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[Delusibeta]

The problem is less "can Nintendo recover from this?", it's more "will there be a market for consoles in five years time?" and frankly I'm going to out on a limb and say no. I expect tablets and smartphones to continue evolving, I expect cloud services to come on-stream (I suspect Sony's purchase of Gaikai may prove to be Square-Enix-buying-Eidos level of business genius & foresight) and I expect the set-top box market to effectively go in the reverse direction to consoles and start acting as game machines, either natively (AppleTV 4 running iOS, anyone?) or through the aforementioned cloud services.

 

[DasMarcos]

So basically, a "real gamer" is somebody who shares your tastes. Got it.

Yeah this is probably the worst post I've seen yet on Gaf. That tunnel vision, I cannot and will not appreciate it.

 

[LiveFromKyoto]

A real gamer is someone who considers video games to be more than just a futile exercise in jumping from one platform to another. Someone who realizes its potential as an art form, someone who supports constant innovation and ingenuity shown by the best artists in the industry. Unfortunately such companies as Nintendo keep thinking that video games are for man children unable to distinguish real works from cheap reproductions. But as the numbers lately show, they are a dying breed. Soon they will be an insignificant minority forever trapped in their own unfullfilled fantasies of plumbers having an affair with dumb-looking blond girls.

Of course you can simultaneously have a Nintendo console and be a real gamer as most likely you own at least one since childhood. But when you reach puberty, you realize there is more to life and upgrade to better, more mature gaming systems that show the potential of gaming in its true form.

And then when you become an adult, you realize none of that shit was actually any more fun than Mario and your girlfriend won't spend a single second with you while you're playing Metal Gear so you go and get a Nintendo again.

 

[Vane_MagicCity]

So basically, a "real gamer" is somebody who shares your tastes. Got it.

You have to love "No True Scotsman" fallacies.

 

[Smiles and Cries]

Here's the question I got:

From: Jeff Grubb [mailto:jeff.grubb@venturebeat.com]
Sent: Thursday, February 14, 2013 8:56 PM
To: Jeff Grubb
Subject: If you're Nintendo, what do you do next?

Let's forget what we think Nintendo will do. What would you do if you were Nintendo?

Apparently, according to the NPDs, the Wii U only sold 55,000 units in January.

First of all, are you worried about NIntendo?

Second, what would you do to turn things around?

I'll assume there's a possibility you will say "get out of the hardware business and make iOS games," and that's fine, but I'd also like to know what you would do to turn around the Wii U.

Thanks. Look forward to hearing from you.


--
Jeff Grubb
Reporter
VentureBeat | GamesBeat

Notice the time stamp, 8:54 p.m. on Thursday night. Please note that I get up at 3:15 a.m. every weekday, and had to do so on Friday to speak to my sales force about the NPD data. I finished writing my NPD note around 9:35 p.m. at the office, was about to log out and go home, and decided to answer Jeff.

My answer, time stamped 9:37 p.m.:

I think they misfired on the Wii U. It’s just not that differentiated from the other two consoles, and the game play isn’t as unique as the Wii. They made a mistake, it’s something they probably can’t recover from.

I do think iOS games would be smart, especially if they recycled old GBA games and converted people to Nintendo fans. I don’t really think they can recover, think that they have made a costly mistake, and their handheld business can’t save them in the face of cannibalization from smart phones and tablets.
______________________________________________________________________

The point is that I needed to get home (at 10:20), get to bed, and get up to work the next day. I decided to answer Jeff's question, and "misfired" and "can't recover" were my words, but I wasn't in a position to look up all the numbers and address profitability. Notice how my comments were edited.

Anyway, my day job takes from 4:20 a.m. till 9 p.m. at least 100 days a year, this was one of them. I don't have a lot of time to reflect on my answers, don't actually know what the article is going to say, and certainly don't know which other analysts are going to be contacted or quoted, or even whether they will use what I say. I try to be responsive, and to work with the limited time I have.

I don't think Nintendo is going bankrupt, ever. I do think that they will have trouble making money on the Wii U, since I see the installed base ending up pretty small, and don't think they will see the strength in handhelds they saw last generation. At least, that's what I thought I said ;-)

Coming from this do you think that the media is now using your name in stories as the anti-Nintendo Expert while in the same story they quoted someone else being more reasonable?

Thank you for taking the time to share all of this with us, at the very least it shows that you care about what you say.

 

[Lord Ghirahim]

This is how some people I know think about Wii U.

I'm waiting for Pikmin 3 to come out.

I'm getting one right before Bayonetta 2 comes out.

I'm definitely getting one for Mario.

Mario is an overgrown baby, fuck Mario and fuck Nintendo's rehashes. I do want Zelda though. I hope it has more story this time.

Oh yeah, Smash Bros, I hope the online is good. I hope it's less floaty than Brawl. Melee was tight.

I got one and now I have nothing to play, can't wait for Monster Hunter!

Mario Kart!

I might want one for Animal Crossing, not sure.

