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The global recession doesn't seem to have slowed Nintendo's momentum much. On May 7, Nintendo (7974.T) reported a 14% gain in operating profits, to $5.6 billion, for the fiscal year through March, and a 10% rise in sales, to $18.6 billion. Both figures shattered the previous year's all-time highs and were in line with what analysts had expected for the Japanese video game maker.
Nintendo has been a bright spot in an otherwise dismal Japanese tech sector. Its Wii living-room console and newly released portable DSi have been a big draw for both nongamers and hard-core gamers. In the past year the company has racked up a return on equity of around 22% and operating-profit margins of 29%—well ahead of other Japanese tech and video game makers, analysts figure.
But the company's latest record-breaking figures could be its last for a while. In fact, Nintendo's own not-so-optimistic forecasts have analysts and investors wondering whether the company is helpless to keep its streak from ending. For the fiscal year ending next March, Nintendo expects a 12% pullback in operating profit—its first in four years—and a 2.1% slide in revenues. That's not bad given how the sudden slowdown has slammed other sectors. Still, the skepticism partly explains the drop in the value of Nintendo's stock by half since last June, and its 21% fall since early January. (The benchmark Nikkei average has rebounded 6% so far this year.) Following the announcement, the company's shares fell 0.1%, compared to the Nikkei's 4.6% rise.
The bearish investor sentiment is putting more pressure on Nintendo President Satoru Iwata to come up with more hit games or services. In Europe and the U.S., the company has continued to rack up big gains. In those markets, the Wii and DS remain the top-selling consoles. In the U.S., Nintendo sold 601,000 Wii consoles in March, compared with 330,000 units for Microsoft's (MSFT) Xbox 360 and 218,000 of Sony's (SNE) PlayStation 3, according to researcher NPD.
The concern for Nintendo is at home: Wii sales are beginning to slow even as the number of software titles—1,323 at last count—for the machine continues to grow. Last fiscal year, Nintendo sold just 2.06 million Wii consoles in Japan, down 47% from 3.9 million the previous year. Even a refurbished DSi, which is thinner and has more features than the DS Lite and went on sale late last year, couldn't save the portable gizmo's tally from coming up short. Tokyo game-industry publisher Enterbrain said last week that Sony's PS3 outsold the Wii in Japan in April for the second straight month (and only the second time in 17 months), with Sony selling 108,530 units to Nintendo's 67,116.
The data in Japan are a concern for Nintendo because the domestic market tends to act as a leading indicator for global trends. Historically, Japanese consumers have been faster to flock to new gaming machines but also faster to tire of them. The dip in Wii sales in Japan suggests that Nintendo could start to see a similar pattern elsewhere.
Nintendo isn't the only company facing this trend, of course. Many analysts predict that gaming machine sales will fall this year, with market researcher iSuppli's Pamela Tufegdzic expecting overall console sales to slip 2.5%, to 53.9 million units, this year. She sees further decline in 2010 as the market for the current generation of consoles approaches the saturation point.
As the market slows, Nintendo's big advantages are disappearing. The company's strategy was to lure people who don't normally play video games by offering a motion-sensing wireless controller, a lineup of so-called casual games and low prices for both the console and game software. In recent months, though, Microsoft has discounted its basic version of the Xbox 360, selling it for $199 in Japan and undercutting the Wii's $250 price tag. And reports abound that Sony will unveil a motion-sensing controller at E3, a major industry conference in Los Angeles in June. Already, Nintendo trails Sony and Microsoft in offering nongaming online services, such as video and music downloads and other goodies. In April, Goldman Sachs (GS) removed Nintendo from its "buy" list and dropped its price target for the stock by 13%, to 30,000 yen.
Not everyone thinks that Nintendo's luck has run out yet. Days before the announcement, Macquarie Securities (MQG.AX) predicted that Nintendo has at least another year of profit gains left, before growth tapers off.
Nintendo's gaming brains aren't sitting idle, either. The company will launch Wii Sports Resort in Japan in June. Nintendo officials are betting that game, which features jet-ski racing and Frisbee, and other anticipated titles can trigger another burst of console sales. Last month, Shigeru Miyamoto, the man behind many of Nintendo's best-selling games, told journalists in Tokyo that his crew is exploring technology that would let the DS and DSi portable consoles act as a guide, map, teaching tool, reference book, and coupon dispenser. That could help Nintendo add to the 101.8 million DS units sold globally since the machine's first version launched in 2004.
Hall is BusinessWeek's technology correspondent in Tokyo.