Feature: Nintendo's Financial Revelations and Hardware Strategies
Posted by Thomas Whitehead
3DS leads as Wii U goes slow and steady
Around this time every year Nintendo reports its financial results for the previous 12 months, and in by-gone days they could be summarised very easily — "we're rolling in cash like money hogs, victory lattes for everyone". Recently it's not been quite that simple, with the decline starting with the initial struggles of 3DS and rapid downturn of the Wii towards the end of its life. This culminated in last year's results delivering Nintendo's first annual loss in 30 years — more a dent in confidence than any lasting impact on the company's overall financial health. This year the Kyoto-based company could actually point to a modest net profit - countering pre-release predictions from Bloomberg. You can see our own high level summary of some of the key facts and figures right here.
What is a problem for Nintendo, no matter how you spin it, is that the operating loss — which reflects the core business — of 36,410 million Yen (roughly $366 million) is only marginally lower than last year's equivalent of 37,320 million Yen; the net profit is being widely attributed to favourable market conditions such as the depreciating value of the Yen. Cutting through the figures there's one key fact that Nintendo will be currently facing up to; it's not selling enough games and systems.
It's worth bearing in mind that Nintendo has been wrong-footed by low sales throughout the past financial year. Between its Q2 and Q3 reports its operating income projections went from a 20 billion Yen profit in October 2012, to a 20 billion Yen loss in January 2013, to the final confirmed result of a 37 billion Yen loss on 31st March. At each stage expectations have been revised down, but Nintendo's stakes, or at least those of Satoru Iwata, are now getting fairly serious. Company president Iwata made a personal commitment to a 100 billion Yen operating profit for the coming financial year, and that's there once again in today's report as a projection. This is a figure that isn't influenced by currency fluctuation, like the net profit, but ultimately reflects how well Nintendo is producing and selling its products.
It's rather bold to predict a swing of 136 billion Yen, but that's what Nintendo is doing. How will it achieve this? While money is to be made with various business activities — such as reducing manufacturing costs — the bulk is naturally through sales of hardware and software, and what's intriguing is that Nintendo is putting a lot of its hopes in the 3DS camp, while being surprisingly modest — compared to previous projections that have been badly missed — in its expectations for Wii U. Let's break it down into key figures of how Wii U and 3DS have performed, and the projections for the coming year; the roles of Wii and DS will be small in comparison. We've drawn figures from a talking point reacting to the Q3 results for the sake of comparison; software sales don't include download-only eShop games.
Q2 hardware projection = 17.5 million units
Q3 hardware projection = 15 million units
Actual hardware result = 13.95 million units
2013/2014 hardware projection = 18 million units
Q2 software projection = 70 million units
Q3 software projection = 50 million units
Actual software result = 49.61 million units
2013/2014 software projection = 80 million units
Q2 hardware projection = 5.5 million units
Q3 hardware projection = 4 million units
Actual hardware result = 3.45 million units
2013/2014 hardware projection = 9 million units
Q2 software projection = 24 million units
Q3 software projection = 16 million units
Actual software result = 13.42 million units
2013/2014 software projection = 38 million units
In terms of the 3DS being the great sales hope for Nintendo, that's no real surprise. It's now enjoyed over two years in the market and has been steadily building up to a userbase of over 30 million units. It also has a stonking software lineup on the way — and we don't say stonking lightly — with titles such as Mario & Luigi: Dream Team, Pokémon X & Y, Animal Crossing: New Leaf and The Legend of Zelda 3DS being just a few prominent examples coming in 2013. At least one of those is guaranteed to record monstrous sales in Japan and the West — Pokémon X & Y — while the others will likely be hugely successful in their own right. The recent 3DS Direct highlighted just how many excellent titles are coming, and momentum seems to be on the side of 3DS software — New Super Mario Bros. 2 is the third highest selling 3DS game in the system's entire lifespan on 6.42 million sales despite only arriving in August 2012, while Luigi's Mansion: Dark Moon had already reached 1.22 million sales on 31st March despite only being in stores barely a week before the result's cut off point.
Perhaps pleasing is the fact that the 3DS hardware and software figures weren't drastically off their Q3 predictions, and when you combine the software lineup with the inevitability of increasing retailer competition and enticing bundles and economical prices, the Nintendo estimate of 18 million unit sales isn't too outrageous. And then there's the real money maker — 80 million software units are predicted; it may seem brash, especially in light of previous plummeting projections, but this is a year of new games that blows the previous two years out of the water. There's real depth to the lineup, and we've also seen plenty of evidence recently that the performance of the 3DS eShop is giving reason for cheer; it will have its own valuable role to play with retail downloads and the ever expanding download-only library.
The performance of Wii U will have disappointed Nintendo. While its sales are arguably respectable for a new console launch — they rarely go smoothly beyond the initial week one sell-outs — it still fell below the targets that Nintendo set for itself, as the figures show. We know that some big titles are coming, but the estimate of nine million hardware sales (half the 3DS number) and 38 million software sales (less than half the 3DS estimate) perhaps reflect the chastening downscaling of initial projections, and the fact that it hasn't enjoyed the benefit of time and maturity afforded to the 3DS. An initial reaction is to perhaps think of these as rather low, but the software sales figure seems relatively ambitious in light of the games we know will come. The news that Mario Kart is expected this year, with Nintendo placing it prominently in a list of games coming within "several months", suggests a Holiday release; that title may contribute greatly to the overall goal. After all, Mario Kart 7 was one of a duo of titles air-lifted in to help save the 3DS in late 2011, as an "act of emergency". We'd suggest that the prediction of nine million console sales means we shouldn't expect any near-term improvements in the system's fortunes, with Nintendo itself emphasizing the latter half of the year and a perceived important role for Miiverse, which will surely mean rolling that feature out onto external devices relatively soon.
...We plan to concentrate on proactively releasing key Nintendo titles from the second half of this year through next year in order to regain momentum for the platform. Nintendo strives to improve the sales by communicating the compelling nature of our hardware and software to as many people as possible through our new network service called "Miiverse," which offers an environment where people can empathize with others and share their gaming experiences.
If the projections bear out, the 3DS will be merrily on its way towards 50 million (lifetime) hardware sales a year from now, if not there yet, while Wii U — even hitting its targets — will have sold just under 12.5 million units in around 16 months on the market; in a little over a year (late February 2011 to March 31st 2012) the 3DS had sold just over 17 million units. On an entirely different scale — arguably in a golden-age for Nintendo before smartphones, tablets and other rivals shrunk the market — the DS family of systems outsold Wii by more than a third.
DS family of systems hardware sales — 153.87 million sales
Wii hardware sales — 99.84 million sales
While there's still, in our view, a solid marketplace for Nintendo to sell both of its systems, it looks like the handheld space could be the real banker. Perhaps Wii U's momentum will increase this year and the next to match or exceed that of 3DS, yet some of these trends do suggest that the greatest success could come in the smallest system packages. Maybe it's simply due to the ease with which portable systems can be iterated — the DS "family" consists of four main models — but the handheld space seems to be Nintendo's key strength. What's refreshing is that the projections for both 3DS and Wii U seem reasonable, especially after seeing repeated estimate slashing by Nintendo in recent times. There's less bombast than normal, which hopefully means that the company can realistically hit the 100 billion Yen operating profit that it's set itself.
It looks like the days of sales figures in the ball park of DS and Wii lifetime sales are becoming a fading memory, but that doesn't have to mean that Nintendo can't operate as a profitable company that still brings us great games and systems. Perhaps realism is taking over from unfettered optimism.