Almost everyone has their own "system seller", but none of them has been released. It's a bit of an issue when the people who are aware of the system's existence have to wait months/years for it to become a worthwhile purchase. Even so, I don't believe Wii U will pull "a Gamecube". Its headstart alone should protect it from that, unless the competition hits the market with $200 systems and some really aggressive marketing.

 

[AzaK]

First, I must apologize for calling two thirds of you assholes. It's probably more like 5%, so I was overly sensitive in my generalization.

Second, and to the point, there is actually some reasoning behind my comments that the Wii U is a mistake from which Nintendo may not recover, and I threw the 3DS' cannibalization from smart phones and tablets in there to make a point.

Nintendo has historically made money, and a lot of money, on each hardware unit sold. The DS at $99 US is more profitable for them than the 3DS at $169 (see many quotes from Nintendo in Kyoto about losing money, or being barely profitable). The DS sold 23.5 million units in FY:07 (ended March 31), 30.3 million in FY:08, 31.1 million in FY:09, and 27.1 million in FY:10. Nintendo made money, and a lot of money, in each of those years.

I think it is instructive to use operating income in Yen as a guide, since Iwata said he would consider resigning if Nintendo did not earn ¥100 billion in FY:14. Nintendo made ¥90 billion in FY:06, ¥226 billion in FY:07, ¥487 billion in FY:08, ¥555 billion in FY:09, and ¥356 billion in FY:10. In FY:11, DS sales dropped to 17.5 million units, and operating income fell to ¥171 billion; in FY:12, combined DS and 3DS sales were 18.6 million units, but operating income disappeared, and Nintendo generated a LOSS of ¥37 billion. Obviously, the loss was impacted by lower Wii sales and lower software sales, but the point here is that the 3DS doesn't generate much of a profit per unit, if any, and the DS did.

Over the same period, Wii hardware sales were 0, 5.8 million, 18.6 million, 25.9 million, 20.5 million, 15.0 million, and 9.8 million. We have been repeatedly assured by Nintendo that the company makes a profit on every Wii sold, but as sales leveled off at 10 million, the company printed its first loss ever.

In FY:13 (the current year, ending next month), Nintendo is projected to sell 17.3 million DS and 3DS units combined, and to sell 8 million Wii and Wii U units combined, and is projected to generate an operating loss of ¥20 billion. That means that current levels of sales keep the company at roughly breakeven.

My comment about the Wii U being a "mistake" from which the company "may not recover" was intended to say that if Wii U sales don't materially improve, Nintendo is unlikely to be profitable. They have around ¥1 trillion (around $11 billion) in cash, so they aren't in danger of going out of business for decades. However, if they aren't profitable, they aren't doing a good job for shareholders.

To elaborate, if the Wii U is not generating profits, and if the 3DS is not generating profits, the only thing that will generate profits is software. Nintendo is ensured high sales of its proprietary software, but it makes the most money on its royalty business, collecting fees from third parties for the privilege of letting them put out games on Nintendo platforms. Publishing (software) revenues peaked at ¥675 billion in FY:09, and are on track to come in around ¥235 billion this year; my call is that if hardware sales don't materially improve above current combined levels, software sales are unlikely to materially grow. If software sales don't materially improve, losses or break even will become the norm. Nintendo will not "recover" to its formal highly profitable glory.

The poor sales of the Wii U in January are likely to impact third party publisher plans to support the console. Notice that GTAV is not on the Wii U; that wasn't a typo, they don't see enough promise in sales to cause them to spend extra development dollars on a Wii U version. I have spoken to several publishers who are skeptical, and I think that the Wii U will see a lower level of third party support than the Wii did, unless sales materially improve. If I'm wrong, I'll admit it, but without third party titles, Nintendo will not generate its customary levels of royalties, and losses or break even could become the norm.

Many of you point out that the 3DS is selling better than the DS at a similar point. That's true, but the DS was always profitable, and the 3DS is not. Also, the DS saw sales go from 8.8 million units in its first four quarters to 18.0 million its next four, to 20.2 million in its third full year; I'm pretty confident that the 3DS will not get to 20 million units, but even if it did, it would generate little profit from hardware. Keep in mind that the DS redesign to a lite version boosted sales, and there was little competition for 12 year-old and older from smart phones and tablets. Now, parents who can afford it are opting for Kindles, iPads, and smart phones for their teenagers, and the more casual of those are perfectly happy playing Angry Birds and putting their DS or 3DS into a drawer.

The important point is that if 3DS sales level off at 15 million and Wii U sales level off at 8 - 10 million, software sales will be much lower than they were in the past. If Nintendo doesn't make a profit on hardware, they can't afford to cut prices further. If they do cut price, it will likely occur as their manufacturing costs come down, but I don't expect big hardware profits in the foreseeable future. They are stuck with software profits, and at current sales levels, they are unlikely to make an overall profit from software.

That's it, not trolling, but that is my reasoning.

