Earlier in the week, Nintendo Co. Ltd. (NCL) announced their first profit drop in four years. The company’s first half profits for the current fiscal year declined by 59% as a result of sluggish Wii sales in both Japan and North America. NCL president, the often frank and amicable Satoru Iwata stated in an earnings press conference: “We didn’t release strong software continually [for the Wii] and let the good mood cool down.”
It’s no surprise that Nintendo haven’t had the best six months. The big question on everyone’s minds is, what is Iwata going to do about it?
Putting it in perspective
Despite a steep decline in profits, Nintendo have and still are selling more videogame hardware worldwide than both Sony and Microsoft. There’s no doubt their competition would love to swap places with them, given the sales of the Wii compared to the PS3 and Xbox 360. The problem becomes more evident, however, when you compare the first half of this year’s sales to last year’s H1, when the company released Super Smash Bros. Brawl, Mario Kart Wii and Wii Fit, all of which helped drive both hardware and software sales across all three major territories (EU; US; JP) and continued to do so for the next several months.
The downhill drive began in the second half of 2008 when NCL banked on Animal Crossing: City Folk and Wii Music as their major releases for the holiday season, neither of which performed in line with their high expectations. Since Nintendo hardware typically receives a big boost during Thanksgiving and Christmas on the grounds of being popular gift items, the effects of their miscalculation weren’t felt until 2009 when Wii sales dropped off precipitously in Japan and remained that way until the release of Wii Sports Resort in June — just as H1 was coming to an end. It’s no surprise profits dropped the way they did and that the PS3 and Wii have been on equal footing this year — a drastic change from the situation last year.
Factors contributing to the problem
Obviously, this situation could have been avoided and Iwata’s comments both recently and in the past indicate that he understands the issues at hand all too well. Nintendo’s problems in this regard are severalfold:
1. Constant delay of high profile software: While Nintendo are no Blizzard, they do have a tendency to delay their high-profile games often — the most recent example of this being Wii Sports Resort, which was originally scheduled for release in Spring and would have contributed nicely to H1 profits had it done so. The company’s Entertainment Analysis & Development (EAD) division — managed by Shigeru Miyamoto and Takashi Tezuka — in particular has a reputation for not being able to hit a deadline. Of course, EAD are also known to produce some of the company’s biggest hits; but while putting out quality content worthy of the Nintendo name is important, it isn’t the only priority.
2. Allocation of resources: If one were to look at the number of companies that undertake second-party development for Nintendo, they might be surprised. There are more than you’re probably familiar with and chances are, you haven’t even heard of a lot of their games. Companies like Genius Sonority (Pokémon Colosseum), Noise Inc. (Custom Robo), Paon (Klonoa / Donkey Kong Barrel Blast), Skip Ltd. (Captain Rainbow) and Ambrella (WiiWare Pokémon) are certainly not sitting on their laurels, but at the same time, they aren’t producing software that performs particularly well either. Someone on the outside could never claim to be completely familiar with Nintendo’s internal structure, but it does make you wonder if there is a body at the publisher (similar to SPD3…more on them in a bit) tasked with the job of helping these companies grow into better developers that put out more…notable games that are worthy of a marketing budget.
Given that Nintendo have historically been excellent at identifying assets and liabilities, their relations or agreements with these developers must obviously be profitable on some level. However, one could still argue that developers like Monolith Soft and Genius Sonority are good examples of teams that could produce fantastic and popular software, were they only given direction, and that they could have helped fill in the gaps when the Wii was in need of new releases to sustain its sales.
3. Third-party relations: There has always been a certain uneasiness between Nintendo and third-party developers. While the situation has improved somewhat with the Wii, the majority of third-parties still put out either mediocre or low-profile or just ill-suited games on the system and fail to understand why, when they sell poorly to an audience that is (a) far more familiar with mainstream titles, and (b) used to getting shafted. You can’t release a spin-off of your company’s most niche IP or an unproven franchise with minimal marketing effort behind it and hope for it to compete with better marketed, more high-profile efforts. However, the pendulum swings both ways.
Nintendo, too, have dragged their feet when it comes to encouraging developers — especially in Japan — to invest in meaningful Wii development. President Iwata has stated on many occasions that his general policy is not to assimilate third-party developers, but rather to improve Nintendo’s relations with them. I believe Internet terminology for this is "moneyhatting," which encompasses outright funding of development and / or providing a great deal of marketing support, which is something that has worked wonders for Microsoft in their efforts to encourage a culture of spending amongst their audience.
