Nintendo Co. Ltd. (NTDOY) Memo Name: Joseph Caiello Phone #: 315-416-1454 College/School: McIntire School of Year: 2nd Commerce Important Company Financial Data Stock Price (4/23/13): 14.50 2013 Full Year Earnings Release: 4/24/13 Market Cap: 14.83B 52 Week Range: 11.36-17.75 Trailing P/E: 59.27 EPS: 0.24 Thesis / Key Points Ø Poor Sales Performance from the Wii U: Nintendo released their next-generation gaming console in November 2012. The Wii U was sent to the market long before Microsoft or Sony even announced their plans for their next- generation systems, as only Sony announced preliminary plans in February for its PS4 console. The console introduced an intriguing controller, a Wii U Gamepad with a six inch touchscreen for more a more “interactive experience” and second screen play. Also, the Wii U is compatible with Wii Remote Plus, Nunchuck, and a Wii U Pro Controller, which is meant for more hardcore gamers and is styled similarly to the Xbox 360 controller. The Wii U was plagued by a launch that many saw as confusing and that brought along very moderate sales numbers. In the first 6 weeks, the Nintendo sold 890,000 units in the United States and about 636,000 units in Japan. Many initially attributed these sales to a weak game line up with few exclusives and mostly made up of games such as Madden ‘13 and Assassins Creed 3 that were adapted for the console. Also, the console was launched in two different versions, a basic version for $300 and a deluxe version for $350. The deluxe version offered four times the storage, included a game for the Wii U, and was a much better value for consumers. Therefore, many basic versions were stuck on store shelves as customers opted for the deluxe edition. Since launch, sales have been quoted as “disappointing” by GameStop. For example, according to NPD numbers, Nintendo sold only 57,000 units in January this year 64,000 units in February. Neither the PlayStation 3 nor the Xbox 360 has ever had such poor monthly sales. In a survey I conducted on video game behavior, only 1.3% of the respondents owned a Wii U system. Ø Nintendo is a Fading Star in a Changing Industry: The video game industry is very different from recent years. In fact, physical video game sales are down 25% overall as of February 2013. The trend is moving towards digital consumption and away from traditional consoles for some consumers. For example, in an airport I am always shocked by the number of children I see playing games on an iPad or iPod Touch; devices that used to be replaced by Nintendo Gameboy devices a decade ago. In a survey I conducted, 50% of the respondents indicated that they play games more on smartphones than on consoles. This group is also composed of casual gamers, those who play video games every once in a while and normally as a social activity with friends. Nintendo captured this group with the Wii console, which had tremendous sales, but the group is beginning to adopt the cheaper and more convenient smartphone platform. Also in my survey, about 83% of those who own a Wii responded to using the console less than one hour per week, which indicates that customers have gotten somewhat bored with the console and its once innovative motion detection control scheme. As a personal example, the Wii I brought to college in 2011 is still sitting in the moving box because it was never preferred as a social gaming platform over Xbox 360 or PS3. Nintendo has not been able to capture a hardcore market of gamers, especially with their specifications on their next generation console. The Wii U just barely matches the graphic capabilities of the Xbox 360 and the Playstation 3. The next generation consoles from Sony and Microsoft are almost guaranteed to have 4K resolution support and true next generation graphics while the Wii U is stuck at a maximum of 1080p. A GameStop employee noted that Nintendo is “just catching up to the previous generation” in terms of processing power and graphics. Those who are continuing to play hardcore games are sticking to platforms like Xbox or even PC and have not been swayed into any of Nintendo’s offerings. In my survey, 24% said that Xbox 360 is their favorite gaming platform and 24% responded with PC. Misperceptions Ø New Games Will Drive Sales: Many game analysts believe classic franchises such as Super Mario, Pokémon, and Super Smash Bros can reignite sales of the Wii U console. Nintendo has confirmed that the above franchises will showcase new games at E3 2013. However, I think this is overly optimistic thinking. A core Nintendo group will still buy these first party games, but