To the 5% of you who ARE assholes, bring it on ;-)

Thanks Michael, nice to see you coming in and hopefully quieting some of that 5% of assholes.....bah who am I kidding.

I'm confused. So they make most money off of software royalties, yet the hardware not being profitable is a dealbreaker? And... isn't this exactly what Sony and MS have been doing for decades?

He mentioned a couple of times that it's about recovery back to how Nintendo operate (Lots of profit). Sony and MS haven't worked that way, however if they're a little more modest this time around they might get into profit quicker. Basically with Wii U not selling (And 3ds not bringing in mass profits on hardware), publishers aren't supporting and so the big money makers (license fees) for Nintendo are not going to be there any time soon.

 

[mujun]

And this is the one point where your expertise is lacking. The gaming part itself. Nintendo would never even consider porting a gba game to an ios device. Obvious business reasons aside - it's about the game itself. It's all about the games. Nintendo designs their games around their hardware. You simply cant play a gba game on an ios device the way it ment to be. This is not a business decision it's one about quality. A point Nintendo cares about. The frequent mentioning of ios ports just shows a deep misundersterstanding of nintendos philosophy. Actually this might be the missing variable which is always screwing with your predictions.

Spoiler

postet from a wii u.. not on purpose..

Doesn't seem like a misunderstanding on Pachter's part.

Sounds like he is saying that they need to become more profitable, forgo the "quality" you speak of in favor of good business decisions and license out older stuff for iOS and the like.

It's not like the iOS crowd would care. Most of the stuff on iOS would play better with a traditional control method but many are willing to put up with hampered controls in favor of convenience or a lower price.

 

[Soriku]

What Nintendo Can Learn From Pachter

 

[Medalion]

Pachter can't resist da GAF fiyah

 

[gamergirly]

What Nintendo Can Learn From Pachter

Absolutely nothing. But Pachter can bank from these sensational thread titles which people who don't like Pachter continue to post

 

[Pachterballs]

the wiiU is going to be gamecube 2.

They should just make a purple+spice one and call it a day.

There's really no way to salvage it now.

 

[AJSousuke]

I hope he is wrong!!!!!!!

Spoiler

xP

 

[oneils]

nintendo has 2/3 of pokemon? are you sure? if that is the case, I have been living deceived...

I think he might be confusing the pokemon IP with the pokemon developer gamefreak. I was sure that Nintendo owned the IP outright. So what if they don't own the developer outright?

I'd have to look it up, but I'm too lazy.

 

[ghst]

This is how some people I know think about Wii U.

how lucky you are to have a group of friends with such neatly spread out preferences regarding a console which most lay people barely know exists.

 

[Jack_AG]

God Patcher really does love to troll Nintendo GAF

Fixed.

 

[tehrik-e-insaaf]

The important point is that if 3DS sales level off at 15 million and Wii U sales level off at 8 - 10 million, software sales will be much lower than they were in the past. If Nintendo doesn't make a profit on hardware, they can't afford to cut prices further. If they do cut price, it will likely occur as their manufacturing costs come down, but I don't expect big hardware profits in the foreseeable future. They are stuck with software profits, and at current sales levels, they are unlikely to make an overall profit from software.

You keep attributing the low profitability to higher hardware costs - in an earlier report you referred to Nintendo's "cost structure" as being problematic for it to turn a profit. The problem with your analysis is that you can't break down Nintendo's gross expenses based on category of spend - a higher cost structure could simply signal higher structural investment in future software and the growth and expansion of their internal studios which is most likely the case.

Even if you want to argue that somehow a little birdie told you otherwise, you then rely far too much on equally amortized cost analysis to ignore the improving economies of scale in hardware production and allocation of R&D spend. While you might be right that Nintendo's profitability is far lower early in its hardware cycle than where it was, it's also probably a result of larger investment upfront to secure parts and supplies for improved scale 1-2 years into the future given the recent volatility in the supplier marketplace post-earthquake and dependent on currency issues - something that's normal for a company that can make large cash outlays and doesn't (like Sony) rely on creditors. The BOM for the 3DS is <$100 and based on the most expensive components and improving exchange rates, the 3DS is likely to hit DS territories over 12 months with bigger hits and increasingly declining costs to earn revenue. All this with higher per-game and per-device revenues versus the DS average.

Finally, there is a bit of a false premise in your analysis of software. Software has high upfront expense but 99% marginal profitability. With increasing digital distribution and the general per-game revenue for Nintendo being extremely high relative to peers, the projected future release is without a doubt highly improved. You try to ignore the fact that Nintendo hasn't release one big hit for the Wii U at all and attempt to make a poor case for Nintendo's need to rely on third party royalties, but even on a conservative and install-base weighted launch of highly anticipated titles, their own first-party publishing margins and revenues would dwarf third party royalties.

Given that's the case, I question your ability to intuitively understand the current cashflow and balance sheet and the cyclical trends contained within - or your understanding of Nintendo's current supplier arrangements. The biggest issue that leads is to then is your your analysis/take is that you talk about how Nintendo should release content for iPad. There is very limited support for this as you offer no meaningful analysis of how and why such a strategy would work (if at all), and most importantly, you fail to discount those earnings against the reduced branding cachet of exclusive content on proprietary hardware.

