Global Economics

Nintendo Hits the Sweet Spot


Sales of its handheld DS and next-gen Wii console are powering a remarkable earnings run at the gaming giant, with no end in sight

Nintendo keeps on wowing investors. On Apr. 26, the console maker announced that its annual sales for the 12 months ended Mar. 31 reached $8.1 billion—a 90% rise on a year earlier. Net income rose 130% to $1.5 billion.

The superb results come after upgrades earlier this month and in January when Nintendo raised its 12-month sales projection by 19% to $7.5 billion. Nintendo's stock closed unchanged today at $312 before the results were announced. Over the 12 months, though, it has risen 122% (see BusinessWeek.com, 4/5/07, "Nintendo's Handheld Keeps on Rockin'").

One reason for Nintendo's profits leap is the Nintendo Wii. Launched late last year, the Wii game console, which is battling it out with Sony's (SNE) PlayStation 3 and Microsoft's (MSFT) Xbox 360—amid huge amounts of hype surrounding the Wii's innovative controller and games—is proving a big success.

Porta-Party

In the weeks following its launch in November, the Wii console blew away Sony's PS3, thanks in part to Sony's failure to deliver enough new consoles to the all-important U.S. market. Nintendo had sold 1.1 million units of the Wii in the U.S. by late January vs. 687,000 PS3s during roughly the same period. "Nintendo Wii won the launch phase," noted Standard & Poor's equity analyst Clyde Montevirgen at the time. (S&P, like BusinessWeek, is a unit of The McGraw Hill Cos. [MHP]).

Yet for all the razzmatazz surrounding the Wii, analysts say it's Nintendo's DS portable that's the biggest factor behind the company's run of spectacular prosperity. Launched in late 2004, sales of the DS have long been outstripping Sony's PlayStation Portable and have surpassed 30 million units—that's around three times more than the Xbox 360.

One factor is that the DS has successfully reached customers who previously wouldn't look twice at a game console. In particular, quirky games like Nintendogs and the Brain Training for Adults series are proving hits with women and the over-35 segment.

Big Game Growth

Through the nine months ended Dec. 31, Nikko Citigroup analyst Soichiro Fukuda noted that "brisk domestic and overseas sales of the DS handheld" were the "principal factor behind substantial earnings growth" at Nintendo. Fukuda added that by the third quarter, Nintendo had already achieved 98.3% of the company's full-year sales target for DS software, compared to 72% at the same point a year earlier. Nintendo indicated that its latest upward revision was for similar reasons.

The impact on the game industry shouldn't be underestimated. In 2006, Japan's video game market grew 37% to a record $5.3 billion, according to Enterbrain, which tracks the video game business in Tokyo. Hardware sales grew by 59.1% to $2.2 billion largely on the back of DS sales, which had reached 8.9 million units in Japan by the end of the year.

The Nihon Keizai, a Japanese business daily, reported that the popularity of the DS also meant that handheld software accounted for 62.9% of game software sales—the first time handheld sales had exceeded console sales since figures had been recorded in Japan.

Wii Will Rock You

With overseas DS sales also beating expectations, small wonder Sony is concerned. On Apr. 3, Sony cut the price of the PSP by 15% to $169.99 in the U.S. The PSP had sold only 7 million units, compared to 9.9 million DS units, according to NPD Group, a research firm.

And the Wii should soon start making a big impact on Nintendo's bottom line. Nintendo had targeted shipments of 6 million by the end of the financial year in March, although the company may have sold many more. However, David Gibson, an analyst at Macquarie Securities in Tokyo, noted in early April that, from this month, Nintendo will begin ramping up Wii production from around a million units a month to 1.5 million. "This means that they could be selling over 17 million in a year," he says.

What's more, unlike Sony, Nintendo breaks even on Wii console sales and should soon start to make a small profit, even before the games-related earnings flood in. "They've hit the sweet spot—they've got both the handheld and the console," Gibson added. From a profit and sales perspective, "this year is about the DS and next year is about the Wii." Today's blockbuster earnings are unlikely to be Nintendo's last.

Click here for a slide show detailing Nintendo's impressive recent run.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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