintendo needs to expand from their current hardware business model. It’s a structural problem.”

The revisions increase the pressure on Iwata, who vowed in October to meet a forecast of 100 billion yen in full-year operating profit and 9 million units in Wii U sales. Nintendo has lost about 80 percent of its market value since the introduction of the original Wii drove shares to a record high of 72,100 yen in November 2007, according to data compiled by Bloomberg.

Its market capitalization is about $20 billion — less than Samsung’s previously announced capital expenditures.

“The revision is much worse than expected,” Yusuke Tsunoda, an analyst at Tokai Tokyo Securities Co. in Tokyo, said by phone. “It’s going to be a third consecutive annual operating loss and that raises a serious management issue.”

Iwata said any announcement about a pay cut would come later this month when the company releases third-quarter earnings. There are no plans to reshuffle management in the near term, he said.

Lower Dividend

The company reduced its planned dividend for the fiscal year to 100 yen from 260 yen. Nintendo revised its foreign-exchange assumptions to 100 yen to the dollar from 90 yen, and to 140 yen per euro from 120 yen.

“We were unable to sufficiently take advantage of the weaker yen,” Iwata said.

Even with new titles including “Pikmin 3,” Nintendo failed to capitalize on U.S. video-game product sales that surged to their highest in three years in December.

Hardware sales increased 28 percent to $1.37 billion from a year earlier, Port Washington, New York-based NPD Group Inc. said on Jan. 16. The tally, the highest since spending hit $1.84 billion in December 2010, drove total retail sales for the industry to their fifth straight monthly gain.

Price Cut

The Wii U features a tablet-like, 6.2-inch touchscreen controller that lets players connect wirelessly to the console and shift the display between the device and a television. The consoles compete in a market where smartphone sales are on track to exceed 1 billion units this year, researcher IDC said Oct. 29.

The Wii U’s price in the U.S. was cut by $50 to $299.99 on Sept. 20, while the Japanese price remained a suggested 30,000 yen.

Nintendo introduced the 2DS portable machine, resembling a tablet, in October for $129.99 to lure first-time and casual gamers.

The global video-game market may reach $111 billion by 2015, researcher Gartner Inc. said Oct. 29. Mobile games are the fastest-growing segment, with revenue set to reach $22 billion by 2015 from $13.2 billion this year, Gartner said.

“We cannot continue a business without winning,” Iwata said. “We must take a skeptical approach whether we can still simply make game players, offer them in the same way as in the past for 20,000 yen or 30,000 yen, and sell titles for a couple of thousand yen each.”

To contact the reporters on this story: Masatsugu Horie in Osaka at mhorie3@bloomberg.net; Takashi Amano in Tokyo at tamano6@bloomberg.net

Nintendo Pressed to Exit Hardware After Wii U Flop

Nintendo Co. (7974) is under pressure to consider exiting production of video-game machines after reporting disappointing sales of its Wii U console and forecasting a surprise loss, prompting its stock to tumble.

Nintendo, based in Kyoto, Japan, fell 15 percent to 12,445 yen, the biggest intraday plunge since 2011, at 9:34 a.m. in Tokyo trading. The company on Jan. 17 projected an operating loss for the year ending in March, and cut its forecast for annual sales of the year-old Wii U by more than two-thirds.

President Satoru Iwata should concede defeat with the Wii U, shut down production and open up Nintendo’s iconic software characters such as Zelda and Super Mario to the smartphones, tablets and consoles that have made a shambles of his strategy, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. Nintendo should exit hardware altogether, Pachter said.

Iwata “has to take responsibility for the Wii U missing the mark,” Pachter said. “He will be under pressure to make dramatic changes. If he can do so while remaining in charge, more power to him, but they need to make some changes.”

Iwata, 54, says he’s not going to step down and plans to see the company through its unspecified transition. To date, he has refused to offer Nintendo franchises for competing console systems or mobile devices. He said on Jan. 17 he’s considering changing the business model, without offering specifics.

‘Not Simple’

“Given the expansion of smart devices, we are naturally studying how smart devices can be used to grow the game-player business,” Iwata said at an Osaka press conference. “It’s not as simple as enabling Mario to move on a smartphone.”

Tying Nintendo’s iconic characters to its hardware helped boost demand for the original Wii, which sold more than 100 million units and became the world’s best-selling console.

