By now, most people know that things aren’t going to well for Nintendo at the moment. The 3DS launch didn’t take off as expected, reception of the Wii U after its E3 roll-out was mild at best, and a floundering Wii leaves the company in a tight spot.
But what stops all of this from being anything other than a short slump? People were skeptical of the DS at first, but the DS Lite and a slew of great titles soon led it to be one of the best (perhaps THE best) portable gaming systems ever. And people have been shouting doom and gloom about Nintendo for some time, making it nothing new to question the stability of the company or the soundness of its strategies.
However, there’s a strong case to be made that this time is different, and here are several reasons why:
1. Nintendo has trouble on multiple fronts
2. The gaming landscape is fundamentally different now
3. A hyper-competitive marketplace is especially threatening to Nintendo
Before exploring the dangers that Nintendo faces, I want to preface my arguments with the fact that that I love Nintendo (Zelda and Mario are my top two favorite franchises), I’ve enjoyed what good titles the Wii had to offer, had as fun a time as anyone else playing the DS, and most importantly, I do not WANT Nintendo to fail. I’m analyzing trends here, not making value judgments. So with that in mind, on to the challenges facing Nintendo.
Nintendo has trouble on multiple fronts
Last week the video game company‘s stock took a major hit. News of a massive 3DS price drop led to investor uncertainty and voluntary pay cuts for top executives. And in the short term, as per 1up’s Chris Pereira,
Iwata confirmed this to be the case, explaining that "before the mass-production effect can take place for the hardware, [the price drop] will naturally generate red ink on the hardware sales."
In addition, Nintendo’s stock is down %40 overall in 2011 so far. Though that doesn’t look promising, Nintendo came back from much worse circumstances in previous years. But can the it do it again? 2006 were brutal times for Nintendo, but Wii sales and the DS’s success gave the company new life.
Unfortunately, one has to wonder if the Wii U and 3DS can be equally as triumphant. Even Nintendo hasadmitted its launch lineup for the 3DS was weak, and many of the titles that will arrive are either remakes (Ocarina of Time, Star Fox) or derivative of past ideas (Luigi’s Mansion, Mario Kart). Does that mean these games won’t be great? Not at all. Nintendo produces great games and has some of the best brands. The company's also great at maintaining these brands and keeping their releases diverse, incrementally exploring the potential and wonder of IPs from Mario to Kirby often with great success. In the current setting though, none of these titles can be anything short of great if Nintendo is to rebound. In other words the company has limited room to manuever and can't afford to have any flops.
Indeed, some feel that the bulk of the company’s prospects now hinge on how the Wii U fares, not a reassuring proposition. The system still won’t be released in time to take advantage of the third-party blockbusters coming out this fall and winter, and it remains unclear how much potential buyers might see the belated availability of a game like Arkam City as a reason to make the at launch purchase.
And then there’s the current iteration of the Wii brand, lost in the wilderness with no software support to help it find its way back home. I’ll be the first to defend Skyward Sword. I like the art style and am intrigued by the premise. Plus, can you imagine a better time of year to buy a Nintendo product? For any gamer of a certain age, Christmas (or your gift giving holiday of choice) was always marked by some Nintendo console or games under the tree. Having a quintessentially Nintendo brand like Zelda releasing at that time is perfect. But it’s not going to drive anyone to go out and purchase a defunct system, and then there’s the question of how many people haven’t already traded in their Wii or grieved over its passing (mine is on its last legs).
So Nintendo’s back to needing its portable to rally and excitement over the Wii U to grow. However, most people seem less than thrilled over the 3D effect and I find it hard to believe that parents and grandparents who helped boost Wii sales will go at it a second time, especially when they now have a smartphone to mess around on or a sleek tablet to enjoy. Which brings us to digital downloads and mobile gaming.
The gaming landscape is fundamentally different now
For the greater part of gaming history, things hadn’t changed too much. Console manufacturers created new hardware every so many years, and then licensed content for it. Developers went to work making new games, and then publishers got games into stores and onto shelves with a modicum of publicity behind them.
Then came social networking, digital downloading, and mobile gaming. All three are still developing, but already we’ve seen them interact and overlap to cause large shifts in the industry. People don’t just want to play games when they turn on their PS3, they want to message other players, compare trophies, and see what their friends are playing. A sizable portion of the success of titles like Call of Duty: Modern Warfare 2 can be attributed to their nearly endless online multiplayer replay value. And people who never played video games before, from young children to older adults, now regularly invest time and money into Farmville and Angry Birds.
