Talking Point: Nintendo's Wii U Struggles Bring a Challenge, Not Doom
Posted by Thomas Whitehead
The wider picture shows more than "Nintendoomed"
So, it was a funny old day at Nintendo HQ. Within a short space of time we went from 3DS topping hardware sales in the U.S., alongside the Wii U enjoying its "highest month", to Nintendo confirming major reductions in its sales and financial projections. The timing of this — after the December NPD figures and before the Q3 results at the end of January — seems like rather standard corporate damage control; for Nintendo the message isn't positive, so get ahead of loose speculation and lower expectations ahead of time.
We're going to look at context and swerve away from excessive negativity to what, hopefully, will be a balanced outlook. We shouldn't hide from facts, however, and the update from Nintendo is a warning sign for the Wii U, in particular, as the optimism and bold outlook of 2013 make way for a less satisfying reality. Below, copied from our article earlier today, are the new hardware and software projections for the period covering 1st April 2013 to 31st March 2014.
Previous software sales projection — 38 million units
Updated software sales projection — 19 million units
Previous hardware sales projection — 9 million units
Current hardware sales projection — 2.8 million units
Previous software sales projection — 80 million units
Updated software sales projection — 66 million units
Previous hardware sales projection — 18 million units
Current hardware sales projection — 13.5 million units
Previous software sales projection — 20 million units
Updated software sales projection — 26 million units
Previous hardware sales projection — 2 million units
Current hardware sales projection — 1.2 million units
Previous software sales projection — 10 million units
Updated software sales projection — 10 million units
No hardware sales projections for DS
We're focusing on the 3DS and Wii U, as they're the core concerns here — we will, however, give a high five to Wii software for bucking the downward trend.
Let's begin with the 3DS, which has seen its estimated sales for the year drop 4.5 million to 13.5 million units. We're not sure that updated figure is a disaster by any estimation, but what it isn't is DS levels. In fact, the remarkable thing is that Nintendo's essentially maintained almost constant sales of the portable year-on-year; the figures below are revealing in that respect.
3DS hardware sales from 1st April 2011 to 31st March 2012 — 13.53 million units
3DS hardware sales from 1st April 2012 to 31st March 2013 — 13.95 million units
Projected 3DS hardware sales from 1st April 2013 to 31st March 2014 — 13.5 million units
The first year, following the launch sales — which fell under the previous financial year, just — brought a crash in sales over the Summer period, saw numbers spike in a big way with a major price-cut and notable releases such as Super Mario 3D Land and Mario Kart 7. Year two was a steadier affair (with some particularly big hits in Japan) and included the successful launch of the 3DS XL. This most recent year has brought a number of fantastic software titles and the 2DS in the West — let us not forget that the 3DS family has also been the top-selling games hardware of 2013 in territories such as the US and UK, though those figures cut across two financial window periods.
Nintendo's software and hardware initiatives each year have maintained momentum, and it was clearly thought that the Pokémon factor — with X & Y — would combine with other products and games to give the system its best year. This might be the point at which the general public, and Nintendo itself, drops the pretence of the 3DS family keeping pace with the extraordinary sales of the DS family. The market has changed a great deal, yet the 3DS is still a relevant, popular device with tens of millions of units in the wild. It's perhaps a case of optimistic expectations making way to a new reality that an increasingly fragmented, busy tech world places the prospects of the 3DS within a lesser, but still substantial, sales outlook.
Now onto the bigger headline issue, the Wii U. Let's get one thing out in the clear right from the off. There's no positive spin on Nintendo's announcement — an estimated 2.8 million hardware sales for the whole year, a drop of 6.2 million on the old target, is a horrible, horrible number. Software sales are estimated to be half what was anticipated. So there's that.
Clearly the Wii U will be the hot topic in Nintendo's end-of-month Q3 briefings. Nintendo knows it, we can be sure of that, and shareholders will be demanding a battle-plan as a bare minimum; Satoru Iwata has said he'll instigate plans himself to reinvigorate the business. We've written in the past that it can be easy to overlook the differences in corporate culture in the West and Japan — while there are exceptions, many Western companies would likely have started making managerial changes, including the top job, long before now. It's clear, from Nintendo's go-steady approach and the comparative calm of its shareholders, that the willingness to tolerate negative moments is far greater. These trends are clear, though we won't pretend to guess what the future holds, yet we've been here before when the 3DS endured a poor start — the answer of Nintendo's management was to change the business plan for the project and accept a year of no bonus and reduced salary. A far cry from the golden goodbyes so often seen in corporate life in the West as the top jobs frequently change hands.
