Can Nintendo Rebuild?

Caught unprepared for the sharp drop in Wii sales, Nintendo is launching a slew of products for the holidays and exploring new uses of its consoles

By Kenji Hall

Over the past few years, when it was racking up record profits and crushing its rivals in the video game industry, Nintendo often drew comparisons to Apple (APPL). The two had gone against the conventional wisdom to create gadgets and software that consumers couldn't seem to get enough of.

But these days Nintendo is hurting. On Oct. 29 the Kyoto company reported weaker-than-expected earnings for its fiscal second quarter ended Sept. 30. Nintendo also revised downward its forecasts for the fiscal year ending March 2010, saying it expects to sell fewer Wii living-room consoles and game software this year than it had previously thought. A day later, Nintendo President Satoru Iwata told financial analysts and journalists that the company had been unprepared for the sudden drop in sales of its Wii living-room game console. "We sensed that the market mood was cooling off in the spring," he said. "But frankly, we hadn't expected to get as bad as it did by summer." In the past six months the stock has slid 22%

The global financial meltdown and a dearth of hit games have had a chilling effect on the industry's results. In August, Sony (SNE) and Microsoft (MSFT) lowered the price of their machines to spur sales. Nintendo, whose own console sales were flagging, responded with a 20% price cut of its own for the Wii. That move, say analysts, weighed on the company's profits. In the July-September quarter, Nintendo's operating profit dropped 52%, while sales slid 28%. Nintendo now expects full-year profits of $4 billion on $10.9 billion in sales, instead of $5.4 billion in profits and $19.7 billion in revenues. Last fiscal year, the company had its best year ever, raking in profits of $6.1 billion on revenues of $20.1 billion.

Crucial Holiday Season

The yearend holidays will be a crucial test for Iwata & Co. Last year, the October-December quarter accounted for a third of Nintendo's revenues and nearly half of its operating profits for the entire fiscal year. Nintendo will need to reverse slowing Wii sales. The DS portable console and Wii are the best-selling machines of their class. Nintendo has sold more than 56 million Wii consoles since November 2006 and 113 million DS machines since late 2004. In the latest quarter, Nintendo sold fewer than 5.8 million Wii machines, down from 10.1 million in the same period the year before. (Sony sold 3.2 million in the quarter.) DS sales dipped, too.

In the coming weeks Nintendo is planning to launch a slew of products. It's introducing a larger portable machine with two 4.2-inch screens, known as the DSi LL, next month in Japan, and at least two additions to its popular Mario and Zelda series will be in stores worldwide by late December. "What's key for the Wii is that sales of popular games, such as Wii Sports Resort and Wii Fit Plus, stay strong," Iwata said.

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