Nintendo Bets on Games, Not Consoles, for Growth
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Sept. 16 (Bloomberg) -- Nintendo Co., which introduced Super Mario and Donkey Kong in 1981, will be relying on the same characters to sell its new game console even as Sony Corp. and Microsoft Corp. offer machines with more realistic graphics and faster Internet connections.
The third-biggest maker of game devices for the home is betting that by keeping the hardware of its new Revolution console simple it can lower prices, while still improving games aimed at children and families. Kyoto-based Nintendo won't even have a booth at today's Tokyo Game Show, where Sony and Microsoft will be showcasing their latest devices.
``Nintendo realizes they can't be No. 1 in this industry,'' said Takashi Oka, who has an ``outperform'' rating on Nintendo's stock at UFJ Tsubasa Securities Co. ``Instead of over-investing in hardware to the point that they can't recoup losses, they are looking to churn out steady profit from capturing a niche.''
Nintendo, which dominated the game console industry in the 1980s, has seen its market share shrink to about 14 percent for its GameCube machine. Microsoft has spent more than $12 billion on its gaming business since 2000 to give the Xbox 360 Internet connection, hard drives and a DVD player. Sony is developing the Cell chip for its PlayStation 3, which will make it 35 times faster than its older console.
Shares of Nintendo fell 2.5 percent to 12,450 yen at the 11 a.m. break on the Osaka Securities Exchange today. The stock has declined 3 percent this year, compared with a 13 percent gain in the Nikkei 225 Stock Average.
`Formula One'
What Sony and Microsoft are doing is ``similar to taking a Formula One racing car to go shopping at the neighborhood grocery store,'' Nintendo President Satoru Iwata said in an interview in May. ``Our focus is on strengthening the game, rather than strengthening and adding more horsepower to the processor.''
Nintendo's best-selling games are ones with its signature cartoon characters of Super Mario, Donkey Kong and Pokemon, while Sony's top seller is the Grand Tourismo racing car game. Halo, a first-person shooting game, is Microsoft's bestseller.
Nintendo's strategy has worked so far. The company hasn't posted an annual loss since introducing the original Nintendo Entertainment System in 1985.
Sony's games business took a 51.1 billion yen operating yen loss in the first year after the PlayStation 2, because of costs from adding a DVD player to the console. Microsoft, which loses money on sales of the Xbox and makes money on game sales, has lost $2.4 billion in the past two years in its division.
Growth
``Having the lower-cost product aimed at a younger age-group market might be where the growth is,'' said Stuart Cox, who manages a $95.6 million Japan equities fund at JP Morgan Asset Management in London. ``Nintendo has been very successful in the past and has read its market well.''
Microsoft yesterday said it will charge 37,900 yen for its Xbox 360 when it comes out Dec. 10 in Japan. Merrill Lynch & Co. expects the PS3 to be priced at 44,800 yen in Japan and Revolution to cost 19,800 yen, the brokerage's analysts wrote in a July report.
For Nintendo, which began selling playing cards in 1889, the lower specs also mean that it's cheaper for software makers to make games because the graphics don't have to be as intricate.
Konami Corp., Japan's fourth-largest maker of video games, this week said costs for developing games will increase for the new consoles from Sony and Microsoft than for existing devices.
Development Costs
``Game development costs may be 1 1/2 to double of what they are for current machines,'' said Michihiro Ishizuka, Konami's executive officer in charge of game software business.
Gamers who had the first Magnavox's Pong and Atari consoles in the 1970s are now in their mid-20s and 30s and are demanding more sophisticated games that the consoles made by Sony and Microsoft can provide.
Sony's PS2 is now the second best-selling video game console ever with 9.1 million units shipped worldwide since its March 2000 debut, lagging only its predecessor PlayStation, which has shipped over 10 million units.
Nintendo has retained its virtual monopoly in the handheld video game industry since it launched its GameBoy player in 1989. The company has shipped 67.77 million units worldwide of its GameBoy Advance handheld player as of the end of June 30. It expects to ship 10.2 million units this fiscal year.
Its latest player, the Nintendo DS, has sold 6.65 million units since it was introduced in November 2004. The DS, which costs about 15,000 yen, has two screens, including one that is touch sensitive.
Nintendogs
The most popular game on the DS is Nintendogs, where players look after a pet dog by petting it on the screen and teaching it tricks through voice command. Other bestsellers include a game for adults that offer brainteasers.
Even on that front, Nintendo is facing competition from mobile game devices such as Sony's PlayStation Portable, which launched in December. The PSP, which retails for about 19,800 yen, can play games, movies and music and is Internet-ready. Sony has shipped 5.06 million units as of June 30, and expects the total to rise to 15.97 million by March.
To fight back, Nintendo last month started selling its GameBoy Micro, which measures 4 inches wide (10.2 centimeters) and 2 inches tall, for 12,000 yen.
``When you see something as big as the PlayStation brand infiltrating the handheld business which you've dominated for so many years, you've got to get worried,'' said Amir Anvarzadeh, director of Japanese equity sales at KBC Financial Products in London. ``The console business for Nintendo has been dead for years, so it's really only the handheld business.''
