Nintendo has pulled off an amazing comeback to again find itself ruling the gaming world. But can it hang on to its crown for long?
IT HAS, by any measure, been a rocket-fuelled year for Nintendo. The Japanese videogame maker this month announced a yearly rise in group operating profits of 487 billion yen (almost €3 billion) - up 120 per cent - on the back of what The Nikkei Financial Daily recently called Japan's best stock-market performance in two decades. Last month, US-based Businessweek magazine installed the firm in its list of the world's 25 most innovative companies. Nintendo has even been credited with single-handedly spawning a whole new consumer phenomenon: social gaming.
This blockbuster performance is largely down to a single product: the Wii home game console, launched in late 2006. Nintendo shifted 18.6 million Wii hardware units in 2007, helping to push its yearly software sales up by over 300 per cent. Last month, the company's American arm announced shipments of 1.4 million for its Super Smash Bros. Brawl in a single week, making it the fastest-selling game in the company's history. At one stage, Brawl was being carried out of US shops at a rate of 120 per minute. Wii Fit exercise software, which sold a million units in just one month earlier this year in Japan, is expected to help sustain the company's golden run, at least in the short term.
The Wii success story is stamped with the fleet-footed business qualities of a company that has seldom run with the herd. As Japanese rival Sony struggled to add yet more bells and whistles to its PlayStation 3, Nintendo went back to basics, introducing a much cheaper and leaner player that basically consisted of a screen and a controller-wand, swung around like a golf stick, baseball bat or tennis racket. Millions of older people left bewildered by the PS3's complex box of tricks took to the new product. The innovation helped the Wii far outstrip the performance of both Sony's PS3 - launched with great fanfare at roughly the same time after heavy investment in custom-made chips - and the Xbox 360, brought to market a year earlier by US giant Microsoft.
Nintendo now boasts operating profit four times larger than Microsoft, according to The Nikkei, and is even more profitable than Apple Inc, one of the greatest US success stories of the past decade. No wonder, then, that one analyst dubbed Nintendo the Japanese "belle of the ball" this year. Even Nintendo's normally reserved president, Satoru Iwata, said in January that 2007 was a "paradigm shift in the industry", and proved the company's belief that "fun is universal".
The fact that most of its rivals can call on far greater resources makes Nintendo's success all the more eye-popping. Microsoft, of course, came late to the videogame fight, but was backed by one of the world's largest armies of software engineers, while Sony's payroll is about 50 times larger than Nintendo, which has a workforce of just 3,500.
Unlike its rivals, Nintendo sources all the hardware under the hood of its games from companies scattered around the world: consoles from Taiwan, sensors from the US and software from Japan, the US and Europe. The head office of the Kyoto firm, which started life over a century ago as a playing card manufacturer, boasts about 20 reception rooms for meetings with the thousands of foreign salesmen and suppliers from across the planet who visit every year.
Five years ago it was a very different story. Nintendo famously hit the mother-lode with the 1983 launch of its Family Computer console, which blazed a trail for the modern videogame industry. Software mega-hits like Super Mario, the moustached plumber, Pokémon and Donkey Kong - all developed in-house - helped make the company one of the most profitable in the world, a position consolidated by 200 million worldwide sales of the Game Boy hand-held console. But then Sony came along to snatch away Nintendo's crown. The consumer electronics giant went on to sell 200 million PlayStation machines and almost completely eclipse its once mighty competitor - at one stage controlling 80 per cent of the global market for home games.
Nintendo was never on the ropes though. Even as the PlayStation juggernaut rolled across the planet, the Kyoto firm churned out a stream of innovative products, which have broadened the demographic of console buyers and continued to keep the industry on its toes. The 20 million-selling Nintendo DS showed there was plenty of life left in the company yet, and the Nintendo 64 and Game Cube shifted over 50 million units between them. But many industry watchers believed that, by the late 1990s, the firm's glory days were over. "For a while there it was pretty bleak," says Jay Defibaugh, videogame analyst at Credit Suisse in Tokyo. "They were being threatened in their handheld domain, so they've made a remarkable comeback."
The comeback is not being taken for granted. The DS boom has peaked in Japan, again leaving Nintendo relying heavily on a single hit product. American analysts note that sharp new games in the Blu-ray Disc format, and a price-cut of over €130, have helped give the PlayStation 3 a new lease of life, with US sales of over half a million machines in early 2008. Microsoft meanwhile shifted about 4.6 million units of the Xbox 360 in the U.S. last year. Both are clawing back into the race and, with their enormous resources, few would count them out.
After briefly sharing the same dizzying air as market behemoth Toyota, when its capitalisation climbed to number two on Japan's stock market, Nintendo's share price has slipped by over a quarter since earlier this year - a sign, says Defibaugh, that investors want new sources of growth.
"The bar is set very high so they can't go on operating in double-digit profit. The DS business has clearly slowed down in the Japanese market so they do need to find another growth driver there." But he believes Nintendo is still on top of its game. "President Iwata is not going to wait for consumers to get bored with the product before they try to innovate again."
In an interview earlier this year with The Nikkei, Nintendo's boss echoed that sentiment. "Our job is to constantly fight against our customers becoming satiated or bored, as the services and products offered by the entertainment business are not necessary for daily living . . . Game consoles have to change every day."
That was read by some as suggesting that Iwata would lead his company on a charge up the internet highway. But, while he did promise to explore new net services, he said firmly: "Our core business will remain gaming."
In the meantime, Nintendo must decide what to do with the mountain of cash it has accumulated over the last three years. The company is now one of the most cash-rich in Japan, with reserves of about one trillion yen. President Iwata has hinted at a splurge on firms that will help his small workforce stay ahead of the technological race. Some analysts suggest he must move soon or risk a takeover. Either way, Iwata ponders a problem most rivals would love to have.
