Nintendo Brings the Games to the People

The Wii has a user-friendly controller and games, costs less, saves energy, and fans say it will outsell higher-tech Sony PS3 consoles

by Kenji Hall

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In 2003 about two dozen video game designers and engineers gathered in a room at Nintendo's (NTDOY) Kyoto headquarters to divine the future of the video game console. The company was three years away from launching a new machine, but hadn't decided on any of its core technologies yet. Naturally, the talk was heavy on chips, graphics, and software. Then someone mentioned moms.

Though kids had long been the main audience for Nintendo's consoles and games such as Super Mario Bros. and The Legend of Zelda, discussion quickly turned to what the company could do to woo mothers. After all, this critical constituency signs off on major purchases by its kids, and the idea of extending a console's franchise beyond hardcore gamers to novices had an obvious business appeal.

"When that happened, we talked about basic concepts and goals, not about the technical specifications of the console," recalls Shigeru Miyamoto, who heads Nintendo's entertainment analysis and development unit and is the mastermind behind some of its best selling games. Among the items up for consideration were affordability, low energy use, a wireless controller free of unsightly cords in the living room, and simplicity of use that even Mom or a younger sibling could jump in once in a while.

High-Performance Option

Hundreds of miles away, at Sony's (SNE) Tokyo offices, games chief Ken Kutaragi was taking a starkly different approach to designing the company's next-generation gaming platform.

Convinced that consumers wanted a technologically superior console, Kutaragi envisioned an entertainment system that would feature a high-definition DVD player and an ultra-fast processing chip for multitasking over a high-speed Internet link. "By then, plans for the chips and DVD player were already in the works," says Shinichi Okamoto, who was chief technology officer of Sony's games unit until late 2003.

The battle of the gaming consoles will commence in November, when Nintendo launches the Wii and Sony its PlayStation 3. The contest will pit two competing ideas about the future of the $30 billion video game market against each other. But industry execs and analysts are already calling a winner: Nintendo's Wii (pronounced Wee).

On a Fast Track to Victory

Analysts at NikkoCitigroup are forecasting that sales of the Wii could top 6 million by the end of the current fiscal year (March, 2007) vs. 5.5 million for Sony's PlayStation 3. And while the Tokyo brokerage thinks it's unlikely the Wii can catch Microsoft's (MSFT) Xbox 360, which got a 12-month head start, Nintendo may yet widen its lead over Sony. If so, this would be a painful setback for Sony, whose PlayStation 2 was a mega-hit when it debuted in 2000 and grabbed 70% of the game console market at one point.

Nintendo has been on a tear. Its stock has nearly doubled in the past year, to more than $200. On Oct. 3, the company raised its full-year earnings forecast, saying it expects net profit of $843 million, up 1.6% from last year. A favorable exchange rate has helped. But its DS portable consoles and Brain Age games also have been a huge hit. (On Oct. 27, Nintendo said operating profit tripled in the April-September quarter to $565 million, from $165 million in the previous year.)

Nintendo's strong game software lineup—where the serious money is made—backing the Wii could mean another earnings windfall. "This is a software story," says Macquarie Securities analyst David Gibson. "They're making 35% to 40% operating margins on software." Gibson thinks 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.

Blame It on the Delay

To create the Wii, Nintendo had to buck the industry's conventional wisdom. Every new generation of gaming consoles has brought faster chips and more realistic graphics. That has come at a price. Skyrocketing R&D costs have made profits from consoles harder to come by. Microsoft's Xbox hasn't made a dime since the company entered the business in 2001.