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TheStreet Open House

Nintendo Should Scrap the Wii U

NEW YORK (TheStreet) -- It's pretty much a given these days that every Nintendo (NTDOY) earnings announcement will be accompanied by an apology of some kind from the company's helm. Sometimes they're punctuated by symbolic gestures like the senior executive pay cuts that were meant to represent an atonement for its ugly third-quarter financial statement in January.

In May, Nintendo CEO Satoru Iwata declared the company's losses "unacceptable" and pledged before shareholders a return to "Nintendo-like" profits after disclosing a dismal, third, fiscal year of operating losses.

Despite the colorful displays of penitence, the company's moves are being viewed by many investors as nothing but empty promises and blank apologies; it hasn't once outlined a plausible strategy for real change.

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Wedbush Securities analyst Michael Pachter, who has a "neutral" view on shares of Nintendo, says he'd become more bullish on Nintendo if the company were to finally shift its core assets, its top software titles, to Apple's (AAPL) iOS and Google's (GOOG) Android, while continuing to deemphasize its fixation on driving hardware sales. Similarly, Richard Windsor, a tech analyst at Radio Free Mobile, tells TheStreet that he has a negative outlook on Nintendo, but would be prepared to "completely reverse" his long-term opinion if Iwata were to push for the transformation of the company into a pure games producer and jettison its hardware business. It seems pretty clear to all except for Nintendo itself that the company is due for a major transformation, with Iwata publicly resisting any moves in the direction of Nintendo becoming a full-time games-maker.

Simply put, unless Nintendo wants to be indefinitely pigeonholed as the console maker that's always coming in at no. 3 behind giants Sony (SNE) and Microsoft (MSFT), it needs to scrap its hardware business.

It's hardware struggles are beyond fixing. The Wii U has become trapped between two types of core gaming categories and can't get out. They're casual-based gaming, which is very big on tablets and smartphones, and hardcore-based gaming, which consists of highly-keen players who are willing to pay up for the Xbox or PlayStation gaming experience. The Wii U's problem is it's not powerful enough to compete in the hardcore segment of the market and not cheap enough to appeal to the casual-based gamers.  While Nintendo has had more than 30 years of experience catering to the video game market, much of the new generation of casual players, the crucial growth market, is not buying the Wii U and other Nintendo hardware because they've already got a more versatile Android or Apple device to tap into for a host of functions, with casual games being just one of them.

According to tech entertainment market forecaster DFC Intelligence, so far in 2014, the Wii U has been selling more like the steeply-declining Xbox 360 in comparative markets where both systems have launched. Against the Xbox One and PlayStation 4, sales of the Wii U are behind by well more than 2 to 1, according to DFC, and the Xbox One hasn't even launched in many markets yet. Though the Wii U had a big head start to the PS4 when it launched a year before the latter's introduction in November 2013 and December 2013, the PS4 was able able to catch up fast, nearly matching total Wii U sales just two months later. The Xbox One also had a strong debut last November. As DFC Intelligence analyst David Cole describes it, smartphones and tablets have hurt Nintendo's business much more than Sony's and Microsoft's because the PS4 and Xbox One experiences cannot be duplicated on tablets or smartphones, while more casual games don't have to be played on the Wii U.

"My view, basically, is that the market for the Wii U will not exist for much longer," Windsor added.

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