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Nintendo is the only company among the three console makers that began life as an entertainment company - and it shows. Microsoft is known for software; Sony is known for hardware; and Nintendo is known for games.
American gamers are well acquainted with the Nintendo brand; but, American investors generally know very little about the company. That's unfortunate, because despite all the attention given to Sony and Microsoft's video game operations, Nintendo is the ultimate pure play video game company.
Nintendo is an interesting business to write about from an investor's perspective for several reasons. The company operates in an exciting industry with excellent long-term prospects. It's more reasonably priced than many public companies in that industry (although that's not saying much). It's a truly unique business (with a unique past), and it has a clear vision of what it is and what it isn't. Obviously, Nintendo's tremendous intellectual properties add to its appeal both as a subject of an article and as the object of an investor's interest.
Nintendo has been a good steward of its intellectual properties. It's been very careful to protect the image of its most beloved characters. In fact, some would say the company has occasionally been too protective of its strongest franchises.
For instance, between 1994 and 2002 there were no new Metroid games, despite the popularity of that franchise. The benefit of such a strategy is that when Metroid Prime was released in 2002, it received extraordinary reviews and sold over a million units. The downside to this approach is obvious. Nintendo effectively surrendered the revenue (almost certainly more than $100 million) that could have been milked from the franchise throughout the latter half of the 1990s.
Nintendo is an entertainment company; not an electronics company. Console sales are inextricably intertwined with games sales. Hardware sales account for a large portion of Nintendo's total sales; however, hardware sales don't drive a large portion of Nintendo's total sales. At Nintendo, the games sell the consoles. Of course, the console itself can affect the game play experience in its role as a
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Third party publisher support for the Wii has been the subject of much debate and speculation. Nintendo's consoles have enjoyed less support from third parties than the competing consoles, because Nintendo has been less willing to work with third parties on their terms.
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Considering the industry it operates in, Nintendo has been a solid performer. The company consistently turns a profit, which isn't easy when there aren't other divisions to smooth out any of the bumps brought on by launching new consoles and essentially launching new products constantly.
After all, that is the greatest difference between the video game business and almost every other business around. All your sales are coming from "new" products, even if they are variations on the same theme or sequels within an established franchise. The lifecycle of each product is unnervingly similar to the lifecycle of a fruit fly.
So, the business depends upon doing an adequate job a great many times. As a general rule, businesses where you only have to do one really smart thing every couple of decades are better bets.
On November 19, 2006, Nintendo Co. Ltd (Nintendo), a Japan-based game console manufacturer, launched the Wii, a video game console which came with a unique wireless controller called Wii Remote, in the US. The Wii made its debut in a highly charged gaming market. Sony had launched the Playstation 3 (PS3), a game console with a Blu-ray6 player, on November 17, 2006 in the US; Microsoft's game console, the Xbox 360, had been launched in November 2005 and had sold around five million units by June 2006. Nintendo, which started out as a manufacturer of playing cards in Japan, had gradually shifted to making toys and video games. It was in the 1980s that it launched its first game console, the Nintendo Entertainment System (NES), which went on to become a huge success.
The NES was followed by the Super Nintendo Entertainment System (SNES) in 1991, the Nintendo 64 in 1996, and the GameCube in 2001. However, in the early 2000s, Nintendo's fortunes in the game console market saw a gradual decline. The sales of Sony Playstation 2 and Microsoft Xbox far outpaced that of the Nintendo GameCube.
With Nintendo's market share falling, industry observers expected it to exit the game console industry. Nintendo, however, had other plans. In 2004, it announced that it had begun work on developing a new console. A few months into the development, Nintendo realized that the continuous technological up gradation in each succeeding generation of consoles was increasing hardware costs but discouraging innovation7 in the games industry. Therefore, it chose to tread a different path. It decided to develop a console that would offer gamers unique gameplay,8 even though it would not have the latest processor or graphics. For this purpose, it designed a completely new console called the Wii with a unique controller. Apart from the usual gamers, Nintendo wanted to attract casual gamers and people who had never played video games before.
The Wii generated a lot of buzz because of its unique design and gameplay, and this was expected to translate into good sales. The Wii, however, faced several challenges. Analysts were skeptical about whether Wii's unique gameplay would be reason enough for serious gamers to accept a technologically inferior product; especially when the competing consoles (PS3 and Xbox 360) boasted of cutting-edge graphics and HD capabilities. In addition, the fact that games developed for the Wii could not be replicated for PCs or competitor's consoles was expected to reduce the number of prospective game developers for the system, resulting in fewer game titles being available for the Wii
Nintendo's Slide in the 2000s
Nintendo's hand-held game devices were hugely popular and were a major source of revenue for the company. However, the company's stationary consoles were not as successful. In fact, Nintendo's console sales declined with the release of every new generation of consoles. In the 1980s, when Nintendo launched the NES, its only major competitor was Sega Corp. (Sega), which launched the Sega Master System, a not-too-successful game console. However, in 1991, when Nintendo launched the SNES in the US, Sega's Mega Drive/Genesis was the most popular game console in the market. The SNES was not able to dislodge Genesis from its pre-eminent position, partly because the Genesis, unlike the SNES, offered backward compatibility.
Faced with rising game console development costs, Nintendo was forced to reconsider whether it wanted to continue in the race to build consoles which had greater processing speeds or which supported improved graphics. "Give them (gamers) one, they ask for two. Give them two, and next time they will ask for five instead of three. Then they want ten, thirty, a hundred; their desire growing exponentially. Giving in to this will lead us nowhere in the end. I started to feel unsure about following that path about a year into development," said Genyo Takeda (Takeda), General Manager, Integrated Research and Development Division, Nintendo. In the game console industry, it had become an accepted practice for the console manufacturers to lose money on the hardware and to recover the loss by charging high licensing fees to game publishers and developers...
In May 2006, Nintendo unveiled the new console and the much talked about wireless controller at the E3 conference in Los Angeles. At the conference, Nintendo announced that its new console would be called 'Wii'. It also gave a 150-word explanation as to why it had chosen the name. Nintendo said that the name was in accordance with its philosophy of creating a gaming world without boundaries, attracting new gamers, and making a fun product for everyone. Nintendo's press release explained, "Wii sounds like "we," which emphasizes this console is for everyone. Wii can easily be remembered by people around the world, no matter what language they speak. No confusion. No need to abbreviate. Just Wii." The unique spelling was also expected to be easy to search on the Internet as well as to serve as a trademark...
Even though the Wii had a lot going for it, concerns about its eventual success remained. With the PS3 launch, gamers would now be able to experience true high-definition images and sound on their games, in comparison to which the Wii games would look primitive. Some analysts felt that even casual gamers would find the graphics power of the Wii disappointing in comparison to the other consoles. The unique gameplay of the Wii also had the potential to cause its downfall. Some analysts felt that playing games with the Wii Remote could become repetitive and tiring over time...
With more and more households willing to buy more than one game console, the Nintendo Wii stood a fair chance of being included in Christmas and other holiday shopping lists, because of its low price (compared to the PS3 and Xbox 360) and unique interface. Analysts felt that customers would choose between the Xbox 360 and the PS3, but were highly unlikely to buy both, mainly because of their high price and similar features. Not surprisingly, Microsoft officials believed that customers would prefer the Xbox 360. "People are going to buy two (machines.) They're going to buy an Xbox and they're going to buy a Wii ... for the price of one PS3...