News Article

Wii U Research & Development Costs May "Undermine Profitability"

Posted by Thomas Whitehead

IHS head of games Piers Harding-Rolls not writing off Wii U

Yesterday brought us Nintendo's Q1 financial reports, with the headlines generally focused on an overall profit, strong 3DS performance and poor Wii U sales. In terms of what was expected for the three months in question, it was a report with little in the way of major surprises, though did give us some facts and figures to chew over.

Naturally, industry analysts and those that make a living from assessing the markets and providing investment advice have been pitching in with their thoughts on Nintendo's results. Some have spelled doom and gloom for its home console, while others have struck cautionary notes that the true momentum of the console will become clear by the end of 2013, once more software is released. IHS head of games Piers Harding-Rolls is in the latter category, with his note seeking to emphasize the context of the Wii U's most recent quarterly sales (of 160,000 units), against the prospects of upcoming software, greater marketing efforts from Nintendo and the company's heavy reliance on traditional seasonal success.

[U]ntil we experience a strongly backed holiday sales season for the Wii U, long-term outlook is less clear. If sales of the Wii U fail to impress during the holiday season, IHS will downgrade its outlook for the platform and implement a significantly shorter sales cycle for the Wii U compared to the other next generation consoles.

Another cautionary note from Harding-Rolls focuses on Nintendo's challenges to return to operating profits, which brought a Q1 loss of 4.9 billion Yen (around $50 million / £33 million). Although Nintendo aims for a 100 billion Yen operating profit by the end of the financial year, the IHS analyst suggests that costs to produce Wii U products through Research & Development could undermine those targets.

While 3DS platform profitability has grown during the quarter, the traditional slow nature of sales from April to June means that any significant increase in R&D costs for Wii U software would easily overwhelm these profits. Even so, IHS expects R&D costs for Wii U software to continue to undermine profitability for at least the next four to six financial quarters, as Nintendo seeks to generate momentum for the stalled Wii U platform by spending more on developing its own software.

It's a reasonable assertion, but how much did Nintendo spend on R & D in the last quarter? According to the results, this spend in the last quarter was 13.7 billion Yen (roughly $139 million / £91.7 million); that's compared to 11.8 billion Yen ($120 million / £79 million) in the equivalent quarter last year. The yearly forecast for R & D is 55 billion Yen ($558 million / £368 million), which compares to 53.5 billion Yen last year ($542 million / £358 million). On current projections the increase is, in the context of these sort of numbers, modest, but the volume of first-party content for Wii U and — let's not forget — 3DS suggests that some feel it may go higher, or perhaps believe the numbers are already difficult to relate with handsome operating profits.

It's all a balancing act for the Nintendo management, with the need to turn profits accompanied by the desire to invest and ensure success for its systems. We'll know how well these priorities have been met at the end of the financial year, though we suspect fans would rather that Nintendo spends big now to secure a strong future for both of its platforms. Let us know what you think in the comments section below.

[via gamesindustry.biz, nintendo.co.jp]

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User Comments (25)

Nintenjoe64

#2

Nintenjoe64 said:

At least this didn't just seem like sensationalist Nintendo-bashing!

Say what you will about Michael Pachter but since January, his Wii U sales calculations have been fairly accurate!

Dogpigfish

#3

Dogpigfish said:

This is largely a reflection of the industry, not just Nindi. The big 3 are up against inexpensive streamline games. Wii U is shifting to support small scale projects, which is what they need to do to survive. Ubi, EA, and Acti need the big 3 to succeed in selling expensive consoles or they will fail.

GiftedGimp

#4

GiftedGimp said:

Thing is I still think if WiiU was due out this year and Either Ps4 or Xbone was released last year then Sony or Microsoft would be in a simular situation than Nintendo is in now regardarding system sales.
A lot of people would, and have been waiting to finding out what alk 3 next gen systems are going to offer and at what price point. A lot of people don't buy new systems untill its first price cut and/or a substantial back catalogue of games. Finally During the initial console launch months only the core gamers buy thier chosen system, and only a systems core fan(boy) will buy the latest system itteration on launch day.
Nintendo openly admit they messed up in a number of ways which has added to the problematic situation but to get a true picture of how well Nintendo, Sony and MS are doing this next gen people need to see how game and system sales do for the WiiU, Ps4 and Xbone from the middle of next year up untill next years christmas period. By then all 3 systems will have a good back catalogue of game and had timd to settle into the market with the general game/system buying public, not just the core gaming public/fan
Nintendo has just started thier recovery plan, which should hopefully build some momentum for the WiiU and although Nintendo have made mistakes just because Sony/MS are spouting various promises about thier systems that doesn't mean either MS or Sony won't be dropping ball, and making mistakes with thier systems at launch. Xbox360 had severe lack of retail games for months after the initial launch period, Ps3 had simular issues coupled with pricing issues.

