Does Nintendo Have a Future?

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Since before the introduction of the company's very successful Wii console, Nintendo has claimed that it does not exist in direct competition with Sony and Microsoft . Nintendo touted a "blue ocean" strategy that sought to create new experiences and attract customers that existed outside of traditional demographics.

Satoru Iwata, the company's CEO, recently indicated that Nintendo will continue to pursue disruptive strategies but pointed to an inability to compete as part of the rationale for doing so. As per The Bridge's translation, Iwata stated, "Nintendo is not good at competing so we always have to challenge [the status quo] by making something new, rather than competing in an existing market." Assuming this translation is more or less on point, it paints a risky portrait of Nintendo's future.

So, what color is the ocean, again?
Whether Nintendo likes it or not, it has to realize that it is, in fact, in competition with virtually every gaming-enabled device on the market. The rise of mobile and tablet-based gaming and the deterioration of the dedicated handheld gaming market should make this abundantly clear. Just ask Sony's President of Worldwide Studios Shuhei Yoshida, who stated that there was no question that its Vita handheld had been hurt "quite badly" by the prominence of smartphone and tablet alternatives. While Nintendo's 3DS is performing much better than the Vita,  it is still underperforming when compared to the original DS system. As the manufacturers of dedicated handheld gaming devices, Nintendo and Sony are creating "high end" experiences for a market that is increasingly satisfied by the likes of Angry Birds and Candy Crush.

It's also worth noting that Nintendo shied away from its "blue ocean" strategy with its most recent gaming systems. The 3DS is essentially a more powerful version of the DS, with 3D display capabilities that probably seemed like a great idea around the time that James Cameron's Avatar was released. The Wii U is basically a souped up Wii with a tablet controller. These are simplifications, but it is clear that neither system matches the DS and Wii innovations that propelled the company to the top.

No contest?
Iwata's stated belief that the company is not good at competing has some validity, but the reasons why are muddied by Nintendo's long history of questionable decisions. It is true that the company is not in the best position to employ the loss-leading practices that Sony and Microsoft have traditionally used for their hardware. Gaming is a small part of Sony's business and, to an even greater degree, Microsoft's business. These companies are better equipped to sell high-tech hardware at a loss while profiting from software sales and online services. There was a time when Nintendo's systems dictated the technological standard for gaming platforms. That time has passed.

There's more to Nintendo's "competition problem" than hardware power. The company has spent decades being unfriendly to third-party publishers and overplaying its hand as a platform holder. Sony's PlayStation would likely never have materialized if Nintendo had not torpedoed a partnership to produce a SNES-CD platform. The N64 stuck to expensive proprietary cartridges, driving publishers into the arms of a newly created rival. The GameCube saw a transition to optical discs, but the medium was again proprietary and had substantially less storage space than a DVD.

In the current generation, publishing giant Electronic Arts has abandoned the Wii U platform, citing the lack of a worthwhile online ecosystem. There are many reasons why third parties are loathe to do business on Nintendo platforms, and having to compete against Nintendo software is certainly among them. The company may not be able to survive in the hardware space if it insists on going its own way.

Poor Wii U
The impending November launches of the PlayStation 4 and Xbox One look to make Nintendo irrelevant in the home console market. Sony's device will debut at $399 and Microsoft's at $499, and each system will offer superior hardware, online services, and third party support than the $299 Wii U. The Wii U also competes with the cheaper Xbox 360 and PlayStation 3 systems. This might not have been a death sentence for the console if Nintendo had the right software to propel the device. After a number of flops and underperformances, only Super Mario 3D World is likely to have a notable impact.

What next?
Outside of ditching the GamePad and implementing a massive price cut, it is safe to say that nothing will save the Wii U. Meanwhile, Nintendo's handheld breadbasket is being eaten by mobile. Iwata may be right to suggest that the company needs to pursue disruptive strategies, but recent history suggests the company is not in a position to shape the industry. History also showse why the industry might not want the company back in such a leadership position. 

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The article Does Nintendo Have a Future? originally appeared on

Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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