3 Ways Nintendo Can Save Itself

Nintendo recently reported dismal annual results due to lackluster demand for the Wii U, which has sold 6.2 million units compared to Sony's 7.5 million PS4 units and Microsoft's 5 million Xbox Ones.

Although the Wii U doesn't appear to be faring too badly against both rivals, investors should remember that the Wii U launched in November 2012, a full year before either the PS4 or Xbox One hit the market.

Source: Nintendo.com

During the fourth quarter, Nintendo only sold 310,000 Wii U consoles -- a dismal figure considering that Sony has sold an average of over a million PS4s per month. On the bright side, Nintendo sold 590,000 3DS handheld consoles during the quarter, bringing its lifetime sales to 43.3 million units. The cheaper 2DS version has sold 2.2 million units to date.

Bad news, hopelessly high targets
For fiscal 2013, Nintendo posted a net loss of ¥23.2 billion ($229 million), a steep plunge from a profit of $68.9 million a year earlier. Revenues fell 10% to $5.63 billion. While things certainly look grim, Nintendo predicts that it will return to profitability, a profit of $197 million on revenues of $5.8 billion by the end of the year. Nintendo still expects to sell 3.6 million Wii Us and 12 million 3DS consoles by the end of 2014 -- a very steep target considering how weak sales were during the fourth quarter.

Yet what's clear to investors, who have watched shares of Nintendo fall more than 60% over the past five years, is that Nintendo needs to do something soon to change its current course. Let's discuss three things that Nintendo should do before it's too late.

1. Appoint a new CEO
Much of the disappointment regarding Nintendo stems from President and CEO Satoru Iwata's unwillingness to realistically adjust the company's forward projections. Iwata has a habit of falling woefully short of unrealistic expectations during earnings releases.

Up until January, Iwata claimed that Nintendo would earn a ¥100 billion ($982 million) profit in fiscal 2013. In the same month, Nintendo finally admitted that its full-year Wii U sales forecast of 9 million units was unrealistic, abruptly slashing expectations to 2.8 million units and acknowledging that it would end with an operating loss for the year.

Iwata's blatant stubbornness -- demonstrated by his affirmations of inflated forecasts for nine months before revising them -- is undeniably reckless. Nintendo needs a new CEO who can steer the company in the right direction in the first quarter of a fiscal year, not one who waits until the fourth quarter before admitting defeat.

2. Escape the shadow of Shigeru Miyamoto
It's hard to imagine Nintendo without Shigeru Miyamoto, the man who created Mario, Donkey Kong, Zelda, and countless other beloved franchises. But even though 61-year-old Miyamoto is to Nintendo what Walt Disney was to Disney , it might be time for him to step aside.

Miyamoto's earlier accomplishments shaped Nintendo's identity, but in recent years he has simply put fresh coats of paint over older ideas. Over the past three years, he produced Super Mario 3D Land and Luigi's Mansion: Dark Moon for the 3DS, and Pikmin 3 for the Wii U -- all well received games but also retreads of his older ideas.

Super Mario 3D Land. Source: Nintendo.

Miyamoto's problem touches all aspects of Nintendo -- it continually remasters, remakes, and reboots titles when it should be looking forward. So many of Nintendo's new games are built on Miyamoto's older designs that the company has failed to release any major new IPs over the past decade.

Therefore, instead of investing heavily in remaking Miyamoto's hits repeatedly, Nintendo needs to support new ideas with new characters. So for the sake of the company, Miyamoto should step aside and let some rising stars at Nintendo take the initiative to help the company develop the next game-changing title like Super Mario Bros. or Wii Sports.

3. Following Disney's example
As I mentioned in a previous article, Nintendo is stuck where Disney was in the early 1980s prior to the appointment of Michael Eisner as CEO -- pumping out family-friendly fare for a steadily shrinking market.

Eisner bailed Disney out of that rut by focusing on developing films for older audiences through Touchstone Pictures, helping Disney jump from last place to first place in total box office receipts among the eight major studios within four years.

Nintendo could do the same by acquiring third-party publishers, many of which fled to Sony's PlayStation in the mid 1990s due to Nintendo's insistence on sticking with the cartridge format. Although developers have slowly returned to develop 3DS and Wii U titles, Sony's PS4 and MIcrosoft's Xbox One get arguably flashier titles such as Konami's Metal Gear Solid V: Ground Zeroes and Square Enix's eagerly anticipated Final Fantasy XV.

Nintendo finished fiscal 2013 with over $9 billion in cash. Considering that Square Enix, Konami, and Capcom have a combined market cap of approximately $6 billion, Nintendo could theoretically acquire all three major Japanese publishers in one fell swoop with its cash on hand.

As a result, Nintendo would become the home to iconic characters such as Lara Croft, Solid Snake, and Mega Man. More importantly, it could profit from sales of those titles on the PS4 and Xbox One, without having to release its flagship Nintendo characters on rival platforms or mobile devices.

The bottom line
It's frustrating to watch Nintendo stand in the middle of the road like a deer in the headlights when it has so much potential.

But in my opinion, Nintendo can't succeed unless it changes its CEO, moves forward out of Miyamoto's shadow, and aggressively pursues new sources of inorganic growth. If it does so, it could have a chance at recapturing a larger part of the market that it revolutionized and effortlessly dominated during the 1980s and 1990s.

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The article 3 Ways Nintendo Can Save Itself originally appeared on Fool.com.

Leo Sun owns shares of Walt Disney. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Microsoft and Walt Disney. 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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