"For Nintendo, yes, things really are that bad" - analysts

Do plummeting bottom-lines heap pressure on Wii U?

So Nintendo posted a six-month 70 billion yen loss (-579.3 million / -$926.3 million), and now braces for its first yearly loss in decades. But it's Nintendo - are things really that bad?

"For Nintendo, yes, things really are that bad," Wedbush Morgan analyst Michael Pachter answered Eurogamer.

"Nintendo started out this cycle with a dominant handheld position and made a conscious decision not to compete with Xbox 360 and PS3 on graphics. They expanded their handheld dominance, and their decision not to compete with Xbox 360 and PS3 worked, and five years later, they are dominant on both console and handheld. However, their momentum has stalled, as iPods and smartphones proliferate, and as the 'high definition' consoles have overtaken the Wii."

"I called for the Wii HD in 2009 and again in 2010 because I saw all of this coming, and had enough respect for Nintendo management that I presumed they had to see things the same way that I did. It is clear that they didn't share my view, and this week's earnings report and sharply lower forecast are the consequence of their decision to stay the course in the blue ocean rather than compete in the red ocean.

"Unfortunately," he added, "this week's results show that Nintendo's blue ocean is no longer blue; the sharks are not only circling, they are devouring Nintendo's market share at will."

Nintendo's flagship Wii console has lost momentum and is now outsold consistently by Xbox 360 in the US, PS3 in Japan and PS3 in Europe.

The 3DS was supposed to catapult Nintendo back on top. But it didn't, so Nintendo did something it hadn't since 1997, and slashed the price of the 3DS after not quite five months on sale (in Europe).

Selling hardware at anything but a chunky profit isn't Nintendo's style, and the company yesterday attributed a significant portion of the six-month "huge loss" to lowered revenue from 3DS hardware sales.

But for Screen Digest analyst Piers Harding-Rolls it's still "too early to call the death knell of the 3DS". "This Christmas will tell us a lot more," he told us, "and its performance over the next two months will also be key in convincing third parties to increase investment in the platform.

"Nintendo's blue ocean is no longer blue; the sharks are not only circling, they are devouring Nintendo's market share at will."

Michael Pachter, Wedbush Morgan analyst

"At present, a lot of publishers are taking a wait-and-see approach and, even with a strong Christmas, I don't see major 3DS investment from third parties until the end of 2012."

Nintendo expects Super Mario 3D Land and Mario Kart 7 to bring home a big Christmas for 3DS - a handheld that has so far suffered from a lack of key Nintendo games. Will Christmas 2012 be the turning point for 3DS?

Whether it is or isn't, Michael Pachter believes 3DS will never achieve the same money-spinning success as DS.

"I said that the iPod Touch and the emergence of smartphones made it easy to deliver simple and fun games to the masses, carving out a sizeable chunk of the DS target market," Pachter said. "That has clearly happened, as is evidenced by Nintendo's lowered DS forecast and sharply lower DS/3DS software forecast.

"It's pretty clear that the potential for Nintendo handhelds is smaller now than it was when the DS was launched," he added, "and software sales are going to continue to suffer, as the value proposition of 'shovelware' on the handhelds has declined precipitously with the emergence of free-to-play and $0.99 games on iPods and smartphones."

Nintendo now expects to sell not 9 million DS consoles by the end of March 2012, but 6 million. Wii sales expectations are still 12 million for the full year, although Wii and DS software sales expectations declined.

Nintendo expects 3DS will still sell 16 million units by the end of the financial year, but the software prediction has fallen considerably from 70 million to 50 million units. Piers Harding-Rolls reckons hitting that 16 million hardware target will be "a challenge".

But, argued M2 Research analyst Billy Pidgeon, "slowing Wii and DS sales were expected". It was "the yen's relative strength against the US dollar and the Euro [that] was the real inhibitor here".

"Unfortunately," Pidgeon added, "the negative economic factor of a strong yen may continue to plague Nintendo and other Japanese companies dependent on American and European markets."

But what does all this mean for the future? What if 3DS sales don't pick-up, and what if Wii and DS sales also continue to decline - what will the ramifications be for Nintendo's new console, Wii U?

"The pressure is on for Wii U."

Billy Pidgeon, M2 Research analyst

"The pressure is on for Wii U," acknowledged Pidgeon. "Wii and DS will continue to decline, so Nintendo needs a good uptake on Wii U hardware coupled with a good attach rate.

"Wii U is not likely to match Wii performance, but the attach rate should be better if enough quality software titles are available as a smaller base will be more enthusiastic."

"Both 3DS and Wii U innovate," Piers Harding-Rolls told us, "but neither at this stage offer the potential of as much mainstream engagement as their predecessors. Add in competition from non-specialist connected devices and Nintendo's business is looking much less robust than at the height of the Wii adoption.

"With the 3DS failing to perform, the company has had to cut the price - this will have a knock-on impact on other internal costs to make up the margin loss in other areas. This could mean a reduction in R&D spend or perhaps a reduction in content development investment across its products.

"Nintendo is likely to find 2012 a challenge as it waits to drive sales again with the launch of the Wii U. The strength of the yen against the dollar has exacerbated the situation."

Michael Pachter concluded: "The Wii U will either succeed early, forcing Microsoft and Sony to accelerate the launches of their respective next generation consoles, or will sell only modestly, allowing Nintendo's competitors to launch later."

Nintendo president Satoru Iwata commented today that Wii U will be released between April 2012 and March 2013. He didn't commit to a pre-Christmas 2012 launch.

Will Wii U be rushed out to pick up the slack?

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