CEO of EA, John Riccitiello made this point not too long ago:
“Consoles used to be 80% of the industry as recently as 2000. Consoles today are 40% of the game industry, so what do we really have? We have a new hardware platform and we're putting out software every 90 days. Our fastest growing platform is the iPad right now and that didn't exist 18 months ago.”
This all means a shift away from the traditional way of developing and distributing games to a more flexible approach. Many new and potential gamers attracted to the medium by what they’ve seen on the Internet, with free-to-play, or on iTunes, with cheaply priced apps, won’t be willing to meet the $60 price point for most console titles.
As a report by the NPD Group notes, while “hardcore” gamers are still a plurality, the group is becoming more encompassing and diverse as Industrygamers explains,
“The report still maintains that core gamers still make up 23 percent of total gamers, with ‘family gamers’ in second with 22 percent, and ‘PC Gamers’ and ‘light PC gamers’ taking in a 15 percent share each. Mobile and digital-only gamers fall behind. Unsurprisingly, most groups of gamers are playing on at least three different platforms.”
What this means for Nintendo is that the “casual” market it capitalized on during the first Wii era will be divided and swallowed by mobile and social gaming this time around. In addition, Nintendo is perhaps the worst positioned to adapt to a video game market driven by connectivity and crowd sourced indie development. Thus we arrive at point number three.
A hyper-competitive marketplace is especially threatening to Nintendo
Microsoft has made great strides toward adapting to the new video game landscape in recent years. The fact that it remains the console of choice for those primarily interested in online multiplayer while also sporting arguably the best downloadable regime mean it has the capacity, if it chooses to act rigorously enough, to change with the times.
Even Sony, whose recent debacle with the PSN undercut consumer confidence and relationships with downloadable developers, still possesses the strategic depth to compete on the digital and mobile playing fields. Adapting their hardware for more casual, on-the-go consumers wouldn't be impossible.
But user interface (Microsoft) and technical prowess (Sony) aren't the company's historical their strong suits. Instead, Nintendo offers the not very technically advanced 3DS filled with lots of low quality ports in between the release of its bigger titles.
As far as brands go though, anyone who claims to have a better stock of more popular or more recognizable IPs is just regurgitating PR talking points. But the question remains, can a handful of famous IPs support a video game company the size of Nintendo?
Do gaming tablets and mobile phones allow the space for the 3DS to become as profitable as its predecessor? And without that casual audience to run to, is the Wii U really going to meet the demands of what’s left of the “hardcore” gamer audience and convince them to purchase what is by all conventional wisdom a stop-gap system?
This chart from Gamasutra shows the extent to which retail sales are shrinking and other forms of delivering gaming content are growing.
If this trend continues, Nintendo will find new growth impossible to achieve without tapping into these other areas of potential revenue. And in the weakened world economy populated by fickle investors, staying the same is not good enough, and taking steps backward can be commercially disastrous.
Finally, there’s Nintendo’s corporate culture, on which I am no expert and would be arrogant to assume. But my intuition is that Nintendo might not change course soon enough. A 3DS price drop is a tactic to turn things around in the short term, but it’s not a long term strategy. And If the burden of that strategy falls on the Wii U, I’m not sure Nintendo is anywhere near “getting” it.
Here’s another quote from Riccitiello,
“We intend to finish this fiscal year a much different company than when we started.”
Does that sound like something Iwata would say? Without a new philosophy of video game development and distribution, or at least a demonstrated recognition of the new market it is operating in, Nintendo might well continue on its course toward increasing irrelevance and ultimate demise.
Update 1 -
Iwata claims that the,
"incredible success of the Wii and DS systems in the last several years has put Nintendo in a great place financially and afforded the company the opportunity to take some real risks if need be. So dropping the price on 3DS while also pursuing Wii U development isn't as tough on Nintendo as it might otherwise be."
And says in a Q&A that he wants digital downloads to become another of Nintendo's pillars.
Analyst Mitsuo Shimizu at Cosmo Securities Co. in Tokyo says,
"The company remains in the severe situation for next few years until it develops something revolutionary, not an extension of existing products,”
And fund manager Masamitsu Ohki with Stats Investment Management Co. argues,
"Nintendo should use its ample cash to buy a social game maker, as the place to play games is shifting to smartphones and tablet PCs.”