What's wrong with Nintendo?

The Globe and Mail

(Nintendo)

Nintendo’s disastrous financial news last week can’t help but make one wonder about the future of the Japanase game giant.

For those who missed it, Nintendo posted a record loss of $926-million for the first six months of its current fiscal year, which ends next March. That’s about twice what Nintendo was expecting, and it helped drive the company’s stock to a five-year low (its current sub-$20 price is down from the mid-$70 plateau it enjoyed in 2007 and 2008).

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A loss of nearly a billion bucks is bad news, but what’s even worse, as Bloomberg notes, is the projection that came with the announcement. Despite what will, as always, be a profitable holiday season, Nintendo expects to post a loss for the full year for the first time in the three decades since it became a world-renowned video game juggernaut in 1981. And not just a wee setback loss, but a substantial $264-million dollar thrashing.

So, what’s gone so terribly wrong for the company that just a few short years ago was the toast of the game industry?

One doesn’t have enough fingers to point in all the directions that blame could be thrown.

Misplaced trust in the stuttering 3-D revolution has led the company’s thriving handheld business into the crapper. Nintendo was forced to slash the price of the stereoscopic 3DS over the summer after it launched last spring to woeful sales. It's enjoyed an uptick since, but its fancy 3-D screen makes it a pricey machine to manufacture. Nintendo may be selling more of them now, but at what cost to profit?

Meanwhile, the short-sighted Wii, though seductively cheap and in possession of a couple of compelling casual gaming gimmicks, proved unable cope as both user desires and surrounding technologies evolved. Its more robust competitors, Microsoft's Xbox 360 and Sony's PlayStation 3, got off to a slower start, but have thrived in the long term, and will likely continue to prosper for at least a few more years.

Of course, it’s not all Nintendo’s fault. As the company notes in its earnings release, the strength of the Yen compared to the relative weakness of currencies in key markets (particularly in the U.S.) has only exacerbated the company’s revenue woes.

Plus, the mobile phone space is offering cheap and accessible interactive entertainment by the boatload, making it harder for grown up gamers to justify investing in a dedicated game system like the 3DS. (As an aside, warning bells should be going off for Sony and its upcoming Vita, which, freakishly powerful though it may be, seems to be targeted at more mature players in possession of similarly powerful smart phones.)

But Nintendo's biggest problem is in an area in which the company should have complete control: Games.

People buy video game hardware as a means to access the games they want to play. The issue Nintendo faces is that there are fewer and fewer great games coming to Nintendo’s platforms, which gives consumers less reason to purchase them. The Wii is projected to have but a single exclusive blockbuster game this fall: The Legend of Zelda: Skyward Sword.

What's more, the vast majority of great games that have come to the Wii have originated almost solely from Nintendo's internal development teams. Nintendo’s game makers are an unusually gifted bunch, but they’re being tasked to bear the burden for the success of multiple platforms. I can’t imagine the stress. And, clearly, their masters have put them into overdrive in 3DS development, with games like Super Mario Land 3D, Mario Kart 3DS, Luigi’s Mansion 2, and Kid Icarus: Uprising slated to arrive over the next few months.

But, as Sony and Microsoft have proven, third-party partnerships are key to long-term success. This is the challenge that will ultimately determine whether Nintendo stays in the hardware business. With the upcoming Wii U -- a platform that offers processor power on par with or better than the Xbox 360 and PlayStation 3 and a controller which, though unique, offers the sort of tradition-style interface that the coveted hardcore gamer demographic desires -- Nintendo once again has a game machine that will allow external studios to bring their most popular franchises to bear.

At least for a while.

Nintendo faces the unusual and unenviable dilemma of having fallen out of sync with its rivals in the console cycle. Sony and Microsoft are gearing up to launch their new systems in the next few years, and they will almost certainly be much more powerful than the Wii U. That means studios will once again encounter issues designing games that can easily be developed for all three platforms simultaneously. This is the very problem Nintendo has been dealing with in the current generation, and why blockbusters like the Call of Duty franchise either never arrive on Nintendo hardware or show up in neutered form (and, not surprisingly, sell relatively poorly).

Nintendo isn’t doomed. It has far too many brilliant developers and iconic licenses to worry about the brand going extinct. However, if the 3DS doesn’t get on track and the Wii U sputters out of the gate in 2012, it could very well end up becoming a software-only company. And that might not be a bad thing.

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