Nintendo Buzz Likely a Bust for Game Makers

Nintendo could be the big winner this holiday season in the video-game wars, but that might not be great news for game publishers.

The venerable video-game company's Wii console was the surprise hit of the industry's E3 conference this spring, and many analysts now believe that Nintendo could have a big hit on its hands once the Wii debuts later this year.

But don't expect game makers such as Electronic Arts (ERTS) to cash in right away on the Wii's success. Indeed, such companies will likely have few Wii games to offer this holiday as stocking stuffers.

The publishers "were caught off guard" by the buzz around the Wii, says James Lin, a longtime industry analyst and a consultant with Simba Group. "They weren't expecting anything."

That the publishers were apparently unprepared for the Wii is also bad news for investors in the sector who have seen their holdings get beaten up lately amid sinking sales and rising costs.

The implication is that investors may have to wait even longer to start seeing the stocks turn around.

"No one's going to make money on the software except Ubisoft," whose Red Steel title Nintendo showcased at E3, says one hedge fund manager, who is short shares of THQ (THQI) and Take-Two Interactive (TTWO). "Everyone got caught flat-footed."

Still, investors may be able to catch a ride on the Wii. But they will have to do a little thinking outside the game box, analysts say.

The former industry leader, Nintendo has been a distant also-ran behind Sony (SNE) in the last two generations of home video-game machines.

Things had gotten so bad for the company that many analysts were largely writing off Nintendo in the next console cycle, portraying the market as largely a battle between Sony and Microsoft (MSFT).

Nintendo, however, has been bouncing back lately. Many analysts had expected Sony to challenge Nintendo's dominance in the handheld game market, its last remaining stronghold, when Sony introduced the PlayStation Portable last year.

But Nintendo has more than met the challenge, as its simpler, cheaper DS has outsold the PSP by a long shot in Japan and has run fairly even with it in the U.S.