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Analysis: What The Nintendo 'Slowdown' Really Means

Analysis: What The Nintendo 'Slowdown' Really Means

May 8, 2009 | By Kris Graft

May 8, 2009 | By Kris Graft
More: Console/PC

[Nintendo's forecast indicates slowing growth, but even in an off-year, the Mario house will still be ridiculously profitable. So where do you go from the top? Gamasutra investigates...]

The little black cloud hanging over Nintendo's record fiscal year sales and profits was its rather lukewarm forecast for the year ahead.

The company projected almost flat sales year-on-year and profits to decline 12 percent. Hardware sales for the DS line and Nintendo Wii will hardly move the needle either way in the coming year, Nintendo expects.

The numbers that Nintendo is forecasting are purposely conservative -- a weak global economy and a fluctuating yen are keeping the game maker guessing.

But even with these "conservative" figures and flat or down projections, Nintendo is still doing extremely well, speaking in relative terms.

Even with a projected 12 percent year-on-year decline, Nintendo is still expecting ¥490 billion, or $4.9 billion, in profits. By comparison, game giant Electronic Arts' recently-released guidance for the current fiscal year projects between $3.7 and $3.85 billion -- in adjusted overall sales.

26 million Wii... Isn't Bad?

Sure, the explosive growth Nintendo has experienced over the last few years looks to be settling into more of a steady groove, but the company still expects to sell 26 million Wii hardware units this fiscal year.

That's only 500,000 more than the previous fiscal year (which suggests that there will be no price drop before March 2010); but what Microsoft and Sony wouldn't give to have an "off" year that saw 26 million in hardware sales.

However, Nintendo's homeland of Japan remains a question mark -- the country absolutely did not hold its weight sales-wise last year. Nintendo president Satoru Iwata admitted in front of press in April that "the Wii is in the most unhealthy condition since it hit the Japanese market."

We can see clearly that domestic weakness in Nintendo's results this week -- and Iwata may have actually been understating the Wii's condition in Japan.

For the year ended in March 2009, Wii sales in Japan were just 2.06 million, a decline of 47 percent year-on-year in the region that represents just eight percent of last year's 25.95 million in Wii hardware sales. Meanwhile, the install base grew substantially in the Americas, which saw sales of 12 million Wiis, while Europe and other territories bought nearly 11 million.

Japanese Jitters For Wii?

One of the more noticeable red flags indicating a shifting wind in Japan was when Sony's underdog PlayStation 3 outsold the Wii in both March and April -- something that would've been unheard of at the height of Wii's growth.

It's not completely clear what Japan's flagging Wii sales mean for the rest of the world. Often, these types of consumer trends migrate westward. Iwata also claimed during that same press conference, "The speed with which people get tired of any new entertainment is faster in Japan than in overseas markets."

But analysts note that despite declining Wii sales in Japan, Western gamers, particularly in the U.S., continue to buy the hardware, which is now readily available at many retailers.

At this point in time, it's almost unfathomable that the PS3 or Xbox 360 could outsell the Wii during any given month in the U.S., as Nintendo's console handily outsells its competitors combined on a consistent basis. And with over 50 million Wii hardware units sold in just over two years, it's hard to complain too much about Nintendo's performance.

Let's not forget the handheld market, which Nintendo has controlled since the original Game Boy. The Nintendo DS has sold over 100 million units since its 2004 launch, and sold over 31 million units last fiscal year, exhibiting slight growth worldwide. Nintendo projects the DS will sell around 30 million more this year.

The numbers suggest that the new feature-laden, pricier DSi, released in Japan last year and in the U.S. later this year, is more of a means to maintain the current level of sales, rather than to drive a sharp upward spike. The DSi, launched in the second half of the fiscal year in Japan, accounted for just under 10 percent of total worldwide DS sales during the period.

Nervous Investors

The fact that Nintendo, conservatively, expects to deliver these aforementioned numbers is even more impressive considering the recession.

Nevertheless, investors used to Nintendo being the faultless beacon of the games industry have tended to react on a hair trigger if a single chink in the armor emerges. And a dip in Nintendo shares can lead to a dip in shares of other game makers.

Since Nintendo lowered forecasts for the most recent fiscal year, shares for the company have been "in free fall," Barron's recently noted. Overselling of shares may be an overreaction considering Nintendo's strong balance sheet and fundamentally solid foundation, the publication said. But like clockwork, on news of Nintendo's lukewarm forecast today, shares in the company dropped nearly seven percent.

In the year ahead, Nintendo is counting on games like Punch Out, Wii Sports Resort and The Legend of Zelda: Spirit Tracks. More titles will emerge later in the year, as the remaining third parties finally come on board with the Wii full force and the DSi launches in other territories in the months ahead. That may give us a clearer picture of where Nintendo goes from here.

For now, we'll have to wait and see if Nintendo's slowing growth is just a little black cloud passing over the company, or the precursor to a brewing financial storm that might further extend industrywide disruption.

But in the mean time, it appears Nintendo will still be many times more profitable than its major competitors, even if investors are spooked by marginally dipping numbers.

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