For Nintendo, last place is profitable

I thought it was interesting to read in todays WSJ (sorry, subscription only), that Nintendo, although in last place in videogame console and software sales behind rivals Microsoft and Sony, has massively higher profits.

Nintendo has been recording healthy profits in part because it has relied on products that are simpler and less costly to make. Despite its third-place position, it earned $841 million on sales of $4.35 billion last fiscal year. It expects its new system -- dubbed the Wii to sound like "we" or "whee!" -- and its games to be profitable within a year.

By contrast, Sony and Microsoft are spending billions of dollars developing their machines, with little return so far. Sony's games earned $75 million on revenue of $8.19 billion in the fiscal year ended in March 2006. Microsoft has not yet earned a penny from its Xbox business, analysts say.

I think there is an important but hard to define lesson in both business and technology here.

The most profitable part of Nintendo's business has not been its consoles that hook up to TV sets, but rather its handheld DS system. The DS has been more successful with women and older people than other videogame platforms.

As a kid, I wasted countless hours playing games on the old Atari 2600 with graphics horribly primitive compared to the average cell phone of today. So I know first hand that super impressive graphics aren't necessary to draw people into a videogame.

There was also a time only two years ago when I got into playing chess on my PocketPC, which played a really mean unbeatable game (at least unbeatable to a regular person like me). Then I bought a more powerful chess program for my desktop PC, but discovered I liked playing on the small handheld device better.

I can see how a device that's not the most super-powerful, but that is portable, easy to use, and not too expensive, could be a more fun product than the latest XBox or PlayStation. Maybe I should buy one of these DS devices?

On the other hand, I think the DS is not the ideal portable videogame device because its software comes on physical cartridges. If the software has a bug in it, there's no way to fix it because the cartridge can't be updated. A better device would be like an iPod where you download the games from the internet and transfer them to the device using a USB cable.

Comments

[Peter]

There something else to consider: videogame consoles and software are pretty much the only business for Nintendo, while they're a small (probably very small) part of Sony's and Microsoft's total business.

[bbartlog]

Early indications seem to be that the Wii is going to be a bigger hit than the PS3.

More generally I would argue that a lot of companies pursue revenue growth at the expense of profits in a largely misguided belief that they can leverage the market share into actual earnings somewhere on down the line. Of course growth investors encourage this behavior by boosting the prices of stocks that have good revenue growth but poor earnings...

[JewishAtheist]

What Peter said. Sony and Microsoft can afford to lose money on their videogame systems -- at the worst, it's very inexpensive advertising, considering the distribution.

[ChrisV82]

Sean Malstrom wrote an interesting article entitled "Wii Fallacies" about misconceptions regarding Nintendo's upcoming console. While most of the article is an interesting look at Nintendo's market disruption successes and plans, he discusses the myth that Peter and JewishAthiest discuss, that being that Sony and Microsoft have so very little hedging on the success of their own next-gen consoles.

To say that Sony is betting the entire company on PS3 is not an understatement. The future of Blu-ray depends on the future of the PS3. The future for most of Sony’s digital content plans also depends on the PS3. Much of the Cell chip depends on the PS3. If the PS3 fails or disappoints, Sony, like a giant enemy crab, will be massively damaged. Listen to the investors complaining at Sony for the company’s future depending so heavily on their video game business. Even Kutaragi admits Sony’s hardware is in a period of decline. The company is still facing major troubles and there is no more vulnerable time period than transition.

Microsoft’s myth of invincibility comes from its dominance from its Windows OS and Office applications. Microsoft just won’t be running out of money (like Sega did). But look closer. Why is Microsoft in the console market in the first place?

The PC market has reached saturation. The only people buying new PCs are those replacing their broken PCs or hardcore gamers updating for new games. Prices for PCs have astoundingly fell sharper and sharper with each year. The main reason why Windows was so successful was because it was seen as ‘free’ due to it being bundled with every system. But as prices fall, the cost of Windows is beginning to stick out like a sore thumb. In overseas markets, many PC buyers opt for Linux instead which is completely free. Windows also faces major security problems. Vista keeps being delayed. Apple can ship their new OS while Microsoft cannot.

Nothing lasts forever. Microsoft knows that it cannot always rely on the cashflow from Windows or Office. Windows has foundational problems of security issues that cannot easily be solved. In other words, the ‘house’ of Windows is currently on fire. Strategies such as ActiveX made Microsoft successful against Netscape but, in turn, exposed the entire Windows platform to insecurity problems which have not ceased to this day.

Microsoft is desperately trying to create a new platform. Look at WMA and how fast Microsoft abandoned it when Apple’s Ipod took over. Look at how Microsoft is jumping head-first into the portable music playing business with Zune. Microsoft is all over the place trying to create new platforms. Outside of Office or Windows, when was the last time Microsoft had a hit? How many failed platforms has been established? Active-X, .net, WMA, on and on the list goes.

He might be wrong, but they are intriguing arguments nevertheless.

And Half Sigma, I wouldn't worry about bugs in the cartridges. That's something I've never heard much if anything about, and it doesn't appear to happen much. It'd be like not buying a PS2 because you're afraid it will melt your TV.

The DS also has a tremendously diverse library of games, and if you enjoy brain teasers and puzzles, the DS has plenty of that.

[ChrisV82]

The Malstrom article link: http://thewiikly.zogdog.com/article.php?article=42&ed=4&p=1

[Douglas Knight]

bbartlog:
I would argue that a lot of companies pursue revenue growth at the expense of profits in a largely misguided belief that they can leverage the market share into actual earnings somewhere on down the line.

I assume you're referring to the fact that Sony & Microsoft sell consoles at a loss, while Nintendo is sells at a profit. Nintendo may have the right strategy, but either way, looking at early revenues skews things towards Nintendo.