Overall, even if Nintendo reaches Gamecube-like levels and generates marginal profits, they will still be highly profitable. Your statement that they aren't doing a service to their shareholders is flawed, because the company is closely held by a few institutions and Yamauchi, and the goal of the company is to stay in business and produce games for another generation, not maximize short-term profits by diluting their brand value so your clients can make a few extra dollars. Any reasonable analysis of their existing shareholder base will indicate so much easily, so I fail to see how you can make your recommendations on a flawed and ethno-centric basis the way you do.

Also, no offense, but there are a lot of professionals in the finance industry that don't complain and run to a forum bringing up their home-life or personal obligations to justify terribly written e-mail. I appreciate you having the decency to apologize, but next time, don't hit send if you don't want people to react negatively.

 

[FStop7]

I like the kinder, gentler Pachter.

 

[Smiles and Cries]

I like the kinder, gentler Pachter.

Me too, almost think this is someone else hacking his account here because I even got a decent PM reply to my question, taking the time to share his side. Makes me feel bad that I had brought into the media created hype about him. *shamed*

+1 Respect

 

[metalslimer]

how lucky you are to have a group of friends with such neatly spread out preferences regarding a console which most lay people barely know exists.

In general most of my friends don't give a shit about 95% of what Nintendo does but they ended up begrudgingly buying a Wii to play Brawl or Skyward Sword.

Edit: There's a question to be asked if Nintendo could ever have replicated the Wii's initial success considering no one had ever done it before (fastest selling console of all time). If Nintendo does sink to the depths of the Gamecube or below they would still be a pretty profitable company.

 

[tehrik-e-insaaf]

Me too, almost think this is someone else hacking his account here because I even got a decent PM reply to my question, taking the time to share his side. Makes me feel bad that I had brought into the media created hype about him. *shamed*

+1 Respect

It's funny how him putting up one flawed post based on a poor understanding of a cyclical business while asking people to forgive him for his "personal situation" has made 1) a lot of people ignore all of his comments over the past few months and say nice things to him and 2) others bandwagon onto his "reasoned" opinion because he shows some level of ability to do mathematics (however flawed his understanding of rates of change and Calculus might be) 3) entirely lose their ability to critically think and respond

I guess it's the old adage... honey... vinegar... flies... attraction... something something

 

[Byakuya769]

Definitely a mistake, but the "may never recover from" line? Obvious GAF bait. And here we are.

I have no doubt that Nintendo can innovate in a substantial way again, I just think the DS/Wii allowed them get high off their own supply.

 

[?oe?oe]

Patcher being born is a mistake that we will never recover from.

Trololol lolol

 

[spisho]

Wii U needs FFX HD remake. Then Wii U=saved.

 

[Steve Youngblood]

It's funny how him putting up one flawed post based on a poor understanding of a cyclical business while asking people to forgive him for his "personal situation" has made 1) a lot of people ignore all of his comments over the past few months and say nice things to him and 2) others bandwagon onto his "reasoned" opinion because he shows some level of ability to do mathematics (however flawed his understanding of rates of change and Calculus might be) 3) entirely lose their ability to critically think and respond

I guess it's the old adage... honey... vinegar... flies... attraction... something something

Was this really necessary? You had your big "calling out Pachter" post above. Are you so intent on getting a reaction to your Pachter criticism that you are going to proceed to call out posters who think it was a reasonable post, as opposed to typing out a lengthy rebuttal as you chose to do? It just seems like you are overreaching at this point.

 

[Currygan]

Was this really necessary? You had your big "calling out Pachter" post above. Are you so intent on getting a reaction to your Pachter criticism that you are going to proceed to call out posters who think it was a reasonable post, as opposed to typing out a lengthy rebuttal as you chose to do? It just seems like you are overreaching at this point.

call it whatever you want, he's right though

 

[tehrik-e-insaaf]

Was this really necessary? You had your big "calling out Pachter" post above. Are you so intent on getting a reaction to your Pachter criticism that you are going to proceed to call out posters think it was a reasonable post, as opposed to typing out a lengthy rebuttal as you chose to do? It just sea like you are overreaching at this point.

Well, I apologize if it came across that way, wasn't my intent so I'm sorry if you were offended (or the guy I quoted) - I'm just trying to encourage people to be highly critical - not just accept his perspective because he is now being kinder and gentler.

 

[dragonfart28]

It's funny how him putting up one flawed post based on a poor understanding of a cyclical business while asking people to forgive him for his "personal situation" has made 1) a lot of people ignore all of his comments over the past few months and say nice things to him and 2) others bandwagon onto his "reasoned" opinion because he shows some level of ability to do mathematics (however flawed his understanding of rates of change and Calculus might be) 3) entirely lose their ability to critically think and respond

I guess it's the old adage... honey... vinegar... flies... attraction... something something

Really makes one wonder about what vested intersests some people have.