This time delays in its own titles hurt the Wii U’s sales. The console’s failure in the marketplace is dragging down its higher-margin software sales. The company, which had projected a 100 billion-yen ($959 million) operating profit for the fiscal year, now forecasts a 35 billion-yen operating loss.

Nintendo on Jan. 17 lowered its annual sales forecast to 2.8 million Wii U units from 9 million, and halved its projection for game sales for the system to 19 million units. The company cut its forecast for the 3DS handheld player by 25 percent to 13.5 million units, a drop from a year earlier.

The casual gamers who made Nintendo the leader of a $93 billion industry have abandoned standalone systems like Nintendo’s 3DS and the Wii U for cheap downloads they can play on an Android phone or an Apple Inc. (AAPL) iPad. New, faster consoles from Sony Corp. (SNE) and Microsoft Corp. (MSFT) ran away with the hardcore players still willing to plunk down $400 or more for a machine and $60 for a title like “Call of Duty.”

Doomed Console

Even at $300, Wii U is doomed because it’s not popular enough for outside developers to make games for, said Ben Bajarin, an analyst with consulting firm Creative Strategies Inc.

“They need to go back to the drawing board to reinvent themselves,” Bajarin said in an interview. “The Wii U didn’t move the needle in gaming, so they need to rethink the value of tightly integrated hardware, software and services.”

Iwata should focus on delivering Nintendo’s iconic characters to mobile devices and the PlayStation and Xbox consoles, Pachter said. Both the Wii U and 3DS handheld take advantage of touchscreen controls to play many Nintendo games, which would make it easier for the company to deliver versions of its games for smartphones and tablets, he said.

Smartphone Market

With more than 1.5 billion smartphones in consumers’ hands, Nintendo could release 10 games a year from its library of 1,500 titles, charge $5 to $10 per mobile game, and sell at least 50 million copies of each to a core Nintendo audience, Pachter said. These products alone would generate $2.5 billion to $5 billion a year in high-margin sales without the expense of making hardware.

On top of that, Nintendo could keep releasing more expensive titles for consoles, Pachter said. He pointed to the approach taken by game publisher Electronic Arts Inc. (EA), which is offering “Plants vs Zombies” on multiple platforms.

EA sells a 99-cent version for the iPhone and will offer its latest “Plants vs Zombies: Garden Warfare” as an Xbox exclusive, charging $30 for the Xbox 360 and $40 on the Xbox One.

Cash Cushion

Making the transition to software maker from console hardware isn’t without risk. Sega Corp., once a leader in video-game consoles, ended production in 2001 and is now part of a company that also makes Pachinko machines and operates amusement parks, Sega Sammy Holdings Inc. (6460) Atari Inc., the video-game pioneer that developed “Pong,” filed for bankruptcy protection last year seeking independence from its French parent, Atari SA. (ATA)

In its most recent fiscal year, Nintendo generated the equivalent of $2.9 billion in software revenue and $4.8 billion in hardware, according to data compiled by Bloomberg. The company had 845 billion yen in cash, near-cash and short-term investments as of Sept. 30 and no long-term debt, giving Iwata a cushion to develop a new strategy.

Nintendo American depositary receipts fell 17 percent to $14.90 on Jan. 17 in New York, their biggest decline since September 2001. Each ADR equals 0.125 underlying shares. The shares last year advanced 54 percent in Tokyo trading.

While Pachter recommends exiting the hardware business altogether, making even a temporary shift would buy Iwata time to develop a new console that leapfrogs Microsoft and Sony in three years.

“Nintendo’s console side is broken,’ Pachter said in an interview. ‘‘They’re not even an also-ran there, they just don’t matter.”

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

Nintendo Pressed to Exit Hardware After Wii U Flop

Nintendo Co. (7974) is under pressure to consider exiting production of video-game machines after reporting disappointing sales of its Wii U console and forecasting a surprise loss, prompting its stock to tumble.

Nintendo, based in Kyoto, Japan, fell 15 percent to 12,445 yen, the biggest intraday plunge since 2011, at 9:34 a.m. in Tokyo trading. The company on Jan. 17 projected an operating loss for the year ending in March, and cut its forecast for annual sales of the year-old Wii U by more than two-thirds.

President Satoru Iwata should concede defeat with the Wii U, shut down production and open up Nintendo’s iconic software characters such as Zelda and Super Mario to the smartphones, tablets and consoles that have made a shambles of his strategy, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. Nintendo should exit hardware altogether, Pachter said.

