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.
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.
The appeal of the Nintendo 3DS portable game console is also under threat, gradually being cannibalized by the rising use of smartphones and tablets for casual-game playing.
Nintendo, though no longer being viewed as the winning stock in the gaming hardware universe, still can have a shot at becoming a real marketplace leader again by fully leveraging its strongest software brands such as the classic Super Mario series to the new generation of casual-game players through the iOS and Android platforms. While the company's key software titles haven't guaranteed a translation to new hardware sales, they themselves typically continue to exhibit strong performance.
For instance, Pokemon X and Pokemon Y for the 3DS was one of the top-selling video games of 2013 with 7.64 million units sold. Animal Crossing has also performed very well. Mario Kart 8 for the Wii U sold around 2 million copies within the first month of its late May release. These are all examples of top Nintendo software brands that would be powerful enough to compete in the smartphone- and tablet- gaming market if Nintendo were to create a good monetization strategy for them, according to Mintel tech analyst Bryant Harland. Meanwhile, hardware sales haven't necessarily been moving in lockstep with the popularity of Nintendo's software.
Of the buyers of Pokemon X and Y and Animal Crossing, many were already existing owners of the 3DS rather than new 3DS purchasers. And most of the other casual gamers were playing other games on their iOS and Android devices. Mintel data shows smartphone and tablet gaming have surpassed dedicated portable console gaming, with 52% of consumers playing games on a smartphone or tablet, compared to 33% utilizing a portable gaming device. And despite the nice bump for Wii U sales in June with the debut of Mario Kart 8, the fact remains that the console continues to lag behind other systems. Market forecaster DFC predicts that while some good Nintendo products arriving in late 2014 and 2015 should help bolster Wii U sales, they will not be sufficient to help Nintendo catch up to Microsoft or Sony. "The Wii U is truly just for core Nintendo fans," says Cole.
Although comparing Nintendo's user base to that of Android and iOS tablets would that Nintendo is currently raking in far less profit per sales, the company does have the ability compensate by ramping up many times over the number of games shipped and sold, thanks to the strength of Nintendo's software brands, Windsor noted. But as Windsor pointed out, why settle for less when Nintendo could significantly reduce sunk costs by discontinuing altogether its hardware development to become fully present on iOS and Android without having to deal with the high cost of hardware development.
As a pure game maker, Nintendo would employ less people and potentially have lower revenues than it does today, but be making money rather than losing it, said Windsor. For many, that would be okay, because at the end of the day, the only thing a Nintendo investor really cares about is profit.
That said, why has Nintendo been stubborn to constructive change? Complacency and corporate culture are among the main culprits. Firstly, Nintendo still has a lot of cash in the bank; 795 billion yen ($7.82 billion) at last check. That means the company can continue to rack up losses for quite a while before solvency forces it to make changes.
The second issue is corporate culture.
"If you look across Japanese corporate history, what tends to happen is a Japanese company will hold onto a losing strategy longer than it should," Windsor explained. Sony is just one example of a Japanese company that was unable to catch the technological waves of the last few decades. It fell behind on TV and portable device opportunities including the flat-panel display and the iPod. It had the tools to build an iPod-like gadget years before Apple launched it in 2001, but had neither the flexibility nor the adaptability.
"Nintendo is completely missing out," said Windsor. "It has really good gaming brands but it is passing on the opportunity and missing out. I would say that until Iwata comes forward and basically admits that the Wii U is not going to work and discontinues it, he'll be doing more apologizing."
-- Written by Andrea Tse in New York
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