 

[Quadraphonic]

they actually own 2/3 of the pokemon company, the other one third is owned by gamefreak who i can only imagine like having some level of independence

No.

http://www.bloomberg.com/news/2011-07-06/nintendo-says-it-s-not-expanding-into-smartphone-games.html

32%.

 

[Busaiku]

I don't think making such absolute statements good.
Can "never" recover is still way too early to tell.

 

[DXB-KNIGHT]

Ahh finally some good WiiU news for a change.

 

[Smiles and Cries]

It's funny how him putting up one flawed post based on a poor understanding of a cyclical business while asking people to forgive him for his "personal situation" has made 1) a lot of people ignore all of his comments over the past few months and say nice things to him and 2) others bandwagon onto his "reasoned" opinion because he shows some level of ability to do mathematics (however flawed his understanding of rates of change and Calculus might be) 3) entirely lose their ability to critically think and respond

I guess it's the old adage... honey... vinegar... flies... attraction... something something

The question is how much of what he has said has been gaming media websites using his replies using his name in news stories as click-bate?

The other is how much of this is NeoGAF's obsession with everything Michael Pachter says?

You can disagree with someone and still have some respect for the man. He has shown good judgement in coming here and telling his side.

He has been very outspoken about Nintendo and seriously Wii U as the Wii was to me is not what I wanted Nintendo to do. For the first time ever I am going to buy a Sony home console just to make sure I have some 3rd Party games I want to play. So I don't see it unreasonable if someone who is not as Nintendo loving as I am speaks negatively about what Nintendo has done so far.

I don't want Nintendo on iOS or anything else but I can't say Wii U vs PS4 is going to be a fair fight. Iwata may very well resign in a year.

 

[Steve Youngblood]

Well, I apologize if it came across that way, wasn't my intent so I'm sorry if you were offended (or the guy I quoted) - I'm just trying to encourage people to be highly critical - not just accept his perspective because he is now being kinder and gentler.

I'm not suggesting that there isn't room to disagree with the specific rationale he employs, but I think some of the criticism is overly harsh in that it assumes the most hyperbolic interpretation of the what he meant by "unable to recover from," when many others accepted that he was probably just referring to the Wii U's position even before his lengthy clarification.

Further, you seem to be arguing aggressively in the other direction in a way that doesn't seem altogether indicatve of the reality at play. For instance, you argue that another GameCube would be just fine, whereas I'm under the impression that Nintendo wouldn't be very happy with such a result. Also, I doubt Iwata would have taken the steps he's taken -- pay cuts and lofty revenue targets -- if everything was a-okay as you seem to be suggesting.

I'm not Pachter's number one fan or anything, so I have no problem with challenging his analysis. But just as as an amateur (and admittedly probably not very good) analyst myself, I can't say I'm particularly swayed by your take either.

 

[Busaiku]

No.

http://www.bloomberg.com/news/2011-07-06/nintendo-says-it-s-not-expanding-into-smartphone-games.html

32%.

It's split among Nintendo, Creatures, and GameFreak, or something.
But Creatures is a wholly owned Nintendo subsidiary.

 

[Speevy]

Pachter: "A mistake industry analysis may never recover from"

 

[JohnnySasaki86]

So, does this mean it's a mistake Nintendo will recover from, or it wasn't a mistake?

I'm not sure how to apply the "Opposite of Pachter" rule in this case.

I would say its a mistake they could recover from. Its pretty obvious that Nintendo may have made some mistakes with the Wii U, but Patcher already stated before that the Wii U would be a great success(hence why it has failed thus far lol!) and now hes back pedaling and changing his mind.

 

[Medalion]

Wii-U may not be a success but it will never reach the depths of Virtual Boy

 

[Hazelhurst]

In Nintendo's defense, 3DS is dominating in Japan. Also, Wii U does have the gamepad as its selling point. They need games and better battery in gamepad. I'll get one eventually.

 

[Omnistalgic]

It's funny how him putting up one flawed post based on a poor understanding of a cyclical business while asking people to forgive him for his "personal situation" has made 1) a lot of people ignore all of his comments over the past few months and say nice things to him and 2) others bandwagon onto his "reasoned" opinion because he shows some level of ability to do mathematics (however flawed his understanding of rates of change and Calculus might be) 3) entirely lose their ability to critically think and respond

I guess it's the old adage... honey... vinegar... flies... attraction... something something

I think a lot of posters probably just don't care...

The main line that rubbed ppl the wrong way is "Nintendo can't recover" which certainly needed to be clarified. But after the explanation, who really cares if he's accurate or not? I certainly don't. The basics are Nintendo strives to make profit fairly early, they are a profitable company, 3DS is very likely to be very lucrative along with WiiU. Who is more accurate with how Nintendo's business model works is "meh" to me...

but right above there's a very well-thought out rebuttal to Patcher's claim...

 

[Ghost_Protocol]

It's almost like establishing an actual dialogue with someone, instead of relying on the press to do it for us, actually helps understand where they're coming from............

