[Featurama] An Analysis of Nintendo’s 3rd Quarter Financial Briefing
Earlier this week, Nintendo head Satoru Iwata held a press briefing detailing the troubles of the past year and their drop in profitability. It was wordy and a bit dense, but ultimately it’s a necessary response to the company having lowered it’s earnings forecast from a loss of 20 billion yen to 65 billion yen. They are coming in to this last quarter of the year with $844 million in the red projected to cap it off in March.
Stock holders were obviously a bit worried.
When companies post these earnings shortfalls, changes will need to happen. This is what Iwata tried to explain in 43 power points. Nintendo had a troublesome year with the 3DS and the Wii. Satoru Iwata noted himself that the arrival of Smart Phones as gaming devices has changed the handheld market landscape, however he did attribute most of the blame on the sharp rise of the yen in Japan which cut much of the profit from Western consumers.
Hurting the company still is the fact that the 3DS hardware is not profitable. This is a big deal when you factor in that price cut and is a huge thing to note as hardware sales in the west are falling. To make his point clear, Iwata gave a report of the entire video game landscape according to their observations through analyst findings. Consumers in Japan showed a steady rise over 2010′s numbers in hardware purchased, but they also had a new console push from the 3DS and PSV. The rest of the world saw year over year drops in hardware sales. The biggest change however has been in software unit sales.
Software across the board for the big three is in decline. This can be attributed to people owning too many games, the recession or the fact that new markets haven’t quite opened up for the games industry in the past few years. The US is the strongest market by far in software sales and we are only seeing a small fall in games sales. What is interesting to note is that in America, the 360 is having a growth in capturing the software market year over year while Sony’s hardware stays close to the same and Nintendo’s market starts to shrink.
As you can tell, it’s business as usual with the 360 doing high month to month sales. The Wii doing as well as the PS3 throughout the year is a bit surprising though with the lack of content. The handheld market however is interesting as the 3DS didn’t have that huge initial surge in sales with the price drop. Same with the PSP in February. Christmas was good, but it took until November to see that boost.
Japan, Nintendo’s home market, has dropped software sales down from around 69 million units in 2009 to 55 million units in 2011 sold across all consoles. The 3DS hit a late surge and did surprisingly well compared to the Western markets. The PSP had unfortunately hit it’s saturation point and with the later release of the higher priced PSV, the 3DS had a lot of room to gain in the holiday months. Software however didn’t follow during this transition and the market shrank as DS sales were cut in to by 3DS sales. This large software drop can largely be attributed to Nintendo as Sony’s markets were steady while Nintendo’s declined.
Japan is a handheld country and the hardware did great. The lack of quality titles in the first half of the year hurt the software performance greatly. The PS3 did consistently better than the Wii though a small holiday push moving the console ahead some weeks at the end of the year. As always, the 360 is a non-issue.
Europe is actually a really fun continent to look at. They have no market leader right now according to these reports. The hardware is all about even and because of this the software is following the trend. What we are seeing however is a sharp decline in handheld software sales compared to previous years. As we’ve seen the market shrink, this hurts Nintendo. Because of this, the share of sales from the PS3 and 360 have increased.
Europe hasn’t had hit handheld software in years and it’s hurting only Nintendo. The other consoles aren’t losing too much market share, only Nintendo is. Because of this, the market has just evened itself out.
Nintendo has now been downgraded from industry leader to middle of the pack. What this all means is that the 3DS needs some major changes. The profitability of the console is going to be rectified really quickly. Iwata has a firm timeline of when that will happen. “Let me first inform you that, in the first half of the next fiscal term, we are now anticipating to get out of the situation that we sell the hardware below cost” said Iwata in the outline. That’s a huge difference maker for the company and will quickly take them out of the red. The change doesn’t mean the software will be affected as more Mario is more money, but the system’s overall perception still needs to hit a wider appeal.
This was helped by that massive price cut in the middle of the year as Sony’s new hardware will still be much pricier. Currently the 3DS has an adoption rate that surpasses what the original DS and Wii did in their first years. This growth curve shows the system is healthy and will do a lot to address 3rd party development concerns. In Iwata’s words, “we have learned a bitter lesson from the launch of the Nintendo 3DS.”