Unfortunately, the first and last time Nintendo tried anything along these lines, it didn’t quite work out the way they intended, which may explain the company’s reluctance to try again. Recently however, Tiger Woods PGA Tour 10, Monster Hunter 3 and Tales of Graces have been the first legitimate examples of Nintendo and third-parties collaborating in a mutually beneficial manner on the Wii.
4. Marketing and perception: Games need to be marketed, especially when you’re selling to an incredibly mainstream audience. The majority of the Wii audience likely hasn’t heard of most games we cover on sites like Siliconera. They have, however, heard of Final Fantasy and Call of Duty. Give them names they can trust and provide suitable marketing so you can establish a fanbase on the system. Capcom did it with Resident Evil on the Gamecube and it is an effort that paid off, judging by the sales of Resident Evil games on the Wii. One could argue that marketing is also perceived as a reflection of a publisher’s confidence in their product, and plays an important role in converting enthusiasts that are on the fence or would rather wait for a price drop while keeping themselves entertained with games they perceive to be better.
Where to go next
Unfortunately, listing out problems is the easy part. Actually providing solutions and raising profits is far harder, much more so in the case of a bi-polar organization like Nintendo that tries to cater to such a wide audience. Still, Iwata’s comments indicate he understands what needs to be done and judging from the past few months, he has made an active effort to address the aforementioned issues.
1. Short term: In the short term, it seems as if — at least in Japan — NCL are focusing on catering to the enthusiast gamer in an attempt to sustain Wii sales. Monster Hunter 3 enjoyed a Wii bundle when it released and Tales of Graces will share the same rare luxury. With New Super Mario Bros. and Tales of Graces both releasing within a month of each other, the Wii might be able to retain or even build upon the momentum it gained with the recent price cut, even with Final Fantasy XIII releasing on a rival system within the same timeframe.
Judging by the Metroid and Super Mario Galaxy 2 reveals at E3 2009, it is likely they understand the importance of not only satisfying, but impressing their enthusiast audience in the West as well.
2. Long-term: This is where things get dicey because no one can predict the ways in which NCL work. Again, catering to the enthusiast gamer does seem to be part of the plan judging by the foundation of Project Sora and the Monolith Soft acquisition. Beyond the enthusiast demographic, the Wii Vitality Sensor is set to launch in 2010; however, details of the device and the kind of software that will support it are still vague at best. Rumours of a Wii version of Netflix in the U.S. have also been making the rounds this past year.
Analysts — the ones in Japan that actually count — have a new DS and Wii pegged for 2010. Historically, releasing new hardware to boost sluggish sales is a strategy Nintendo have always employed efficiently; and judging by recent interviews, their next DS revision might be a little more ambitious than simply providing a gaming platform.
Despite being wary of subjecting consumers to expensive service rates, Iwata recently expressed interest in the possibility of offering a service similar to that of Amazon Kindle, where charges for downloading applications are included in the hardware’s upfront cost, and not paid separately by the consumer. Were the DS2 to offer a steady stream of enough useful applications like a GPS or a functional Internet browser with a similar service, the need for it to include a telephony function at all to compete with the iPhone might be offset.
In the software department, it might be prudent to hire another producer similar to their SPD3 division’s Kensuke Tanabe, who oversees and guides all external development. Tanabe has had his fingers in several pies these past few years, acting as producer on games like Metroid Prime, Excitebots and Punch-Out!!, all of which — while not runaway hits — have been popular nonetheless and have played an important role in filling in the gaps between NCL’s own internal line-up of games. A division dedicated to providing support and guidance to Nintendo-funded external development would help avoid scenarios where games like NST’s Project H.A.M.M.E.R. get canceled partway through development. Western development is something Nintendo have yet to fully embrace, but faced with stiff competition from Sony and Microsoft and the dwindling popularity of franchises like Zelda, it might be a necessity in coming years.
Coming back to the vitality sensor, the device could perhaps be an indication of Nintendo delving even further back into their roots and expanding outside of the entertainment market. Back to the days of devices like the Nintendo Love Tester and their love hotels business (which happens to be a very lucrative business in Japan at present). It might seem far-fetched, but Iwata’s strategy for setting Nintendo apart from the competition seems to involve turning the publisher more into a "lifestyle" company going forward, not merely one meant for providing entertainment.
Given his foresight and the way his company seems to be able to predict market trends, it wouldn’t surprise me if they managed to accomplish such a feat, at least in their home country. The real question is, how do you strike that balance between expansion and being conservative with investments in new ventures.