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Nintendo’s share value has declined significantly as they issued a profit warning on Monday, mainly due to poor sales of its Wii U static games console which has been impacted by the successful launch of Microsoft’s Xbox One and Sony’s PlayStation 4. The release of these two competing consoles hit Nintendo particularly hard over the Christmas period. This could signal the start of some soul searching in the company about what it really wants to be. Up until now it has been reluctant to distribute its well-known intellectual property of video games software, for example Mario and Zelda, to other devices, namely smartphones and tablets. It fears this will undermine its differentiated position in the marketplace. This is seen as an increasingly contentious strategy given the expected growth in mobile gaming. In the context of an increasingly difficult hardware market, can Nintendo continue with this approach to not license its core games to these devices and so turn its back on significant potential revenue?
The key issue facing Nintendo is whether to continue to limit the playing of its games to its own hardware, rather than making it available to the devices of other manufacturers. The increasing prevalence of smartphones and tablets has spurred the rapid expansion of mobile gaming, and there are considerable opportunities for Nintendo to leverage its strength in video games in the development of apps for such devices. While Sony and Microsoft both produce exclusive titles for their consoles, neither has a portfolio of games as strong, and therefore as transferrable, as Nintendo’s. Moreover, Nintendo has typically targeted non-traditional gamers, key consumers for casual mobile gaming. In turn this makes it particularly vulnerable to the rise of mobile games on smartphones and tablets.
Nintendo claims that while extending its games to other devices might bring short-term gains, it would ultimately undermine the company’s differentiated positioning. It fears it would then become just another producer of games. So instead it hopes that the production of compelling titles still has the capacity to encourage consumers to buy its hardware. And that’s why the recent Christmas results are so concerning.
True, video games hardware and software categories are forecast to remain much larger than mobile gaming, with a combined value of nearly US$70 billion expected by 2017. However, Nintendo has been unable to compete with the much more technically advanced console releases from Microsoft and Sony. Therefore, in order to enhance their prospects Nintendo should also look to broaden their category exposure and invest in mobile gaming, forecast to become an US$11 billion category by 2017, not something to be sniffed at.
Source: Euromonitor International
Compelling games are not, in themselves, enough. To support the on-going pursuit of its strategy, Nintendo also needs to produce hardware that offers consumers something they are unable to get on other devices. Nintendo’s president, Satoru Iwata, has stated that the strategy is long-term, looking to the next 10 or 20 years. However, much of Nintendo’s past success came from shifting its emphasis away from competing with Sony and Microsoft in terms of high-spec technological innovation and focusing on non-hard-core gamers. Moreover, the capacity to differentiate the experience of using Nintendo hardware from that of using alternative products is likely to be increasingly undermined as mobile devices become more sophisticated and more prevalent.
In an increasingly competitive video games environment where Nintendo have lost 10% of their global value share from 2008-2012, it still holds valuable intellectual property in the form of its well established computer games. If these games do not have a successful platform to support them, their popularity and value could decrease, leaving Nintendo in a more precarious position. Nintendo should re-evaluate its strategy and consider riding the popular wave of mobile gaming.