Don't Worry About Nintendo

The industry giant has seen better years, but things will be just fine.

January 30, 2012

 From a distance, Nintendo would appear to be in some serious trouble. After stumbling with the launch of the 3DS, being forced to prematurely cut the portable's price tag, fumbling the introduction of Wii U, not offering enough quality titles for much of 2011 and forecasting $838 million in losses – a first ever for the company – for its current fiscal year many are correct in wondering what's happening with the Big N. How did things get this bad?

Though grim on the surface, and certainly nothing to take lightly, Nintendo is going to be just fine. While it's true the company hasn't expertly handled the transition from the DS and Wii to a new generation of hardware, most of the losses we're now seeing are simply a natural part of the rocky path back to what could be a new era of dominance. To make this situation into anything greater is simply premature, a blatant attempt to be sensationalistic and overly-dramatic.

As a result of worldwide DS sales dropping by two-thirds and Wii sales sliding by a third, Nintendo finds itself in a challenging position, being forced to broaden the install bases of aging platforms through price cuts and bundles while still moving its agenda forward. As its products sell at lower prices, and the remaining potential consumers dwindle, Nintendo has to simultaneously do something that costs a considerable amount of money – invest in the future.

A lot is riding on Wii U's launch software. Will it deliver?

Nintendo is now developing an innovative new console, which is incorporating new types of technology to broaden its functionality. Wii U's controller will now use the NFT standard that will allow gamers to communicate with other devices and objects, potentially changing the way some games are played – and how we shop for them online. The publisher is also preparing to launch an entire digital service, which was unveiled late last week as the Nintendo Network. Though many will scoff that Nintendo is just now aggressively pursuing an online business model, the fact that paid downloadable content, full retail game sales, individual user accounts and global communities are being pursued is a sign Nintendo is being both comprehensive and competitive. That's not something to take lightly.

New hardware and infrastructure demands one more thing – software. Being forced to almost single-handedly lift up the 3DS towards the end of 2011, in order to prove the system's worth to third parties, while preparing an aggressive slate of HD Wii U launch (window) titles, is no easy task. Any publisher would find that challenging, and many simply couldn't do it. That Nintendo has managed to push its new portable to the front of the Japanese industry, create what appears to be a very desirable 2012 slate for the system, continue secretive work on Wii U, and absorb huge losses because of an aggressive price cut, is simply remarkable.

Nintendo's finances seem to point to the costs of these increased efforts, as the company is forecasting an R&D increase of $1.3 million per month for the final three months of the fiscal quarter. Nintendo has guaranteed it will release Wii U by the start of the 2012 holiday shopping season. It also plans to have an appropriate launch slate ready. Assuming there are one or two more major 3DS games coming towards the end of 2012, Nintendo will be lucky to keep its development costs in check during the next 12-15 months. It has a lot of critical work to do in the year ahead. All eyes will be on the launch of Wii U - and what Nintendo can reveal at this year's E3.

What will Nintendo show at E3 2012? It needs to be good.

Beyond considering Nintendo's investment challenges, the simple fact is that some years are better than others. Some generational shifts go better than others. Sony moved from the PlayStation to the PlayStation 2 in fine form, and even pushed Sega's Dreamcast over a ledge along the way. Yet its move to the PlayStation 3 was considerably more challenging. The company lost money and marketshare as it developed a software library that lured consumers, and while the PlayStation 3 still trails the Xbox 360 worldwide, Sony's overall position in the industry is far more stable than when the PS3 first launched.

There's no question Nintendo is hurt. No company can endure premature price cuts, poor launches, third party abandonment and lackluster years forever. By protecting its new portable, the company has taken a significant hit, as the company's currently financial plight clearly demonstrates. Nintendo's infamous cash reserve has even taken a hit, sliding to approximately $7.4 billion from an estimated $9.8 billion the year before. Each quarter the company tells its investors to have faith, to trust the instincts of a publisher that has dominated the industry time and time again.

Wii U technology continues to evolve. What's next?

Nintendo's fans should do the same. Yes, finances matter, but everything Nintendo has been doing, all of its actions in the midst of this turmoil, are the bigger story. Thanks to great retail software, great downloadable games, a fantastic 2012 line-up, demos, communities and more, the 3DS's future has never been brighter. It's currently dominating the sales charts in Japan, which only bodes well for its software support down the line. Nintendo's early language with Wii U - that it doesn't intend to repeat its 3DS launch mistakes of 2011, and that it continues to add innovative concepts like NFT communication - signals good things for the home console. Of course there's also the Nintendo Network, a strong indication that alongside HD gaming, gamers can anticipate an online service that can compete with Xbox Live and the PlayStation Network.

Money isn't everything in the video game industry, particularly with a company as fiscally responsible and clever as Nintendo. The company still has its reserves, and its fortunes have already turned around. Looking at everything around the balance sheet, the company is doing much better than it was a half a year ago. With that kind of performance, investors and fans have nothing to worry about in the long term.