I do not think they will drive current Wii owners and other casual gamers to buy a new, more expensive console. Especially if they only play their current console occasionally. Ø Nintendo is Still a Leader in the Handheld Market: Nintendo’s 3DS has done well with consumers, but analysts tend to ignore that most mobile games are played on iOS and Android devices. A February 2013 report by IDC and App Nintendo Co. Ltd. (NTDOY) Memo Annie illustrated that revenue from games on iOS and Android surpassed the revenue from dedicated handheld devices from Nintendo and Sony (see exhibit 1). VAR Ø GameStop Employee: Wii U had "decent sales in the beginning and then dropped off.” “They made a mistake by launching so early.” “Handhelds are doing better than the Wii U, but they don’t beat the iPhone.” Ø Best Buy: Best buy had a large area to demo the Wii U, however no one was using it. Also, the unit had trouble with keeping a connection to the gamepad. Even more telling was the large amount of unsold consoles. There were 23 Wii U units sitting on shelves and none of the accessories or games were close to being sold out. This was in comparison to 8 Xbox 360 units and 10 PS3 units sitting on shelves to be sold. Ø Survey: The survey I created on Nintendo and video game habits brought in 150 respondents, most of which were college age students (18-22). The survey overall brought in a lot of Nintendo product owners, but not many owners that use their devices regularly. Also, most respondents chose either PC or Xbox 360 as their favorite console. Exhibit 2 shows the output from an SPSS analysis. How It Plays Out Ø Nintendo may see a good jump from E3 over the summer from new game announcements; however, the holiday shopping season will be overrun by flashy launches of consoles by Microsoft and Sony. Nintendo will not see the sell out hype that came with the Wii; stores already have a surplus of Wii U units. Ø Nintendo is likely to cut the price of the Wii U before the holiday season, which will help with sales. however, I think Sony and Microsoft will price their consoles in the sub $400 range in order to maintain strong sales over Nintendo. These two companies will also have the benefit of launching around the holiday season, which will help with marketing the products. Sony made the mistake of initially pricing its PS3 console at a $600 launch price, and had trouble convincing users to purchase such an expensive item. Ø Casual gamers will continue to move towards gaming on the smartphones and tablets that they already own instead of paying hundreds of dollars for dedicated devices from Nintendo. This is also influenced by the very cheap games on smartphones (sometimes free), compared to the $40 games for the 3DS. The 3DS will see rallies with new games like Pokémon, but the net direction for sales will most likely decline. Risks / What Signs Would Indicate We Are Wrong? Ø If Nintendo gets a sustained boost in sales from their upcoming games, the company may be able to be a major player in the next generation of gaming. This would undoubtedly be led by first party titles. Otherwise, they will have a large hill to climb. European retailers saw a 125% jump in sales for the Wii U on the week that Monster Hunter 3 Ultimate was released. This was also aided by a price cut in Europe for the console. Ø Nintendo could regain part of the mobile gaming market if consumers begin to prefer the higher graphic capabilities of dedicated Sony and Nintendo devices. The graphic capabilities of smartphones and tablets are improving, but they are still not at the level of most portable systems. Signposts / Follow-Up Company Description Ø Follow Wii U sales in the United States, Europe, and NTDOY is a developer, manufacturer, and seller of Japan. entertainment products and specifically video game consoles Ø Watch the market share for mobile gaming and and games. They are well known for popular game franchises calculate if iOS and Android are still capturing a such Super Mario Bros., The Legend of Zelda, Pokémon, and majority of the market from traditional Super Smash Bros. Nintendo produces both home consoles manufacturers like Nintendo and Sony. and portable consoles. Currently the company produces the Ø Follow sales of gaming retailers such as GameStop, Wii and Wii U units as well as the Nintendo DS and 3DS. Its which might indicate that consumers prefer the main selling channels are Japan, the United States, and digital market for purchasing games. Europe. Ø Follow Microsoft and Sony to see if they experience similar launch issues that Nintendo suffered with the Wii U.