Exactly How Bad is the Nintendo Situation?

Today’s financial results reveal Wii U sales below even the most pessimistic expectations. But should we be worried about Nintendo?

Nintendo’s first-quarter financial resultsreveal that 160,000 Wii U consoles were sold in the entire world between the start of April and the end of June this year. I don’t think anyone was expecting a sudden resurgence after the grimace-worthy figures of the final three months of last financial year, but that is below even the most pessimistic expectations. It’s more shocking when you break it down by territory; of that paltry number, 90,000 were sold in Japan, 60,000 in the Americas, and just 10,000 in Europe, Australia and the rest of the world.

Less than 10,000 consoles in the whole of Europe in 3 months. That’s almost unbelievable. The older-gen consoles sell far more than that weekly. Software sales of just a touch over 1 million hardly ameliorate the situation. The Wii U launch was strong - 3 million in its first few months - but although it was widely known that sales had fallen right off a cliff since then, nobody knew it was this dire.

This is bad news. But how bad is it, exactly? Do we need to be seriously worried about Nintendo’s future?

The short answer, for now, is no. Nintendo isn’t about to go bust. It still posted a profit, thanks to its assets and investments and favourable changes in the currency market. The Wii U is costing money, which means that Nintendo is making an operating loss when it comes to actually selling games and consoles, but it’s a very, very long way from bankrupting the firm. The 3DS, meanwhile, is a big success - it’s not matching the insane sales that the original DS was generating, but then the original DS didn’t have smartphones to compete with.

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The Wii U is costing money, but it's a long, long way from bankrupting Nintendo.

Despite that, the 3DS is generally confounding the widespread expectation that smartphones and tablets have killed the handheld market stone dead. 11.4 million 3DS games were sold in three months this quarter alongside over a million 3DS consoles - the hardware number’s solid, but the software number there is amazing, especially when you compare it to the Vita. Sony has been clumping Vita sales together with PSP sales in its financial reports, ostensibly to mask its performance, so we don’t know exactly how much it’s sold - but you can bet it’s a fraction of that.

The 3DS is keeping Nintendo afloat, then, but that doesn’t change the fact that the Wii U is still tanking right now. At this point it’s 200k units behind where the Gamecube was at this point in its lifespan, when the overall games market was much smaller - and the Gamecube hadn’t even launched in Europe by that point. It also wasn’t being sold at a loss, as far as I know.

Even the Nintendo consoles that aren’t regarded as particularly successful - the Gamecube and the N64 - have always made Nintendo money. This is, let’s remember, a company that has only posted one year-end loss in its entire history, in 2012. This is one of the reasons that Nintendo’s future isn’t in jeopardy: the company is extraordinarily solvent. It’s got warehouses full of cash. Seriously, take a look at Nintendo’s assets: it has 492,334,000,000 yen in cash. That’s $5,038,214,927.30. More than 5 billion dollars. In cash. And almost that much in “short-term investment securities”, which are essentially bonds.

It’s too early to write the Wii U off as a failure already, but even if things don’t pick up and the console does end up a flop, Nintendo could weather it. It could weather several such failures. Other companies - Microsoft’s Xbox division and Sony Computer Entertainment among them - have operated at huge losses for years on end, but Nintendo has never done business that way.

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Even if the Wii U doesn't pick up, Nintendo could weather a failure. It could weather several.

This is why, if you ask me, there is no chance that Nintendo will exit the hardware market. Certainly not in the medium-term future, and possibly not ever. Why would Nintendo release its games, its major selling point, on other people’s platforms when it can continue to have total control over its own? Of those 11 million 3DS games sold in the last 3 months, most of them were Nintendo-published, and Nintendo didn’t have to pay a penny to any other platform holder.

Nintendo can afford to own its own platforms for a long time yet. The Wii U is really, really struggling, but in the grand scheme of Nintendo’s operations it actually doesn’t matter as much as you might expect. That’s reflected in Nintendo’s share price, which took a 6% hit in the past week but is actually 37% up on this time last year.

All of this ultimately leaves Nintendo in profit, ticking over and not in immediate danger, but faced with the increasingly real possibility of its first proper home-console flop - and with an operating loss of around $50m to try to correct. It certainly does not leave Nintendo on its knees. The Wii U in isolation, however, is a different story: the console is in huge trouble, and it’s going to take something special in the next six months to turn the situation around.

Nintendo might be in a dominant position when it comes to handhelds, but when the Wii U can’t even come close to keeping up with the current-gen consoles, including its 7-year-old predecessor (which sold 210k this quarter), you’ve really got to ask yourself whether it has any chance at all of holding its own against the PS4 and Xbox One later this year.

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You've really got to ask yourself whether the Wii U has a chance of holding its own.

There are good games on the way for Wii U, but two of the most important - Smash Bros and Mario Kart - aren’t coming until 2014, which might be too little, too late. With two more new consoles on the market by the end of the year, there’s still nothing that makes the Wii U look essential. I just don’t think Nintendo is in that fight - but then, Nintendo’s E3 showing suggested that Nintendo doesn’t think it’s in that fight, either.

There are two stories told in this morning’s results. The first is of an impressively solvent company that’s making a profit and shows no signs of ill health or imminent collapse, with one very successful product and one that’s struggling to take off. The second story is of a console whose post-launch period has been nothing short of a total disaster, and which now faces an extremely tough battle to claw back some ground before its competitors launch later this year. They’re not contradictory. Nintendo should be extremely worried about the Wii U, but we don’t need to worry about Nintendo.