Nintendo Rakes It In...But For How Long?

Posted by: Kenji Hall on April 24

Not even a slowing economy and an unfavorably strong Japanese yen could get in Nintendo’s way. For the fiscal year through March, the video game company reported on April 24 a mind-boggling 52.6% jump in operating earnings, as its Wii and DS portable gaming machines continued to rack up brisk sales.

Last year, Nintendo’s operating income more than doubled to $4.7 billion thanks to a whopping 73% jump in sales to $16.2 billion. And its profit margins edged up to 29%, from an already impressive 23% the previous year.

But not all is jolly in Nintendo-land. The company’s forecasts for this year are far less impressive, with single-digit gains expected for both revenues and operating profits in the current fiscal year.

This reflects a simple fact: Fewer consumers will be blowing their paychecks on video games if the economy turns south. And of the big three video game console makers, Nintendo is the one that stands to lose the most if a recession hits. That’s because it has wooed ordinary consumers who might not normally buy a video gaming machine but were drawn in by the DS’s easy-to-use touch screen and the Wii’s motion-sensing remote controller, which can be swung like a baseball bat or pointed at the screen and shot like a gun. During the good times, those consumers helped Nintendo put some distance between itself and Microsoft’s Xbox 360 and Sony’s PlayStation 3. But the diehards who make up most of Microsoft’s and Sony’s buyers are likely to continue adding to their gaming libraries even if the economy stalls, and that makes Nintendo’s rivals more resilient to a slowdown.

Some analysts had seen it coming. Before today’s earnings announcement, KBC Securities’ analyst Hiroshi Kamide had a “hold” recommendation on Nintendo’s shares. His “cautious outlook”, he said, stems from his view that “a U.S.-led recession will be negative on the casual gaming market.” Since January, the company’s shares have fallen 12%, along with the benchmark Nikkei 225 stock average, but in the past 12-month period its stock price is still up 60%.

Another concern: Slowing sales of the portable DS in Japan. The DS went on sale in 2004 and it’s starting to reach the peak of its life cycle.

A look at its forecast for DS sales this year is revealing. Last year, the company sold 30 million DS consoles, up 29% from the previous year, putting the cumulative total at 70.6 million units. But sales in Japan during that period fell 30% to 6.3 million machines from more than 9 million. (U.S. and European sales remained strong.) And this year's projected DS sales of 28 million units shows that falling sales in Japan could offset growth elsewhere for the first time.

The company’s saving grace will be software sales, which are still on the rise. Though only a fraction of the 342 new game titles for the DS and 184 for the Wii came out of Nintendo’s own studios last year, it earns from royalties from every game sold. How many was that? 185 million game packs for the DS and 119 for the Wii. Just two weeks ago, Goldman Sachs revised upward its software unit-sales projections for the next two years.

Many analysts think Nintendo has been ramping up Wii to shorten the wait for the machines overseas, where retailers are still selling out of the Wii as fast as they can restock their shelves. That should offset some of the recent losses from the yen’s appreciation in value against the dollar and euro. (As the yen goes up, the income Nintendo earns overseas shrinks when those funds are converted to yen.) And if the stellar debut of the new physical fitness game, Wii Fit, in Japan can be repeated in the U.S., where it goes on sale next month, and Europe months later, then Nintendo shouldn’t have too much to worry about. Still, some analysts think Sony’s PS3 will close the gap with the Wii this year, as it plays up its next-generation Blu-ray DVD player and two new features slated for launch later this year--a video download service and a new online 3-D social networking service. It will be interesting to see what creative new ways Nintendo thinks up to keep the momentum going.

Reader Comments

acjaz

April 25, 2008 01:46 PM

Nintendo has a track record of overly conservative estimates. For example, their estimate of sofware sales was 120 million units too low for the year. They also raised their original hardware estimates several times last year, and even beat those.

Also, Wii Fit launched in Europe today. Not in months as your article states.

Travis

April 25, 2008 03:03 PM

"Nintendo posted modest expectations for their next fiscal year, and this caused shares to drop by 2%. You would think there would be nothing but good news flying about after the stellar performance Nintendo put in last year. Apparently, there is no time to relax and enjoy the success…the worries for next year have already started. Of course, Nintendo isn’t worried one bit. Satoru Iwata had nothing but positive things to say, and made a point to say that Nintendo has faced skepticism before.


Will Nintendo outperform the slim gains it predicts for the next fiscal year? That remains to be seen. Until then, analysts are more than happy to call for the end of the good times."

Not my words above, but they sum up my thoughts perfectly.

jamtastic4

April 26, 2008 04:50 PM

I just posted an article about the Nintendo Wii (www.jamtastic4.wordpress.com) and how it has changed my marriage. I think if more families try the Wii they will find the same pleasure and endless entertainment possibilities for children of all ages. The Nintendo Wii video game system requires more physical activity than any other system. More parents are willing to allow children to participate in these types of games. The target demographics are as precedent setting as the health benefits.

Nathan Searcy

April 27, 2008 01:41 AM

Two points:

The U.S. economy is slowing. The rest of the world is not necessarily going to follow. Nintendo is an international company. If sales of machines slow in the states -- well lets just say that demand still hasn't been met. And even if Wiis start to sit on shelves because of a weak dollar, they can just ship the consoles somewhere else. And first-party Nintendo games always sell like a billion units. So the only people who lose from the weak dollar is -- you guessed it, third party game publishers.

And the reason the DS's sales have slowed in Japan -- well, you can't play two at the same time, can you?

Jim

April 28, 2008 01:32 PM

Why is that Nintendo can be making record profits and still receive negative doom and gloom from the mainstream press yet Sony can post billions in losses for their gaming division and the mainstream press doesn't bat an eye?

Let's also note that if this US recession is supposed to be negative for Wii, what, pray tell, does that bode for the more expensive PS3?

Albert

May 12, 2008 04:46 PM

Actually, the track record for PS3 has improved considerably. For example, sales for the PS3 in Europe have surpassed the XBox 360 this month even though the former is more expensive. First quarter earnings in 2008 for all three video gaming consoles were up from last year, but it was the PS3 that made the largest gains. In fact, Sony sold more PS3 units in the first quarter of 2008 than it did in the entire first half of 2007. Its gaming division posted an operating profit of 12.9 billion yen in the third quarter of 2007 and is back in the black as sales increased by 31 percent to 581.2 billion yen. PS3 is making money. Period.

With increased economies of scale (in other words, greater unit production) the PS3 the XBox 360 will fall in price -- price cuts have been made and will continue to be made for Microsoft and Sony consoles as time progresses. Lastly, blu ray won its fight against hd dvd so now the PS3 will be more attractive in the eyes of consumers. Therefore, the notion that the Nintendo Wii will always enjoy a significant price advantage is a blatant lie and represents blithe ignorance of market conditions.

Ergo, it helps to think Jim before you open your mouth... Too late.

Lastly, parents are choosing the Wii because of the perceived health benefits for their children? You have to be kidding me. I would like to see the testimonials from leading physicians who can corroborate these claims of greater health benefits. After playing the Wii, I fail to see how the act of flicking one's wrist can be perceived as strenuous physical activity.

Jamtastic4 sounds like a Nintendo employee...

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About

No longer child's play, the booming global games market is worth billions of dollars. In Games, Inc., BusinessWeek Innovation writer Matt Vella and Tokyo correspondent Kenji Hall analyze emerging business trends in video games and interactive entertainment. They’ll examine everything from button-mashing, chart-topping, console games to serious games commissioned by big corporations to train staff. They’ll also map the evolution of expansive virtual worlds and go behind the strategies at companies that are turning play into big business.

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