Nintendo 3DS & Apple

Thursday, July 28th 2011. | Games News

Nintendo will slash the price of its key new 3DS handheld videogame device – a stark admission that the product has failed to take off. MarketWatch’s Dan Gallagher has details. Sales of Nintendo Co.’s most important new gaming device have plunged since its release, the company said Thursday, prompting the videogame pioneer to slash its profit forecast and scramble to deeply discount the gadget to revive sales. The unexpectedly weak demand for Nintendo’s 3DS hand-held player, which displays 3-D games without glasses and was launched with much fanfare earlier this year, are a setback for a company that had been betting on a hit to turn around its waning fortunes. The company cut its profit forecast for the year ending in March by more than 80%. Nintendo’s disclosure that it sold just 710,000 3DS devices in three months, down from 3.6 million the prior quarter, comes as the videogame industry undergoes a painful transformation. Consumers are favoring devices from Apple Inc. and cheaper games that can be played online or easily assessed and played with friends via smartphones.

The decision to drop the 3DS’s price by about a third to $170 from $250 prompted an unusual apology from Nintendo’s leader. In an online letter to customers, a humbled President Satoru Iwata wrote that this was the first time ever that Nintendo had cut prices so deeply on a product within six months of its introduction. Mr. Iwata offered free software to those who purchased the 3DS at the higher price. “This may not be able to entirely erase feeling that, ‘I lost out because I bought early,’ ” he added. Among traditional videogame companies, Nintendo is showing the most acute signs of pain from a wave of technologies on which games have become a central pastime, including Apple’s iPhone and iPad and social games on Facebook Inc.’s social network. Those technologies tend to attract a more casual gamer with mobile-game titles like Rovio Inc.’s “Angry Birds” and Facebook games like Zynga Inc.’s “FarmVille” and “CityVille.” While games for Nintendo’s 3DS typically sell for $30 to $40 each, mobile and social games are often $1 to $5, or even free, supported by advertising and the sale of “virtual goods” within the games. Games for those newer technologies are instantly available for download, saving people a trip to the store to buy cartridges, like those for the 3DS.

Nintendo, known for game characters like Mario and Zelda—has had problems before when new, more capable game hardware has emerged from traditional rivals like Sony Corp. and Microsoft Corp. Now Nintendo is competing in a much broader market where any device with a screen and Internet connection is a gaming device. “The world is different today than it has been for every other platform transition in the past,” said John Taylor, a videogame analyst at Arcadia Research in Portland, Ore. “It looks to me like the days of controlling a closed format that require the consumer to go out and pay a couple hundred bucks are numbered.”

Nintendo’s misfire with the 3DS is even more noteworthy because of the company’s savvy in redefining the games market in recent years. The 2004 launch of the hand-held Nintendo DS, the predecessor to the 3DS, began a streak of hits for the company. It followed up in 2006 with the Wii, an innovative console for the living room. While Microsoft and Sony focused heavily on creating consoles with the most computing power, for producing realistic game graphics, Nintendo made motion-sensing controllers that allowed players to swing virtual swords and tennis rackets a centerpiece of the Wii. Nintendo has sold more than 87 million Wiis and 147 million DS devices since the products came out, making both the best-selling products in their categories for the most recent generation of games hardware.

In the past few years though, sales of both products have plunged as Nintendo saturated the market with them and they came to seem increasingly dated compared with rival systems. Wii sales dropped to 1.56 million in the fiscal first quarter ended in June from 3.04 million a year earlier, while DS sales fell to 1.44 million from 3.15 million a year earlier, Nintendo said Thursday.

The decline in the fortunes of Nintendo’s products has contributed to an overall gloomy picture in the traditional games business. In June, overall game sales in U.S. stores, including hardware and software, fell to $995 million from $1.11 billion a year earlier, according the market tracker NPD Group Inc. That dropped echoed similar declines for most of the past year.

Not all of Nintendo’s rivals have shared its suffering. Microsoft recently reported a 30% increase in quarterly revenue to $1.49 billion for the division that includes its Xbox business. Its Xbox console caters to an audience of hard-core gamers who favor shooting and sports games and seem to have resisted mobile gaming via smartphones. Unlike Nintendo, which is viewed as having relatively weak online offerings for its consoles, Microsoft operates a lucrative online game network called Xbox Live. Microsoft also boosted growth in its games business with a camera device called Kinect that lets players control games without body movements, eliminating the need for a hand-held controller.

But Microsoft and Sony, too, are likely to feel the underlying changes in the gaming business. Many game developers have been shifting more of their attention to newer outlets like Facebook and the iPhone. That’s in part because of the growing financial risks of making big games for the Xbox and PlayStation 3, where game budgets routinely top $10 million to $20 million.  Electronic Arts Inc., the big game publisher behind the Madden football series and “Need for Speed” racing games, recently announced a deal value at as much as $1.3 billion to acquire PopCap Games Inc., a Seattle company that makes Bejeweled, Plants vs. Zombies and other popular mobile and social games. John Ricitiello, the chief executive of EA, recently said that the company’s fastest-growing category of games are for the iPad.

Nintendo said in a statement Thursday that it hopes the 3DS price cut will “create momentum…and accelerate penetration” ahead of the year-end sales season. By that time the current lineup of 24 3DS-specific games will include new titles, such as “Super Mario 3D Land.”

The shortfall in the 3DS sales hit Nintendo’s results hard in the fiscal first quarter. Revenue fell 50% from a year earlier to ¥93.9 billion ($1.21 billion). That led to an operating loss of ¥37.7 billion, compared with an operating profit of ¥23.34 billion a year earlier. The company’s net loss widened marginally to ¥25.5 billion. from ¥25.2 billion a year earlier. But the year-earlier red ink was largely due to ¥70.5 billion in appraisal losses on its cash deposits and other assets in foreign currencies, the result of a stronger yen.

Nintendo is now working on a new product called Wii U that it hopes will reignite growth in its sagging console business. The device, due out sometime next year, comes with a large tablet-like controller with a touch screen that players will use in conjunction with a television screen. In an interview at a games conference in Los Angeles last month, Nintendo’s Mr. Iwata said innovation will help it grow. “If we do the same thing as before, there is some limit to what we can do,” he said. “So we are always looking for the new frontiers.”

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