Nintendo Posts Losses, But Remains Bizarrely Optimistic

Source: Thinkstock

Source: Thinkstock

The past few years have not been kind to Nintendo or its investors. For the third year in a row, the Japanese gaming company posted an annual operating loss. According to their fourth-quarter report released today, Nintendo saw a 10 percent decline in sales over the past fiscal year, and an operating loss of $457 million. It remained optimistic about the year ahead, but based on the strategy it has outlined so far, that optimism seems unwarranted.

This year’s underwhelming results are largely due to lower-than-expected interest in its two current gaming systems, the Wii U and the Nintendo 3DS. In January, the company adjusted its sales expectations for the year down for both the Wii U and 3DS. The actual figures were slightly worse than even those lowered expectations, as the Wii U sold 2.7 million, and the 3DS sold 12.24 million. When you factor in the other Nintendo hardware currently for sale — like the original Wii and the cheaper Nintendo 2DS — between April 2013 and March 2014, Nintendo sold 3.94 million consoles and 22 million handheld gaming devices. Overall, hardware sales are down 20 percent from last year.

When compared to the competition, Nintendo’s console sales look especially paltry. Over the last six months — half the time it took Nintendo to sell nearly 4 million consoles — Microsoft (NASDAQ:MSFT) shipped 5 million units of the Xbox One to stores, while Sony (NYSE:SNE) sold 7 million PlayStation 4s to customers. It’s worth noting that the Wii U is significantly less powerful than either of those systems, which could help explain things. However, the original Wii was similarly underpowered compared to its competition from the same companies, and it managed to outsell them both by a substantial margin.

The one bright side is that Nintendo’s software sales increased 7 percent over last year. That’s the morsel Nintendo is clinging to in order to appear optimistic about the coming fiscal year. It admits that it faces a “challenging sales situation,” but still remains confident that it can manage $393 million in operating income, with the help of upcoming games like Mario Kart 8 and Super Smash Bros.

Based on the trajectory of its hardware sales, plus increased competition from cheap or free smartphone and tablet games, it seems unlikely that it’ll wind up in the black without making some big changes. Unfortunately, the plan outlined by Nintendo president Satoru Iwata doesn’t sound very convincing.

His plan for increasing profits doesn’t include cutting prices or, as many investors have called for Nintendo to do, releasing its well-known franchises on other systems. It does, however, include releasing software on other systems in order to promote Nintendo’s games and hardware. According to The Wall Street Journal, “For Mario Kart 8, Mr. Iwata said the company plans to offer a Web service users can access through their smartphones to check player rankings even without access to the console. It plans to launch smartphone applications later this year to promote other games.”

That sounds like a step in the right direction, but chances are it’ll have to do a lot more than that to ratchet up profits. Plenty of other major console games have companion apps on smartphones and tablets, but it’s extremely questionable whether it has helped move the needle on game sales. New versions of Mario Kart and Super Smash Bros. will certainly make Nintendo’s hardware more enticing to gamers, but perhaps not enough to make customers choose it over the more powerful Xbox One and PlayStation 4.

To turn the ship around, Nintendo will probably have to make bigger changes than that. From what it has announced so far, it sounds like it’s still thinking pretty small.

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