What we can say for certain is that Nintendo will react, yet all is speculation at this point. We'd suggest that those stating Nintendo will rush out a new console as early as 2015 are underestimating a number of things, such as the amount of time and planning required for the design, manufacture and distribution of new hardware, not to mention software considerations. Some have a belief — including some of the NL team while chatting over a beer and recently published by Games Industry.biz, for example — that Nintendo may integrate its next hardware offering as a replacement for Wii U and 3DS, a portable that also operates as a home console on the TV. That's entirely speculative, perhaps borderline fantasy, but isn't completely impossible; yet still, it won't happen overnight, that's the reality.
We should also recall that the marketplace is a fickle entity, and for the reasons we and many others have outlined in the past the Wii U still has a chance to be a moderate success, given the right content and strategy. It won't hit Wii levels, that is blindingly obvious already, and at this stage will face a — likely losing — battle to keep pace with the Xbox One and PS4. Yet as we've also argued before, Nintendo's existence as a video game company with no external businesses means that it doesn't need to — nor can it — win every generation of hardware. The plotting within its HQ is likely to be focused on ways to get the Wii U through a lifespan, while making it less of a burden on the financial bottom line. It is, we have to say, GameCube all over again, as Nintendo will attempt to sustain it to modest sales and then go at the market afresh with a new idea. And we know what happened after GameCube.
What should Nintendo do with Wii U? Popular suggestions are likely to be that the company finds a way to give it a Wii-style existence in stores, by which we mean it should be a simple, cheap offering. This "Basic" and "Deluxe / Premium" SKU split hasn't worked, for example, so having one Wii U on shelves (multiple colours is fine, perhaps necessary) for $200-$250 — whatever the margins and investment can squeeze to — seems like a way to go. Games such as Mario Kart 8, Super Smash Bros. and various others besides will be tasked with helping a clearly messaged, affordable system to market respectability. Those are just basic ideas, and Nintendo may do something along those lines or be more drastic. As we've seen before, in its reaction to the decline of the GameCube years by releasing the Wii and its reversal of the 3DS' fortunes in a market some said no longer existed, Nintendo is not averse to bold actions.
We would also highlight some key points that — regardless of what happens to Satoru Iwata and what Nintendo does to revive its home console business — should be remembered before we all go nuclear and push the big red button. This scenario isn't entirely new for Nintendo, what is new is that the entire population of gaming enthusiasts has social network platforms to consider the results. Let's look at two generations, admittedly of lifetime sales, that show the pattern of underperforming hardware being propped up by portable systems.
This first example shows sales of the Nintendo 64 alongside the Game Boy 'family' — particularly the arrival of the Color — in the same period (via NeoGaf); these numbers reflect aggregates, not precise numbers sold at retail, but reflect trends in the ball park of retail units shipped.
Nintendo 64 — 34,470,000 units
Game Boy 'family' in the same period — 72,450,000 units
GameCube — 21,760,000 units
Game Boy Advance in the same period — 79,970,000 units
Even accounting for the fact these numbers are slightly higher as they reflect manufacturing totals, they show very clear trends. Even in the Wii generation, such a triumphant period for Nintendo, consider the overall life-cycle sales of the two, allowing for the slightly longer period of sales momentum for the DS family — figures correct as of 30th September 2013.
DS Family — 153.96 million sales
Wii — 100.3 million sales
And so it's of little surprise that the 3DS is the driving force for Nintendo, sustaining the business in the face of the Wii U's negative impact. As stated earlier, sales of Nintendo's current handheld should be considered in the context of its competition in the portable gaming space — the iPhone and Android behemoths weren't factors in past generations, with the DS having a good run before smart devices became prominent. It's perhaps the GameCube / GBA comparison that matters here, with one out-performing the other by a substantial percentage.
In those cases Nintendo rode out underperforming hardware and ticked along. We should acknowledge that, unlike those occasions, Nintendo is making financial losses. Yet also worth pointing out is that, following the Q2 results, we interpreted Nintendo's figures to show that it had around $4715 million in cash assets alone, which doesn't even take into account non-cash assets. The company has also, as it acknowledged in statements today, had a particularly expensive year in research and development as well as marketing, with unified departments and new buildings also bringing costs; yet these investments could be argued as vitally important. Nintendo's decades of success — with major boosts in the Wii / DS era — have left the company with plenty of resources. That means it can ride rocky patches and console struggles for a good amount of time yet, while it also has the means to make major investments to tackle issues.
Only a small group of Nintendo's most senior managers, we suspect, know what the company is planning for the remainder of 2014 and beyond. Those individuals will know whether the company will continue with dual console strategies, new models of pricing and game design and so on. What the rest of us should know, from looking at the past both recent and beyond, is that the company will react to try and rectify struggles in the marketplace. Perhaps most importantly, it's in a financial position to do just that.