Thursday, November 03, 2011

Console Post Of The Week: We're Taking On Water

Raw numbers:
1. Nintendo: $258M quarterly loss, revised fiscal year forecast from a $264M profit to a $263M loss.

2. Sony: $350M quarterly loss, revenue down 9%, revised fiscal year forecast from a $733M profit to a $1.18B loss.

In summary terms, only three months ago Nintendo and Sony were projecting a combined fiscal year profit of $997M dollars. Three months later, they're forecasting a combined fiscal year loss of $1.381B.

That's beyond stunning, really.

Behind that, though, these companies have different problems. Let's start with Sony first, because their problems are much easier to understand. Sony decided to focus their company's future on LCD televisions as the primary growth driver. Remember last year when I said that their forecast for 60% growth in LCD television unit sales was preposterous? As it turned out, while they didn't make it (we all knew that outcome), they did grow the segment by 43%.

FY10 sales of LCD televisions were 22.4 million units, and the original forecast for FY11 was for 27 million units.

Now? They've cut the forecast to 20 million. Here's an excerpt from the earnings release:
"Operationg loss from LCD televisions is expected to increase significantly from the July forecast...Sony is changing its strategic direction from significant volume expansion in mid-term and implementing various measurements."

There's your problem: Sony bet on massive growth in LCD television sales to bail out no growth in most other business segments. Now, not only is the LCD segment not growing compared to last year, it's forecast to shrink.


With those kinds of problems in the LCD line of business, very little growth for the PS3 (<5% unit growth forecast, no growth in software sales forecast) almost qualifies as a relief. At least they're not tumbling off a cliff.

Which brings us to Nintendo.

Net sales for the first six months of the fiscal year were down over FORTY PERCENT from last year. Catastrophe. Surprisingly, though, it wasn't caused by the Wii, which is still forecast to sell 12 million units this year in advance of the release of Wii U.

What pushed Nintendo off the cliff were handhelds. They've lowered the annual forecast for DS sales from 9 million to 6 million, and guess what those 3 million people aren't buying? The 3DS, apparently, because even though Nintendo stubbornly stuck to its forecast of 16 million units for the fiscal year, they've sold only 3.07 million in the first six months.

Do you see demand quadrupling? Me, neither.

Look, Nintendo blew it when they didn't release a highly polished, proof-of-concept pack-in with the 3DS. With a radical shift in functionality, proof-of-concept games are critically important.

Wii? Wii Sports. Does anyone think for a moment that the Wii would have absolutely exploded without Wii Sports as a pack-in? It perfectly demonstrated how and why motion control was fun, and while the reviewers didn't always get it, almost everyone else did.

The 3DS? Crickets chirping. Huge, huge mistake.

What makes it an even greater mistake is that handhelds have been Nintendo's cash cow for as long as I can remember (well, that's a lie--I'm old--but it has been over two decades). The incredible success of the Game Boy provided a safe harbor when other products (Virtual Boy) Hindenburged.

Now, the 3DS threatens that history. Sure, it's too early to predict that the 3DS is a guaranteed flop (much better games are only weeks away), but there are strong, strong headwinds from cellphones and tablets, with a pricing structure for games that must seem nothing short of apocalyptic for traditional game makers.

Even worse, Nintendo is in the middle of a second hardware transition, to the Wii U., and here's where the cellphone/tablet competition becomes painful in a way that may not be so immediately apparent.

When Nintendo began designing the Wii U, I'm sure the "tablet-esque" controller looked incredibly forward-thinking. And it was--three or four years ago. But the technology cycle in the cellphone/tablet industry is remarkably short right now--18-24 months, tops. Today, a tablet controller with buttons already looks like a dinosaur.

When your technology cycle is five years, and associated competitors have two-year cycles, it's trouble.

I'm not saying that Nintendo is ever going away, because I don't believe that. They have been tremendously resilient for a long, long time. And at any point, they could just decide to make software (exiting the hardware business entirely), and they'd be fine. But this is shaping up to be an incredibly painful period for a company that we all think of very fondly.

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