How Nintendo Could Save Its Business


Japanese videogame company Nintendo , known for its successful portfolio of family video games and for being the developer of Super Mario Bros., is going through hardships. The company just announced a huge revision in sales forecast. However, there might still be hope for this company.

A few days ago, Nintendo's stock price fell a shocking 17% after the company's president, Satoru Iwata, forecasted drops in sales in both the company's flagship console Wii U (from 9 million to 2.8 billion) and its handheld 3DS (from 18 million to 13.5 million) for 2014. So far, the Wii U has failed to match the success of its predecessor, the Wii console. To make matters worse, strong competition from Microsoft's Xbox One and Sony's PlayStation 4 makes the Wii U's future even more uncertain.

Source: Quartz, FactSet

The bright side
The good news is that the 3DS is doing well, as it was the top-selling console in the U.S. in 2013,with 11.5 million sales. It surpassed the Playstation Vita in sales, and it is taking the lead in a segment of the market where smartphones are now competitors.

Moreover, with almost $10 billion in cash assets and bonds, Nintendo is quite a solvent company. It seems to have enough resources to finance a turnaround in the mid-run. After taking the strength of its balance sheet into account, Nintendo's operating loss does not look like a major threat so far.

Learning from mistakes
What is important is that Nintendo must learn from the mistakes of the Wii U. Iwata has already recognized that the Wii U failed to differentiate itself enough from the Wii, its successful predecessor. Right now, the company may see some improvement in top line after cutting the price of Wii U, something that did not happen so fast with Wii.

Due to the success of the 3DS, Nintendo has time to improve its research and development. If Nintendo manages to surprise consumers with a highly innovative new generation of consoles, the current weak momentum in stock price may actually be a positive thing for long-term investors. However, this depends on what Nintendo's research and development plans are.

Beware of shift to mobile and software
It has been speculated that Nintendo can save its business by shifting its attention to mobile. Yet, this particular move is likely to decrease 3DS' sales, as smartphones are substitutes to the 3DS.

Moreover, Nintendo would have to compete with freemium and low-cost games, which also tend to have lower quality. This is a big difference from what Nintendo makes now: $40 high-quality games for the 3DS. The complex controls of Nintendo's games could interfere with the simple experience of playing in a smartphone, and it might be necessary to employ a separate hardware controller to play these comfortably. In this way, Nintendo could end up losing lots of casual gamers in mobile systems.

It has also been suggested that Nintendo should abandon hardware, and start selling its games and intellectual property in other consoles, including mobile systems. Such a move would make Nintendo lose its current strength, the successful 3DS console.

To avoid sales cannibalism, the company could make its games multi-platform so that the same title can work in both the 3DS and Wii U. This feature, which is similar to PlayStation 4's Remote Play, would allow the gamer to make progress in both consoles.

Foolish bottom line
Despite a terrible 2014 start, Nintendo can still move forward and save its business. A strong balance sheet and the successful 3DS give Nintendo the time needed to plan its next move wisely. The company has endured setbacks before; for example, its GameCube project was also disappointing. The bottom line is that, although it is uncertain what Nintendo's next step will be, the Wii U is certainly not the end of the company.

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Adrian Campos 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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