Bloomberg News

Nintendo’s Iwata Under Fire After Missing Wii U Forecast

January 21, 2014

Nintendo president Satoru Iwata

Satoru Iwata, president of Nintendo Co. Photographer: Kimimasa Mayama/Bloomberg

Nintendo Co. President Satoru Iwata, who tripled revenue by introducing hits like the Wii console, is coming under fire from some investors and analysts after the company’s latest game machine flopped.

Though Iwata had vowed to deliver 100 billion yen ($960 million) in operating profit this fiscal year, the world’s largest maker of video-game machines instead forecast a surprise 35 billion-yen loss, blaming poor sales by the Wii U. The company last week cut projections for Wii U unit sales by 69 percent and game sales by 50 percent.

The 54-year-old Iwata has stuck to family-focused games, which are losing favor as casual players use smartphones and tablets while hardcore gamers opt for more advanced machines from Sony Corp. and Microsoft Corp. Nintendo, which has zero debt and about $8.6 billion of cash and equivalents, is studying new business models to revive sales after previously ruling out licensing its Mario and Zelda franchises to competitors.

“Iwata misunderstood the market,” said Yasuaki Kogure, chief investment officer at Tokyo-based SBI Asset Management Co., which holds Nintendo shares. “His direction is not what it should be.”

Two analysts downgraded the stock to the equivalent of sell after Nintendo’s revision. Hideki Yasuda, with Ace Research Institute in Tokyo, rated Nintendo underperform and gave a price target of 8,000 yen, or more than 40 percent below the Jan. 20 closing price.

First Outsider

Nintendo American depositary receipts (NTDOY:US) rose 7.7 percent to $16.04 in New York. Each receipt equals 0.125 ordinary share. The underlying shares fell 2.4 percent to 13,415 yen yesterday in Tokyo after dropping 6.2 percent on Jan. 20. The stock has lost more than 80 percent of its value since its peak in 2007, the same year Apple Inc. unveiled the iPhone.

Nintendo said Iwata explained his responsibility to ensure a recovery, and it declined to comment further, according to an e-mailed statement.

Iwata started programming games during high school and studied at the Tokyo Institute of Technology, one of Japan’s top universities. When appointed in 2002, he became the first president of Nintendo from outside the founding Yamauchi family since it started selling cards in the late 19th century.

At that time, Nintendo had annual sales of 555 billion yen.

Iwata subsequently oversaw a winning streak that included the Game Boy Advance SP, the Nintendo DS handheld player, the Nintendo DS Lite, the Wii, the DSi, the DSi XL and the 3DS. The company also opened its first retail store in New York’s Rockefeller Center, selling machines, games and merchandise featuring its Pokemon collection and Donkey Kong.

Apple, Samsung

In 2009, Nintendo posted 555 billion yen in operating profit as revenue more than tripled to 1.8 trillion yen on demand for the original Wii console and software. The Wii sold more than 100 million units and became the world’s best-selling console.

Iwata followed in November 2012 with the Wii U, which failed to match its predecessor’s success. In the period between the Wii and Wii U releases, Apple unveiled its iPhone and iPad; Samsung Electronics Co. its Galaxy line of smartphones and tablets; and Google Inc. its Android operating system used by most mobile-phone makers.

Those were body blows to Nintendo, and revenue in the 12 months ending March 31 is forecast to drop to 590 billion yen. The company projects it will sell 2.8 million Wii U units instead of the 9 million originally forecast, and 19 million Wii U games instead of 38 million.

PlayStation, Xbox

“Iwata, who is very much a video game man, must leave,” Amir Anvarzadeh, a manager of Japanese equity sales at BGC Partners Inc. in Singapore, said in an e-mail.

The increasing criticism comes after Iwata benefactor Hiroshi Yamauchi, who ran Nintendo for 53 years, died in September and left his 11 percent stake to his four children. Iwata said Jan. 17 the company is considering buying back those shares.

As the Wii U founders, both Sony and Microsoft are ramping up the pressure with new consoles. Sony this month said it sold 4.2 million units of its PlayStation 4 since it went on sale Nov. 15, and Microsoft has shipped more than 3 million Xbox One machines.

Both totals exceed the Wii U forecast for the entire year.

“Wii U hasn’t sold well because of Iwata’s misjudgment,” said Yoshihiro Okumura, a general manager at Chiba-Gin Asset Management Co. in Tokyo. “He needs to show a new strategy.”

‘Tremendous Pressure’

Nintendo has kept its games off the world’s 1.5 billion smartphones to protect sales of its own software and hardware.

“Iwata should resign,” said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management Co. in Tokyo, which sold its Nintendo shares more than two years ago. “He said 100 billion yen in operating profit was his commitment. Nintendo faces a structural problem.”

Nintendo should scrap production of its own consoles, instead delivering games to mobile devices and the PlayStation and Xbox consoles, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles.

Both the Wii U and 3DS handheld take advantage of touchscreen controls to play many Nintendo games, which would make it easier for the company to deliver versions for smartphones and tablets, he said.

Dramatic Changes

“He will be under pressure to make dramatic changes,” Pachter said in a Jan. 17 e-mail. “If he can’t make change happen, the company should find someone who can.”

The company could release 10 games a year from its library of 1,500 titles, charge $5 to $10 per mobile game, and sell at least 50 million copies of each to a core Nintendo audience, Pachter said.

Those alone would generate $2.5 billion to $5 billion a year in high-margin sales without the costs of making hardware while keeping the release of more expensive titles for consoles, Pachter said.

Iwata said Jan. 17 the company is considering a new business model, especially using mobile devices to boost its hardware business.

“Management decisions are not linked to raising shareholder value,” Takao Suzuki, an analyst with BNP Paribas SA (BNP), said in a Jan. 17 note.

Iwata’s experience in game development and his success with previous hardware releases may make him the best candidate to lead a revival even after the Wii U misstep, said Hideki Yasuda, an analyst at Ace Research Institute in Tokyo.

During his 12 years in charge, Iwata has been the public face of Nintendo, a role that has left the company with few prominent alternative leaders. That may make it harder for the company to make a change at the top.

“No one else knows the hardware and software game business better than Iwata, inside and outside of Nintendo,” Yasuda said.

To contact the reporters on this story: Takashi Amano in Tokyo at tamano6@bloomberg.net; Mariko Yasu in Tokyo at myasu@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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