 

[DEADEVIL]

First, I must apologize for calling two thirds of you assholes. It's probably more like 5%, so I was overly sensitive in my generalization.

Second, and to the point, there is actually some reasoning behind my comments that the Wii U is a mistake from which Nintendo may not recover, and I threw the 3DS' cannibalization from smart phones and tablets in there to make a point.

Nintendo has historically made money, and a lot of money, on each hardware unit sold. The DS at $99 US is more profitable for them than the 3DS at $169 (see many quotes from Nintendo in Kyoto about losing money, or being barely profitable). The DS sold 23.5 million units in FY:07 (ended March 31), 30.3 million in FY:08, 31.1 million in FY:09, and 27.1 million in FY:10. Nintendo made money, and a lot of money, in each of those years.

I think it is instructive to use operating income in Yen as a guide, since Iwata said he would consider resigning if Nintendo did not earn ¥100 billion in FY:14. Nintendo made ¥90 billion in FY:06, ¥226 billion in FY:07, ¥487 billion in FY:08, ¥555 billion in FY:09, and ¥356 billion in FY:10. In FY:11, DS sales dropped to 17.5 million units, and operating income fell to ¥171 billion; in FY:12, combined DS and 3DS sales were 18.6 million units, but operating income disappeared, and Nintendo generated a LOSS of ¥37 billion. Obviously, the loss was impacted by lower Wii sales and lower software sales, but the point here is that the 3DS doesn't generate much of a profit per unit, if any, and the DS did.

Over the same period, Wii hardware sales were 0, 5.8 million, 18.6 million, 25.9 million, 20.5 million, 15.0 million, and 9.8 million. We have been repeatedly assured by Nintendo that the company makes a profit on every Wii sold, but as sales leveled off at 10 million, the company printed its first loss ever.

In FY:13 (the current year, ending next month), Nintendo is projected to sell 17.3 million DS and 3DS units combined, and to sell 8 million Wii and Wii U units combined, and is projected to generate an operating loss of ¥20 billion. That means that current levels of sales keep the company at roughly breakeven.

My comment about the Wii U being a "mistake" from which the company "may not recover" was intended to say that if Wii U sales don't materially improve, Nintendo is unlikely to be profitable. They have around ¥1 trillion (around $11 billion) in cash, so they aren't in danger of going out of business for decades. However, if they aren't profitable, they aren't doing a good job for shareholders.

To elaborate, if the Wii U is not generating profits, and if the 3DS is not generating profits, the only thing that will generate profits is software. Nintendo is ensured high sales of its proprietary software, but it makes the most money on its royalty business, collecting fees from third parties for the privilege of letting them put out games on Nintendo platforms. Publishing (software) revenues peaked at ¥675 billion in FY:09, and are on track to come in around ¥235 billion this year; my call is that if hardware sales don't materially improve above current combined levels, software sales are unlikely to materially grow. If software sales don't materially improve, losses or break even will become the norm. Nintendo will not "recover" to its formal highly profitable glory.

The poor sales of the Wii U in January are likely to impact third party publisher plans to support the console. Notice that GTAV is not on the Wii U; that wasn't a typo, they don't see enough promise in sales to cause them to spend extra development dollars on a Wii U version. I have spoken to several publishers who are skeptical, and I think that the Wii U will see a lower level of third party support than the Wii did, unless sales materially improve. If I'm wrong, I'll admit it, but without third party titles, Nintendo will not generate its customary levels of royalties, and losses or break even could become the norm.

Many of you point out that the 3DS is selling better than the DS at a similar point. That's true, but the DS was always profitable, and the 3DS is not. Also, the DS saw sales go from 8.8 million units in its first four quarters to 18.0 million its next four, to 20.2 million in its third full year; I'm pretty confident that the 3DS will not get to 20 million units, but even if it did, it would generate little profit from hardware. Keep in mind that the DS redesign to a lite version boosted sales, and there was little competition for 12 year-old and older from smart phones and tablets. Now, parents who can afford it are opting for Kindles, iPads, and smart phones for their teenagers, and the more casual of those are perfectly happy playing Angry Birds and putting their DS or 3DS into a drawer.

The important point is that if 3DS sales level off at 15 million and Wii U sales level off at 8 - 10 million, software sales will be much lower than they were in the past. If Nintendo doesn't make a profit on hardware, they can't afford to cut prices further. If they do cut price, it will likely occur as their manufacturing costs come down, but I don't expect big hardware profits in the foreseeable future. They are stuck with software profits, and at current sales levels, they are unlikely to make an overall profit from software.

That's it, not trolling, but that is my reasoning.

To the 5% of you who ARE assholes, bring it on ;-)

Amazing post from the Pachster.

I definately agree that Nintendo has a really tough mountain to climb in regards to the Wii-U.

But I saw this coming the day they revealed the console. The funny part is they could have made a killing off of this machine if they simpy released it a couple of years ago and called it the Wii-HD as Pach so famously predicted.

