How Critical Is This Holiday for Nintendo?


Two years ago, Nintendo could do no wrong. The Wii was at the height of its retail domination and competitors were scrambling for second place.

Today it’s a much different story and the looming holiday season could be a crucial one that determines the strength – and perhaps the future - of the company’s core console business.

Nintendo likes to set low expectations for its investors. It’s a safe course to follow, especially in a down economy. This year, though, its warnings have taken on a more dire tone.

“If everything doesn't go ahead just as we hope [this holiday season], and if we do not do anything about it, our platform business will be in trouble,” said Satoru Iwata during a late September investor call. “We will need to prepare for such situations."

Nintendo relies on the holiday season to move Wiis. Its casual audience tends to be most active in gift-giving season. This year, though, there’s no big game release pending that seems poised to drive Wii sales – and “Super Mario Galaxy 2”(released earlier this year) does not have the draw of its predecessor. Additionally, Microsoft and Sony will also have motion capture controllers on the market that have the advantage of being novel products that have learned from Nintendo’s missteps.

“At one point, the Wii had captured the zeitgeist of technology and interactive entertainment,” says John Taylor, an analyst with Arcadia Research Group. “But it has been many moons since there were shortages of the Wii in the [retail] channel and sales have been eroding at a fairly fast clip.”

"I don’t know if Nintendo has the stomach for a business model offering something for free and hoping someone pays down the road." -Analyst, Arcadia Research Group, John Taylor

To boost sales, the company’s likely going to try a number of promotions – including bundling more games with the Wii (which already comes with two titles included). One thing that’s unlikely, though, are across the board price cuts.

Nintendo likes to tie its price reductions to a game that has phenomenal sales potential – and there’s not one of those on the drawing board for 2010. Even the next “Legend of Zelda” – due in early 2011 – is an unlikely candidate, since that franchise tends to be more popular with core players than the casual audience Nintendo has courted this generation.

There, is, however, the possibility it could institute rotating temporary price cuts – allowing one retailer to drop the price one week, then another the following week. Such a move would stimulate some consumer interest, but allow Nintendo to save a larger cut for down the road.

Nintendo shook up the video game industry with the Wii in 2006, but the rate of change in gaming has continued to escalate since that time. The rise of mobile gaming, especially Apple’s growing dominance in the space, has impacted consumer’s time spent with both the Wii and the DS handheld unit. And free-to-play games on Facebook and other social network sites have wooed away more of the audience Nintendo brought to the console world.

Analysts are split on whether Nintendo will roll out a new home console next year. Colin Sebastian of Lazard Capital Markets thinks it’s likely, but Taylor says no, noting that the company will likely want to focus on the 3DS and ensure that the launch of that system is a smooth one.

The question is: When Nintendo does launch its next platform, will it once again be able to find an area that competitors aren’t exploring – as well as one that’s intriguing enough to lure people away from the free-to-play business model of Facebook games and bite-sized cheap gaming of the iPhone and iPad?

“Clearly Nintendo benefited from this bug bubble of interest in casual games and they had the right offering and business model to capitalize on that,” says Taylor. “The world has changed a lot since 2008, though. … I don’t know if Nintendo has the stomach for a business model offering something for free and hoping someone pays down the road. The market is shifting now, though, and I think there’s a lot of people wondering what their next move is.”

Questions? Comments?