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.

A similar dynamic may be shaping up in the home console market. Sony got the early buzz last year when it showed off its upcoming sophisticated game machine, the PlayStation 3. But that attention and excitement shifted to the Wii this spring.

Not only will the Wii likely carry a price less than half that of the PlayStation 3 and more than $100 less than Microsoft's Xbox 360, but also Nintendo's focus on making games fun -- most notably through an innovative new controller -- drew rave reviews.

This coming holiday season, the Wii could have all the makings of a success: It has the buzz, and its price could make it a clear winner if consumer spending tightens amid rising oil prices and interest rates.

Wii likely will be the only game console on the market with a bona fide must-have title, the long-awaited next installment in the hit Zelda series: The Legend of Zelda: Twilight Princess.

"The Wii has very strong potential to be the first-place platform" this console cycle, says David Cole, an industry analyst with DFC Intelligence.

In the short run, that's not great news for the publishers. Though game makers have been spending millions of dollars investing in games for next-generation consoles, much of their efforts have been devoted to the PlayStation 3 and the Xbox 360 -- not the Wii.

Midway Games ( MWY) had little in the works for the Wii until recently, says Miguel Iribarren, the publisher's vice president of publishing.

Much of that had to do with Nintendo keeping news on the Wii fairly quiet until around E3, he says.

"We didn't have the information to work off of," Iribarren says. "I think everyone pushed Wii development to the back burner till they got the information on the machine itself and the business model."

Likewise, industry giant EA was "pleasantly surprised" by the reception the Wii received at E3, says John Schappert, general manager of the publisher's Canadian studio. Although the company had already been developing the next version of Madden NFL for the Wii, it has since added more titles to the mix and now expects to have four to six titles for the platform by the end of its fiscal year next March, company spokesman Jeff Brown says.

Mais Wii

Interest in the Wii from developers and publishers has increased in recent months, says Perrin Kaplan, vice president of marketing at Nintendo. Kaplan declined to say how many titles will be available for the Wii at launch or what percentage of them will be from developers other than Nintendo.

"We'll have a healthy dose of product at launch," she says, adding that the company showed off 27 games for the Wii at E3, many of them from third-party publishers.

Still, even if the publishers won't see immediate upside from the Wii, investors might be able to cash in this holiday season. American Depository Receipts of Nintendo, which is listed on the Tokyo stock exchange, trade on the pink sheets in the U.S. And then there are component manufacturers.

If the Wii takes off, small chipmaker MoSys ( MOSY) could see a surge in sales, because its memory chips will go in each Wii console sold.

And ATI Technologies ( ATYT) could be another play, because its graphics chips will be in the Wii and are already in the Xbox 360.

"Those are better ways to play it than the software publishers," says Joe Spiegel, a hedge fund manager at Dalek Capital, who is long MoSys' stock and short its puts. Spiegel's only long position among the publishers is Take-Two, where he is long the stock and short the puts.

In the long run, though, the publishers could benefit if the Wii is a success. Development for the platform is considerably cheaper than for the PlayStation 3 and the Xbox 360, industry sources say.

And then, of course, there's the price of the device. The more money consumers spend on hardware, the less they generally have to spend for games, say analysts.

"It's going to open a lot more room for spending on software," says Cole.

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