There were many missteps at launch and one huge misstep was the games. They cna have a decent E3 and maybe turn some heads, but they got some serious competition with the new systems arriving as well.

Whtever the positions on the subject Pach definately clarified his stance without the filter from the hit seeking sites.

Plus I love that he took on what he calls the 5%, because some definatelylike to dish it in abundance on here, but it's fun to see how some can't take it as well.

 

[tehrik-e-insaaf]

I'm not suggesting that there isn't room to disagree with the specific rationale he employs, but I think some of the criticism is overly harsh in that it assumes the most hyperbolic interpretation of the what he meant by "unable to recover from," when many others accepted that he was probably just referring to the Wii U's position even before his lengthy clarification.

Further, you seem to be arguing aggressively in the other direction in a way that doesn't seem altogether receptive of the reality at play. For instance, you argue that another GameCube would be just fine, whereas I'm under the impression that Nintendo wouldn't be very happy with such a result. Also, I doubt Iwata would have taken the steps he's taken -- pay cuts and lofty revenue targets -- if everything was a-okay as you seem to be suggesting.

I'm not Pachter's number one fan or anything, so I have no problem with challenging his analysis. But just as as an amateur (and admittedly probably not very good) analyst myself, I can't say I'm particularly swayed by your take either.

I was refuting his claim that under a 8-10 million and 15 million p.a. sales of hardware for their two platforms (Wii U and 3DS) Nintendo could NOT earn profits similar to their historic profit curve. Besides the past few years being outliars in terms of performance, under no conservative scenario does Nintendo not earn profits at least comparable to their historic profitability curve by maintaining their existing business model, and if you read my point - Nintendo isn't an NYSE/Nasdaq listed start-up that needs to hit 100% revenue growth targets - their focus is on sustainable development, improved brand value, stockpiling cash, and gradually diversifying their geographic concentrations in terms of revenue.

In another post I've shared my thoughts on the future of Miiverse.

I'm sorry you think that I'm arguing in the opposite direction - I'm not - I've written multiple posts about what an uphill climb it is going to be Nintendo and talked about positive things (3rd party relationships in Japan) and negative things (their inability to develop and retain talent in the US and Europe) - but I've done it in the context of their goals for this cycle and what would help them create long-term sustainable value relative to their historic moving average. If anything I'm making a very nuanced argument - I'll try to be more careful about that and less "aggressive" next time.

 

[SapientWolf]

You keep attributing the low profitability to higher hardware costs - in an earlier report you referred to Nintendo's "cost structure" as being problematic for it to turn a profit. The problem with your analysis is that you can't break down Nintendo's gross expenses based on category of spend - a higher cost structure could simply signal higher structural investment in future software and the growth and expansion of their internal studios which is most likely the case.

Even if you want to argue that somehow a little birdie told you otherwise, you then rely far too much on equally amortized cost analysis to ignore the improving economies of scale in hardware production and allocation of R&D spend. While you might be right that Nintendo's profitability is far lower early in its hardware cycle than where it was, it's also probably a result of larger investment upfront to secure parts and supplies for improved scale 1-2 years into the future given the recent volatility in the supplier marketplace post-earthquake and dependent on currency issues - something that's normal for a company that can make large cash outlays and doesn't (like Sony) rely on creditors. The BOM for the 3DS is <$100 and based on the most expensive components and improving exchange rates, the 3DS is likely to hit DS territories over 12 months with bigger hits and increasingly declining costs to earn revenue. All this with higher per-game and per-device revenues versus the DS average.

Finally, there is a bit of a false premise in your analysis of software. Software has high upfront expense but 99% marginal profitability. With increasing digital distribution and the general per-game revenue for Nintendo being extremely high relative to peers, the projected future release is without a doubt highly improved. You try to ignore the fact that Nintendo hasn't release one big hit for the Wii U at all and attempt to make a poor case for Nintendo's need to rely on third party royalties, but even on a conservative and install-base weighted launch of highly anticipated titles, their own first-party publishing margins and revenues would dwarf third party royalties.

Given that's the case, I question your ability to intuitively understand the current cashflow and balance sheet and the cyclical trends contained within - or your understanding of Nintendo's current supplier arrangements. The biggest issue that leads is to then is your your analysis/take is that you talk about how Nintendo should release content for iPad. There is very limited support for this as you offer no meaningful analysis of how and why such a strategy would work (if at all), and most importantly, you fail to discount those earnings against the reduced branding cachet of exclusive content on proprietary hardware.

Overall, even if Nintendo reaches Gamecube-like levels and generates marginal profits, they will still be highly profitable. Your statement that they aren't doing a service to their shareholders is flawed, because the company is closely held by a few institutions and Yamauchi, and the goal of the company is to stay in business and produce games for another generation, not maximize short-term profits by diluting their brand value so your clients can make a few extra dollars. Any reasonable analysis of their existing shareholder base will indicate so much easily, so I fail to see how you can make your recommendations on a flawed and ethno-centric basis the way you do.

