Nintendo Storms the Gaming World

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Nintendo responded to stories about renegade Wii controllers accidentally smashing through TV screens by offering consumers stronger wrist straps.

Mario, Come Home

A more serious issue Nintendo faces is avoiding the kind of parts shortages and production delays that have plagued Sony. Nintendo has been working with suppliers such as Matsushita Electric (MC), whose Panasonic unit makes disk drives for the unit, and IBM (IBM) and ATI Technologies, which make the core processor and graphic chips.

Right now, meeting demand is a bit of a struggle, says Harrison. "We are shipping the Wii, and they are generally selling out in a day or two," he says.

Of course, the serious cash made in this business is on the game software side, where operating margins can run 35% to 40% on games Nintendo has developed over the years that are compatible with the Wii. This is a company, after all, that created icons such as Mario, Donkey Kong, and Pokémon.

In the first quarter of 2007, third-party game developers such as Electronic Arts (ERTS) will release Wii-compatible games titles such as Tiger Woods PGA Tour 07. Other companies such as Buena Vista, Majesco (COOL), and Ubisoft (UBSFF) are launching new ones, too.

Macquarie Securities analyst David Gibson reckons the average Wii owner will buy more than three games a year—and the bulk of the games will be made in-house by Nintendo (see BusinessWeek.com, 10/31/06, "Nintendo Brings Games to the People").

None of this has been lost on investors. On Jan. 25 the company reported a 40% jump in third-quarter profits of $644 million, and its stock touched a 52-week high of $27.60 in trading on the Tokyo Stock Exchange. Nintendo shares have more than doubled since early February, 2006—and so have its U.S. depositary receipts, which now trade at about $35.75.

Investors have also been cheered by the success of the DS portable lineup at Nintendo. Since its launch in November, 2004, the line has sold 10 million units in the U.S. and enjoys a global user base of 35 million, powered by popular gaming titles such as Brain Age and Nintendogs.

In a category once dominated by Sony's PSP portable, the Nintendo DS has been a hit with women and gaming novices. Its dual touch screen design, voice recognition capability, and easy-to-use stylus have connected with consumers (see BusinessWeek.com, 7/28/06, "In the Game Wars, Nintendo's All Charged Up"). To keep the momentum going, some 20 new DS games are expected to roll out in the first quarter of 2007.

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Bremner is Asia Regional Editor for BusinessWeek in Hong Kong.