Iwata “has to take responsibility for the Wii U missing the mark,” Pachter said. “He will be under pressure to make dramatic changes. If he can do so while remaining in charge, more power to him, but they need to make some changes.”

Iwata, 54, says he’s not going to step down and plans to see the company through its unspecified transition. To date, he has refused to offer Nintendo franchises for competing console systems or mobile devices. He said on Jan. 17 he’s considering changing the business model, without offering specifics.

‘Not Simple’

“Given the expansion of smart devices, we are naturally studying how smart devices can be used to grow the game-player business,” Iwata said at an Osaka press conference. “It’s not as simple as enabling Mario to move on a smartphone.”

Tying Nintendo’s iconic characters to its hardware helped boost demand for the original Wii, which sold more than 100 million units and became the world’s best-selling console.

This time delays in its own titles hurt the Wii U’s sales. The console’s failure in the marketplace is dragging down its higher-margin software sales. The company, which had projected a 100 billion-yen ($959 million) operating profit for the fiscal year, now forecasts a 35 billion-yen operating loss.

Nintendo on Jan. 17 lowered its annual sales forecast to 2.8 million Wii U units from 9 million, and halved its projection for game sales for the system to 19 million units. The company cut its forecast for the 3DS handheld player by 25 percent to 13.5 million units, a drop from a year earlier.

The casual gamers who made Nintendo the leader of a $93 billion industry have abandoned standalone systems like Nintendo’s 3DS and the Wii U for cheap downloads they can play on an Android phone or an Apple Inc. (AAPL) iPad. New, faster consoles from Sony Corp. (SNE) and Microsoft Corp. (MSFT) ran away with the hardcore players still willing to plunk down $400 or more for a machine and $60 for a title like “Call of Duty.”

Doomed Console

Even at $300, Wii U is doomed because it’s not popular enough for outside developers to make games for, said Ben Bajarin, an analyst with consulting firm Creative Strategies Inc.

“They need to go back to the drawing board to reinvent themselves,” Bajarin said in an interview. “The Wii U didn’t move the needle in gaming, so they need to rethink the value of tightly integrated hardware, software and services.”

Iwata should focus on delivering Nintendo’s iconic characters to mobile devices and the PlayStation and Xbox consoles, Pachter said. Both the Wii U and 3DS handheld take advantage of touchscreen controls to play many Nintendo games, which would make it easier for the company to deliver versions of its games for smartphones and tablets, he said.

Smartphone Market

With more than 1.5 billion smartphones in consumers’ hands, Nintendo could release 10 games a year from its library of 1,500 titles, charge $5 to $10 per mobile game, and sell at least 50 million copies of each to a core Nintendo audience, Pachter said. These products alone would generate $2.5 billion to $5 billion a year in high-margin sales without the expense of making hardware.

On top of that, Nintendo could keep releasing more expensive titles for consoles, Pachter said. He pointed to the approach taken by game publisher Electronic Arts Inc. (EA), which is offering “Plants vs Zombies” on multiple platforms.

EA sells a 99-cent version for the iPhone and will offer its latest “Plants vs Zombies: Garden Warfare” as an Xbox exclusive, charging $30 for the Xbox 360 and $40 on the Xbox One.

Cash Cushion

Making the transition to software maker from console hardware isn’t without risk. Sega Corp., once a leader in video-game consoles, ended production in 2001 and is now part of a company that also makes Pachinko machines and operates amusement parks, Sega Sammy Holdings Inc. (6460) Atari Inc., the video-game pioneer that developed “Pong,” filed for bankruptcy protection last year seeking independence from its French parent, Atari SA. (ATA)

In its most recent fiscal year, Nintendo generated the equivalent of $2.9 billion in software revenue and $4.8 billion in hardware, according to data compiled by Bloomberg. The company had 845 billion yen in cash, near-cash and short-term investments as of Sept. 30 and no long-term debt, giving Iwata a cushion to develop a new strategy.

Nintendo American depositary receipts fell 17 percent to $14.90 on Jan. 17 in New York, their biggest decline since September 2001. Each ADR equals 0.125 underlying shares. The shares last year advanced 54 percent in Tokyo trading.

While Pachter recommends exiting the hardware business altogether, making even a temporary shift would buy Iwata time to develop a new console that leapfrogs Microsoft and Sony in three years.

“Nintendo’s console side is broken,’ Pachter said in an interview. ‘‘They’re not even an also-ran there, they just don’t matter.”

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net