Also, no offense, but there are a lot of professionals in the finance industry that don't complain and run to a forum bringing up their home-life or personal obligations to justify terribly written e-mail. I appreciate you having the decency to apologize, but next time, don't hit send if you don't want people to react negatively.

"Total software sales for the Wii U are under 2 million units in the U.S.," Pachter told me.

If this is correct then it's pretty clear that first party sales alone aren't going to make the Wii U profitable.

 

[Smiles and Cries]

Wii-U may not be a success but it will never reach the depths of Virtual Boy

Did Virtual Boy even sell 3 million units?

I love my Wii U, it is not going to do well against next generation but Virtual Boy it has already done very well if we are going to compare it to something like that lol.

Seriously what is so wrong with this is when you see a major DESTINY media viral campaign and not a Wii U version with the PS360. This thing is a 2014 joint it may still have a Wii U port there but the fact they ignored the platform in this media blitz is a problem. They even showed a social smartphone aspect of Destiny. Destiny + Miiverse. lol

Nintendo won't allow it to fail they don't have a choice in this they can't take it back now they have to work it out.

I still think the Gamepad and Miiverse are the strong points for Wii U success.

 

[Quadraphonic]

It's split among Nintendo, Creatures, and GameFreak, or something.
But Creatures is a wholly owned Nintendo subsidiary.

A subsidiary, but nowhere aside from Internet comments does it say "wholly".

I can't imagine any of Nintendo voted for the iOS apps.

 

[tehrik-e-insaaf]

It's split among Nintendo, Creatures, and GameFreak, or something.
But Creatures is a wholly owned Nintendo subsidiary.

This isn't true FYI - I did extensive research on this - Creatures has some of the same shareholders as some ex-NCL management/executives - but NCL itself doesn't own shares in it directly otherwise they would have to account for it under the equity method on their balance sheet.

There is a chance that under some sort of arrangement, Nintendo might have the ability to call shares in Creatures under a sale situation - since that is a ROFR option the value of those could be at book value and thus aren't reflected in overall balance sheet - I am sure Nintendo has something similar w.r.t. Game Freak. Since no one can buy these two companies without having to answer to Nintendo for the joint copy right, their ability to get acquired is extremely limited.

That is what protects Nintendo and ensures they don't lose their cash horde to protecting Pokemon as an exclusive franchise: the copyright is jointly shared between all three entities - so the chance of Pokemon games appearing on any third console is going to be nearly impossible - that being said - NCL barely shows up to the board meetings and let's Creatures and particularly Game Freak do whatever they want with the franchise.

Based on the best data we have, the value of the Pokemon Company is probably close to ~15 billion dollars (probably includes accumulated profits and retained earnings) - from there people imply that Game Freak's founder Satoshi Tajiri is worth ~5 billion dollars.

This is my best guess based on the disclosures - my Japanese sucks and some of this information is very, very vague, so take it with a grain of salt

 

[Steve Youngblood]

I was refuting his claim that under a 8-10 million and 15 million p.a. sales of hardware for their two platforms (Wii U and 3DS) Nintendo could NOT earn profits similar to their historic profit curve. Besides the past few years being outliars in terms of performance, under no conservative scenario does Nintendo not earn profits at least comparable to their historic profitability curve by maintaining their existing business model, and if you read my point - Nintendo isn't an NYSE/Nasdaq listed start-up that needs to hit 100% revenue growth targets - their focus is on sustainable development, improved brand value, stockpiling cash, and gradually diversifying their geographic concentrations in terms of revenue.

I think what I'm trying to understand is the extent to which you're arguing that a scenario reminiscent to GameCube-like profits is acceptable or desirable to those most invested in the company. I understand your point that it might not be prudent to treat Nintendo like a company that is beholden to the kind of growth Pachter's clients would like to see. However, I'm not clear on what you think a reasonable low-end target should be in terms of profitability/growth.

 

[tehrik-e-insaaf]

If this is correct then it's pretty clear that first party sales alone aren't going to make the Wii U profitable.

I'm not sure what your point is? Just because it has sold 2 million over the past few months in the US alone doesn't refute my point - that when hit games come out (few big hit games have come out so far) it dynamically improves hardware sales - and under such a circumstance - it is likely that their publishing revenues would recover. He picked Nintendo's peak to its cyclical trough and is trying to say third party revenues are bigger and more important to their overall company-level profitability. Hence him arguing this negates Nintendo's ability to generate historically average profits to the N64/Gamecube is incorrect.

 

[60_gig_PS3]

He should compare WiiU to the Gamecube not the Wii since that's most likely where it's headed.

 

[GamerSoul]

Imo, I think Nintendo can recover from the WiiU financially with titles like Smash Bros and the successor to Mario Galaxy, but it could be at the cost of losing solid 3rd party support. A lot of developers were not sold on the Wii and waited. Now they're basically looking at something with a unique controller like the Wii but without any of the hype at this point. It's not looking too good but we'll see once more software comes up.