The biggest news for game websites was a reinvigorated focus on what is known as “Evergreen Titles” or titles that simply don’t go bad such as Zelda and Mario. This is highlighted by an announcement of a new 2D Mario. The 2D Mario titles have consistently sold above expectations, so this is good news for everyone. No reveals of a new IP obviously, but we’ll see what the rest of the year has for Nintendo.
What was surprising however is Nintendo’s new focus on the StreetPass and SpotPass features. One of the biggest shocks to come out of the 3DS has arguably been it’s use of Augmented Reality. It could be said that the StreetPass feature didn’t go over well in the US as gamers tend to be less inclined to bump in to somebody else with a 3DS. As growth obviously occurs with the handheld in all territories, this feature might take off.
SpotPass however seems more ideal as using the system to pick up WiFi signals and download content is a novel approach and would work extremely well for everyone that can pass a wireless signal. By expanding their system in accessing digital content, Nintendo is going to have to be serious about their downloadables.
“We are still in the first stage, but we are building the foundation little by little to expand our digital business.”
Unfortunately, little by little is a bit too slow for Nintendo as mobile phones are having some effect on the market for everyone. I assume, this is where the next bit of Nintendo software comes in to clarify all of this. The Nintendo Network will essentially be Nintendo’s version of PSN or Xbox Live. It will cover “competitions and communication among users, as well as the sales of digital content.” Nothing revolutionary, but it’s a confirmed step up from their current digital landscape.
This obviously will raise some naysayers that think Nintendo will start packaging Zelda in pieces. Iwata went above and beyond to ensure consumers that “as a software maker, Nintendo believes that its packaged software should be sold to our consumers in a form so that the consumers will know in advance that they can enjoy playing the software they purchased just as it is.” He went on to attack the social games model of hiding modifiers on content to force customers to spend more than what they were initially promised. We’ll really see how this works out once Dragon Quest X is released.
For those wondering where the Wii U is, it was highlighted but not much was said. It is coming this year and the final product will be shown at E3. With the serious drought of titles for the Wii still going, Iwata is assuring everyone that it will have a solid launch lineup for the system. No console really has an incredible launch lineup and Nintendo’s unwavering focus on the 3DS doesn’t reassure. However, they’ve had plenty of time to make some thing so we’ll see what comes out of it
The big feature that really came out of this for the Wii U was Near Field Communication, something I actually had to look up. What it is for those confused, is a system of reading data from objects nearby through the use of radio signals. Blutooth devices, smartcards that you scan instead of swipe and local information exchange are just a few of the current implementations. It’s usage can be far reaching, but what Nintendo is toying around with right now are micro-transactions and wanting to “create cards and figurines that can electronically read and write data via non-contact NFC.”
Nothing concrete on that front, but the potential is very high for the Wii U.
That’s pretty much what happened at Nintendo’s event. The biggest thing Nintendo needs to focus on is cutting their costs and expanding their markets. They already have plans for pushing the 3DS in to mainland Asia, so that will do a lot to help. Still, the Wii U is right around the corner which will again push costs up. The Wii market is shrinking more and more each year and the migration from Wii owners to Wii U owners is a viable concern. The company has had a really hard year to appease these fears.
Fact is though, the Wii sold poorly for most of the year and then made up for it in December. They sold about as well as the PS3 sold in all territories and you really can’t stop that train. No software to boost their numbers however hurt across the board for Nintendo. Nintendo’s 3DS price cut also did a huge number on their projections and can be one of the major reasons for such a sharp change in their forecast.
|Previous Forecast||Revised Forecast|
|Net Sales||790 billion yen||660 billion yen|
|Operating Income||1 billion yen||-45 billion yen|
|Ordinary Income||-30 billion yen||-95 billion yen|
|Net Income||-20 billion yen||-65 billion yen|
|Previous Forecast||Revised Forecast|
|Wii Hardware||12 million units||10 million units|
|Wii Software||100 million units||100 million units|
|Nintendo DS Hardware||6 million units||5.5 million units|
|Nintendo DS Software||62 million units||59 million units|
|Nintendo 3DS Hardware||16 million units||14 million units|
|Nintendo 3DS Software||50 million units||38 million units|