After Tough 2Q Earnings How Can Nintendo Rebuild?

Posted by: Kenji Hall on October 29, 2009

After Nintendo announced weaker-than-expected second-quarter earnings and lowered its full-year forecasts, attention now shifts to the company’s press conference in Tokyo on Friday. All of the video game maker’s bigwigs—President Satoru Iwata, gaming chief Shigeru Miyamoto—will be there.

What might Nintendo do? One topic that would set the blogosphere abuzz would be for the company to drop hints about a new console. With the Wii, it probably won’t happen for at least another year, since the living-room console is still only three years old (five years being the usual time gap between generations). A new DS portable could be in the making, too; it’s now closing in on six years. But the DS just got a makeover—a camera, built-in memory, extra features—in recent months and Nintendo may want to give the DSi a chance first.

Analysts aren’t ruling out new hardware, though. Citigroup Global Markets Japan analyst Soichiro Fukuda thinks Nintendo could announce its launch plans for a new portable device at the start of 2010, and start handing out development kits to game makers within a few months. Fukuda made the prediction in an Oct. 2 note to investors.

In the July-September quarter, Nintendo's operating profit dropped 52% to $710 million. A disappointing second quarter isn't good news but it's hardly a shocker. (Back in May, I wondered whether Nintendo had peaked.)

Assuming that Nintendo's earnings pattern mirrors last year's, the company could still have a big holiday season and make up for it. (The second quarter accounted for 22% of overall sales and 24% of operating profits last year.) That won't be easy, though. The real nightmare scenario would be this: Nintendo stumbles during the holiday season. That's because the company made well over a third of revenues and nearly half of profits last fiscal year.

There's little Nintendo can do about a strong yen: It will go on hurting overseas profits, as it does all Japanese exporters. Nintendo is vulnerable because it makes all but 13% of revenues in markets outside of Japan.

So adding froth to sales of the Wii and DSi in time for the holiday season will be key, not least because gaming hardware constitutes more than half of annual revenues. The price cut for the Wii in late September was supposed to help but doesn't seem to have done the trick. (Sony reduced the price of its top-of-the-line PlayStation 3 by $100 to $300 in August, sparking big sales gains. Microsoft also reduced the cost of the most expensive Xbox 360 model to $300.)

The patina of newness for Nintendo hardware is clearly wearing off. Quarter by quarter, Wii sales are slowing. That doesn't take away from the fact that its cumulative total--56.1 million units--still makes it the king of this generation of living-room consoles. Sales of the DS, the top-selling portable game machine, were just shy of 113.5 million units at the end of the second quarter, but they're not as strong as they used to be, either. The DS's problem has been competition from Apple's iPhone, now a popular gadget for games.

Here's the outlook.
Revised fiscal-year forecast:
Sales 1.5 trillion yen
Operating profits 370 billion yen
Net profits 230 billion yen

Previous fiscal-year forecast:
Sales 1.8 trillion yen
Operating profits 490 billion yen
Net profits 300 billion yen

Last fiscal year's figures:
Sales 1.84 trillion yen
Operating profits 555 billion yen
Net profits 279 billion yen

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Reader Comments

Levi

October 29, 2009 02:26 PM

I sold my Wii a long time ago. I got fed up with their online "set up" (if you can call it that) The games are not all that revolutionary as promised(a waggle and flick here and there does not make the game more fun, IMO

They also need to bring out an HD console.

tiffany ludwig

October 29, 2009 04:49 PM

They to make more good games like new zelda , paper mario etc. Instead of the fitness ones . tTeople, It would me.

gerrrg

October 30, 2009 02:29 AM

Well, considering that a new DSi will be coming out with bigger screens, and the Wii regained the weekly worldwide sales lead in October after relinquishing it for 4 weeks in September, and that a new Mario Brothers title is coming out soon, I'm not bearish at all on Nintendo.

warwick

October 31, 2009 10:57 AM

@Gerrrg, problem is that the average punter (reading BW) has no idea what your talking about.

I am nervous about Nintendo, and will not be buying stock until next year, but i know for sure Apple WILL NOT beat Nintendo in handhelds. They have destroyed anyone who competes with them in handhelds and im sure they'll figure out how to maintain that 20 + years of domination.
Remember this has been the security blanket, even when they came 2nd or 3rd in home console sales.

Amit

October 31, 2009 04:01 PM

I feel Nintendo's "glory days" are over. It will always be a good company, just not this year. When I first heard the Wii's release, I was happy for a new system to come out that had some different or new features. When I heard about the PS3 and XBOX 360, I totally forgot about the Wii. The thing is, its being dominated by these next gen system because lack of super HD graphics and new technology packages all in one. Nice try Nintendo!

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BusinessWeek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies. Eye on Asia’s bloggers include Asia regional editor Bruce Einhorn, Tokyo reporter Ian Rowley, Korea bureau chief Moon Ihlwan, Asia News Editor and China Bureau Chief. Dexter Roberts, and Hong Kong-based Asia correspondent Frederik Balfour.

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