WiiUExposed

#5

WiiUExposed said:

@GiftedGimp Sony and Microsoft wouldn't have this problem. Do you think that they would delay game after game due to being unprepared for HD development? They wouldn't abandon the PS3 and 360 in late 2011 like Nintendo did (no big Wii games developed after Skyward Sword). They also wouldn't forget about their systems for the entire first half of 2013. Nintendo dropped the ball with the Wii U, and I KNOW that they can do much better. I have higher expectations for Nintendo. It's called tough love.

Mahe

#6

Mahe said:

Hope they'll put out the kind of new and interesting games that the Wii had.

ajcismo

#8

ajcismo said:

@WiiUExposed
You hit on something there with 2011 and how unprepared they were. Its almost as if they were satisfied with the Wii and didn't have a focused plan for R&D heading into the next generation of systems. Still having split handheld/console divisions then probably didn't help either, something to this day I can't believe went on for that long.

MrGawain

#9

MrGawain said:

Here are some numbers.

They could mean this.

Or they could mean that.

I'm glad were clearer on the subject now.

element187

#11

element187 said:

Can't say analyst without anal.... or something.

Nintendo hasn't changed their forecast of 9 million consoles sold by end of fiscal year... Either they are delusional or they have an ace up their sleeve (yes I realized I posted this comment on another article but it needs repeating)

The probability of being delusional, yes is high, but so is Nintendo management knowing something we all don't know. They could have something major lined up that isn't just their heavy hitting franchises... I pondered about Nintendo having their own head mounted tracking system, but it could be a number of things too.

Apparently they have, because they mentioned, they are working on gaming that hasn't been done before and can't reveal it in fear of allowing their competitors to copy... If its as big as motion gaming was back in 2006, then they have every right to be cocky.

element187

#12

element187 said:

"Say what you will about Michael Pachter but since January, his Wii U sales calculations have been fairly accurate!"

@Nintenjoe64 It doesn't take a genius to predict a new games console wont sell very well without software..... I'll be shocked if sales don't start looking normal by January 2014.

Nintenjoe64

#13

Nintenjoe64 said:

@element187 I was referring to Michael Pachter's uncanny ability to add sales figures up from various sources and extrapolate accurate overall figures. His predictions are usually insane. He predicted 12M Wii U sales in Year 1 at one point

WiiUExposed

#15

WiiUExposed said:

@ajcismo I don't even know why Nintendo couldn't be prepared. All they had to do was look at previous consoles and learn from those mistakes. The Playstation 3 bombed at launch, 3DS did too. While they turned out fine, we shouldn't have to wait for a released console to do its job: having games.

Yorumi

#16

Yorumi said:

@WiiUExposed yeah you're right I mean really we want games like nsmb, monster hunter, a lego game perhaps, trine, pikmin, maybe a zombie game of some sort. What ever happened to the day of great launches like the ds, or gba, or snes, or genesis, n64 or ps2 man I sure miss those days.

Metaknight_3Raw

#17

Metaknight_3Raw said:

@element187
It could simply be that they think SSB and Mario Kart are going to boost sails exponentially. Which is both a bit delusional and a bit grounded.

But I wonder what secrets they do have in store... hmmm...

Relias

#18

Relias said:

@WiiUExposed And yet we have.. on both PS3 and 3DS.. heck we even waited on the 360... and actually.. waited on just about every system.. we bought them of promises of future titles or release titles without knowing if those titles would ever show up.. or at least when.. a lot of people bought a PS3 thinking Kingdom Hearts 3 was going to show up... never happened.. and the list can go on and on..

thanos316

#20

thanos316 said:

nintendo has a table right there that they should be making small games for. im not saying bring out crap games. but draw consumers in with a game like angry birds - meaning something not too hard, fun and creative. all games don't have to be gigantic and awesome, some people just want simple fun sometimes. so nintendo took too long to get these games out. but i do applaud them for getting their act together now..

PokeTune

#21

PokeTune said:

Considering this is Iwata running the company, my expectations couldn't be any lower.

mjhopkins81

#22

mjhopkins81 said:

A better point to bring up is, "What, exactly, is Nintendo's overall marketing strategy?" With the release of the Wii, we saw cute commercials in the States that highlighted the Wii's uniqueness. With the Wii U? Umm...nothing. 3DS? Nothing. Upcoming games? Nothing.

I hate to tell you, Nintendo, online advertising on your own website and hoping the word of mouth will spread news about your product isn't a sufficient marketing strategy, much less one that will help you to increase movement of your product.

SwissChris

#23

SwissChris said:

I am annoyed that they moved back some games that are completely 100% finished just to boost their December console sales (like Wii Fit)

SwissChris

#24

SwissChris said:

New customers are more important than existing customers and since I bought my console in the first month this really pisses me off

jondagoth

#25

jondagoth said:

I SAY LOUDLY "WII U IS A GAMES CONSOLE AND HAS NO GAMES IN MONTHS,"this why nobody wants one .....even downloadable gamecube games would sell loads.........QUIT THE KIDS GAMES TOO....MORE HARDCORE SHOOTER LIKE METRIOD OR STARFOX....

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