Global Economics

In the Game Wars, Nintendo's All Charged Up


It could be a World of Warcraft moment when Sony's (SNE) PlayStation 3 and Nintendo's Wii next-generation game consoles both hit the market, as expected, in November. True, Sony stills rules this high-end segment of the game console market, but analysts are worried about a possibly shaky debut for the new PS3, which will cost a hefty $600 (see BusinessWeek.com, 7/20/2006, "Will Sony's Pricey PS3 Pay Off?").

At the same time, Nintendo (NTDOY) is clearly on a winning streak. The Wii looks like a strong contender as a cheaper and less feature-laden, but still cool, game console alternative to Sony's PS3 and Microsoft's (MS) Xbox 360.

Nintendo's DS handheld game-player is a runaway success. Global investors have bid the share price of the Kyoto-based company up 84% over the last 12 months. "There's really very little reason to be negative on the business," says Hiroshi Kamide, an analyst at KBC Securities in Tokyo.

SUPER (MARIO) SALES. Nintendo's quarterly results out on July 25 were stellar (see BusinessWeek.com, 7/25/06, "DS Pays Off for Nintendo"). For the three months through June, Nintendo's sales rocketed 85% to $1.1 billion while operating profit increased almost eightfold to $248 million. A weak yen helped, but a tripling of DS sales to 4.54 million units was the biggest factor behind the better than expected results.

DS sales have also taken hold in the U.S. where the game-player once lagged Sony's PSP handheld. In June, Nintendo sold 600,000 DS handhelds in the U.S.—more than any other game-hardware maker—and DS titles New Super Mario Bros. and Brain Age were the first and third bestselling games.

Small wonder Nintendo is upgrading its annual sales and earnings forecast. This year, Nintendo expects to sell 17 million DS handhelds globally—an increase of one million over earlier estimates—compared to Sony's 12 million projected units sales for the PSP. For the financial year through March, 2007, the company reckons earnings will be $715 million, a rise of 27% over its previous estimate.

REACHING WOMEN. Key to the DS's popularity has been Nintendo's knack of persuading people who wouldn't normally look at games to splurge on a DS. While the PSP, like the PlayStation2, is largely the preserve of the usual 18- to 35-year-old male demographic, titles like Nintendogs and the Brain Training For Adults series are proving hits with women and the age-35-plus gamers.

One factor is that the games are relatively simple and go beyond one-person shooters and sports simulations. In Nintendogs, for example, you can teach your virtual pet tricks by calling its name, or play a game of fetch by tossing a ball with the stylus, a pen-like device that works with the touch pad. That has scored well with female gamers.

Meanwhile, the Brain Training series—Brain Age in the U.S.—which asks gamers to solve arithmetic puzzles has gone down well with baby boomers. In Japan alone, Nintendo brain-training games have sold over 4.5 million units (see BusinessWeek.com, 3/8/06, "Gamers Trained on Nintendo's Brain").

FUN TO WORK FOR. Analysts add that the DS is also more popular with game designers. That's because the DS, with its dual screens, touch-screen technology, and voice recognition, offers something different from the PSP, which in many respects is a portable version of the PS2 with games to match. KBC's Kamide says that the DS's innovations give gamemakers more room to come up with more innovative games which in turn appeal to a wider audience.

"Non-gamers are coming back because there are interesting games people want to play," says Kamide. "The PSP is a beautiful piece of kit but the games are just rehashes of what you would play on the console."

Price is another factor. The DS retails for about $120 in the U.S. while the slightly smaller and lighter DS Lite is about $10 extra. But that's still much less than a PSP which goes for around $200. Of course, the PSP can also play movies with its storage technology called universal media discs (UMD), although that doesn't seem to be a huge success. This month, retailer Target stopped selling movies in the UMD format.

IN THE BUDGET. Perhaps the bigger question, though, is whether Nintendo can replicate the success of the DS with its Wii console as it shapes up to take on Sony's PS3 and the Microsoft's XBox 360. Once again, the Nintendo offering will be much cheaper.

Sony's gadget-packed PS3 will come with a Blu-Ray DVD player, but it will be more than twice the price of the Wii, which Nintendo execs have promised won't cost more than $250. "As a budget console, we expect the Wii to find a separate niche from the PS3 and Xbox 360," says UBS Securities analyst Atsuko Kaneko.

Like the DS, the Wii will have some quirks. For instance, whereas the DS employed touch-screen technology—for example, enabling gamers to bounce a ball by tapping a touchpad—the Wii's wireless controllers can be moved through the air like swords with the movement displayed on the screen.

MORE TITLES. And as with the DS, the Wii seems to appeal to gamemakers. In a recent survey, Famitsu, a Japanese game-industry publisher, asked software creators which platforms they would most like to create games for in the future. More respondents plumped for the Wii than any other platform. DS ranked second.

Meanwhile, at its autumn games preview on July 13, traditional Sony ally Electronic Arts (ERTS) spent far more time showing off innovative Nintendo games than it did titles for the PS3. EA announced six Nintendo Wii launch titles and showed long working demos for two of those. But it offered only a short clip of a car-racing game for PS3. "Software developers are increasingly interested in creating games for these Nintendo platforms," Yuta Sakurai, an analyst at Nomura Securities in Tokyo, said in a note to clients on July 25.

Of course, not every aspect of the DS's popularity will transfer to the Wii. Families that love the handheld might own several, but are unlikely to buy more than one Wii. Likewise, the portable nature of handhelds makes them more accessible to a wider audience than consoles.

Hardcore gamers will probably prefer the raw power of PS3. And for all the positive vibes right now, the Wii isn't expected to outsell the PS3. Nomura's Sakurai says he expects PlayStation3 to sell 71 million units by 2011, compared to 40 million units for the Wii. Still, with sales and profits rising and its share price at a four-and-a-half-year high, few would disagree that these are heady days for Nintendo.


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