Seeking a new high score: Nintendo vows to fight back

After dominating the games console sector for several years, Nintendo's Wii is running out of steam

In Playing to Wiin, author Daniel Sloan described Nintendo's rebirth as the leading player for video game console sales in the past five years as "the video game industry's greatest comeback". Yet as the technology for the best-selling Wii and DS consoles has aged, sales have slowed; against a background of increasing competition, the company is being forced to bet heavily that the Wii's successor can keep it on top.

In a presentation to games developers earlier this year, Nintendo president and chief executive Satoru Iwata warned there was much uncertainty in the industry, adding: "Our world is changing."

How right he was. Nintendo's sales peaked in the 12 months to the end of March 2009 at Y1,800bn with a profit of Y279bn. The company's latest full-year results, published on Monday, showed declines for a second year in a row with sales of Y1,000bn and profits down to Y77.6bn.

While the popularity of its consoles struggled to match its earlier popularity, and software has become cheaper, the company has also been hit by the appreciation of the yen. The earthquake did not affect production but it fears consumer spending could slow as a result.

The numbers were "fairly expected from the trends we have been seeing in the market", says Piers Harding-Rolls, senior analyst and head of games at Screen Digest. "The console business is very cyclical. There is an investment period as it designs the new platform. Nintendo is ramping up that investment at the moment."

Sales of the Wii were down almost a third to 15 million in 2010. "That's a hefty decline in anyone's book," Mr Harding-Rolls says, "but it is still outselling its rivals." Sony's PlayStation 3 sold 12.5 million during the year and Microsoft's Xbox 360 sold 11.8 million.

Nintendo admits the Wii is coming to the end of its natural life. The industry tends to work on five- to six-year cycles, a spokesman for Nintendo says. The Wii was first launched in 2006 and the company president has admitted that developers are beginning to struggle with the old platform. "It is difficult to surprise people with the current model," the spokesman adds.

Mr Harding-Rolls said: "It is the nature of the business: sales ramp up until they get to a peak phase of spending on hardware and software. The console sales tail off and while software normally holds up, the price often comes down."

He added: "You get these waves of adoption and then transition. Nintendo is in the latter stage now: investing heavily and not making the profits they did before."

The Nintendo console had stolen a march on its rivals, Sony PlayStation 3 and Microsoft's Xbox 360, with its motion gaming. Its real success lay in the ability to extend the appeal of video games to demographics beyond that of the traditional gamer. Not only have its rivals caught up with motion gaming themselves, they have now left Nintendo trailing.

Jia Wu, senior analyst for Strategy Analytics, says: "The Wii, PlayStation 3 and Xbox 360 are all of the same generation but in terms of specs [specifications], the Wii was lagging. That's why it has had to move to introduce new hardware earlier. The others have extended the life cycles with new motion products."

Last year, Sony released the Move motion controller for the PlayStation 3, and has shipped eight million devices so far. The Xbox Kinect, which requires no controller at all, has become the fastest-selling consumer electronics device on record, according to Guinness World Records. The hardware sold an average of 133,333 units per day for its first 60 days after its launch in November, outstripping both the iPhone and the iPad over the equivalent period.

Nintendo plans to launch its follow-up to the Wii in 2012, it said yesterday. It will show off a playable model of the new system at the industry's showpiece event, the Electronic Entertainment Expo, or E3, in Los Angeles in June. Analysts believe the specs will have to outstrip all of its current console rivals.

Mr Harding-Rolls says: "Motion control is an accepted standard now, so the successor to the Wii will have to bring something totally new to the table. Their planning will be fairly advanced."

However, it is not just competition from its console rivals that will be worrying Nintendo's senior management. "There is more competition in the market now, and there are more platforms to play games on," Mr Harding-Rolls warns.

The rise of smartphones has taken some of the casual-gaming market, while another games platform gaining traction is those played on social networks. This includes popular titles such as FarmVille. Phones especially could hit sales of Nintendo's 3DS. The follow-up to its extraordinarily successful DS brings glasses-free 3D to handhelds for the first time, yet the company revealed this week it had missed sales targets.

The 3DS went on sale in February in Japan and a month later in the US and has so far sold 3.6 million devices. Over the same period, it sold 17.5 million of the original DS, bringing total sales of the device to 146.4 million. Mr Iwata said: "Sales of the 3DS have been weaker than expected," adding: "There aren't yet so many people who are absolutely sure that now is the time to buy it. Some people may be waiting, thinking that there aren't yet enough software titles that they want to play."

Nintendo believes that sales of the 3DS will pick up throughout the year, saying its customers did not tend to be early adopters who queue to snap up the device on launch day.

Mr Harding-Rolls warns that despite increased competition, it would be foolish to write Nintendo off. "This is a very innovative company and it is hard to bet against them," he says. "But it will be harder to develop something completely disruptive."

Not everyone is so sure. Mr Wu of Strategy Analytics says that the original Wii had turned around the fortunes of a company whose sales were flagging badly in 2006. "If this new console doesn't perform, the company will be in trouble. It is betting a lot on this," he added.

In Playing to Wiin, Mr Sloan said Nintendo's recent history was of a "company in an existential crisis that has not only found its way but regained the mantle of an industry leader". It may be facing more challenges before too long.