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[Chindogg]

The revision to their forecast was released after 3 PM in Japan, meaning after the markets closed. It's going to be a blood bath when Tokyo opens up in ~13 hours. I mean, Nintendo still has ample cash... but the difference between that cash and the value of their operating business could see a 10-15% decline in 7974 (or a ~25% decline in the perceived value of their operating business accounting for goodwill on their intellectual property).

Again the issue here is the loss of pricing power. This is all Nintendo had going for it. Without that their entire software business falls apart - whether they remain first party or go third party is irrelevant - because it means the premium-paying audience is gone.

Moreover, I have a bad, bad feeling this isn't going to be a Nintendo-only problem.

NPD numbers for the Playstation 4 and Xbox One on the software revenue side were not very healthy either even if NPD was trying to spin it positively. Software revenues were flat relative to the past year despite new console launches and huge numbers of new SKUs - many of which had higher production and development costs - and that's before the retailer kickbacks and marketing outlays that inevitably ate into the gross margins of all publishers.

I wouldn't be surprised if Sony books another loss on video games - and at this point they basically are playing derivatives games and selling insurance to pay off their debt servicing requirements. Ironically Microsoft might make it out ok as they are losing the least on their console - and the tie-in for Xbox Live Gold was close to 90%. Still, third party publishers are going to be in miserable pain and I wouldn't be surprised if Activision starts resorting to desperate tactics - and even takes another cash infusion from Tencent to stockpile cash - because if Destiny flops - well - it's not going to look pretty... They have so much riding on that game that if it underperforms significantly, the depletion of cash to cover debt servicing could wipe out the equity holders.

As an aside: I've been building a model that attempts to price in the implied value of piracy into the original DS. The thing is, there are estimates that between 30-50% of DS units were purchased for piracy, and Nintendo was able to keep a fairly high price for their hardware as a result. In many ways - the games that some people pirated effectively had a value of less than $2-5 each - the same price as most smartphone apps. I'll post the results when I get a chance.

This has been my fear for quite some time. Nintendo clearly made mistakes and its costing them huge, but there's no guarantee that either MS or Sony's consoles will continue to go on as strong as they are right now. Both gaming divisions are still unprofitable and software is still down YTD. Add this issue with the customer conditioning of lower prices with these massive budget games and its an unmitigated recipe for disaster.

These next few months in console gaming are going to be very scary and I hope console gaming will survive.

 

[illmatic22]

Fuera Iwata

 

[Tookay]

Yep, I can totally see the masses rushing out, buying Wii Us and burning flags with Iwata's head on it screaming "please understand". /s

Also: People really thinkg firing Iwata will get a better person up there? Who? A suit who will fire 500 people without blinking?

Because that would suddenly make the Wii U sell?

You know, you guys can engage Anticitizen One and disagree with him without strawmanning his posts.

He wasn't arguing a causal link between "Fire Iwata = Wii U sales!" and it's pretty disingenuous to act like he was.

It's fairly clear that management is to blame here and that Iwata's vision of Nintendo's place in the industry (as a non-competitor, above the fray of all other gaming and entertainment companies) is not a market reality.

He's not solely at fault (I'd lay more blame on the BOD and Miyamoto), but his paradigm isn't suited for the moment in the least.

 

[ShogunDarius]

Would be crazy,
almost too crazy imo
How in the world would they decide on green lighting games and doing release schedules.

just off the top of my head but they could do a 'quarter' section layout. both companies have 2 of the 4 quarters dedicated to their output per year, and reversed the next year. So Ninty get Q1 and Q3 and Sony get Q2 and Q4. then the next year they switch and keep switching each year.
It would mean tons of first party/second party games throughout the years.

 

[starmud]

theres something to be said for managing expectations. something they didn't do well in the least.

the contraction happening in the marketplace may not be recoverable in the product offerings we all expect from a company like nintendo.

technology and delivery has been so disruptive to the product they sell, that its going to take lightning in a bottle to fix this current product cycle.

what audience that does exist in "core gaming" is serviced by two products. arguing that theirs room for nintendo to be dominate in the space seems silly. it would cost a mountain of time and money. given the space they service is increasingly getting older and either, A. declining or B. stagnating.

it makes little sense for nintendo to turn back time to '92 and act as if they can be "THE" gaming box for that type of consumer. the company would find itself increasing trapped and niche.

its time for nintendo as a whole to look forward. i have little faith in the future of product nintendo sells being able to come in a $40 to $60 box. nor in a $300 home console. delivery, expectations and value, along with everything else in entertainment, has changed.

 

[Linkstrikesback]

Because that would suddenly make the Wii U sell?

No, but someone else might have an idea that wouldn't be a terrible bomb.

If nothing else, Iwata has a resonponsibility to ensure profability: hundreds/thousands of jobs depend on him making the right calls, and he hasn't been able to do it and is showing no plan that will turn the compnaies fortunes around.

When you screw up, you should be accountable, even at the highest level.

 

[wsippel]

who the fuck cares about the wii U? That shit is deader than disco. I'm talking as a shareholder about turning the company around and making it both competitive and profitable again.

I'm a shareholder as well and I want Iwata to stay. Further changes are necessary, but replacing Iwata would improve nothing. It's not our call though as the regular shares come without voting rights.

 

[cyberheater]

Horrible numbers. Simply horrible.
<etc>.

Amazing post. Makes me wonder if Nintendo can ever really recover from this or are we watching a self inflicted mortally wounded company in it's slow death throws.

 

[Anticitizen One]

Are you 'trying' to avoid reality? A new leadership could lead to a new path. Nintendo needs a fresh start. It's not only about short term but mainly for the long term impact to the company

It's not even worth arguing with these people defending Iwata. They are either too simple minded or lack any sense of business to be able to debate or comprehend what is happening in reality.

I'm not even gonna respond to the bullshit anymore because the proof is in the pudding. When Wii U and 3DS aren't moving systems despite 3DS (supposedly) being a "great system" and Mario 3D World supposedly being "a GOTY contender" (it isn't and the majority of gamers see that) and Knack easily outselling Mario in Europe there is a major problem going on. This is on top of Nintendo posting their first loses ever in their 200 year history under Iwata.

 

[GamerJM]

i think the problem is that the software may be too similar across both platforms. while the interaction is somewhat different (the wii u allows for more social multiplayer), the design of a lot of the games can be similar, and the libraries kinda blend together. if nintendo has certain games that sell to a wide audience like pokemon and mario, they can have that in 3d goodness while keeping the same graphical jump their handhelds have always enjoyed. instead of turning their console into a handheld, it's more about making a handheld that hooks up to the tv... so it interacts like their last console.

the smaller handheld would feature a simpler interface. maybe just the ds's control scheme and only one screen. this would push design differences in software between the two as well as requiring less teams. this would be a 'new line' of hardware to replace their dead console line, even though it's another handheld. then imagine if the hybrid has wii fit u installed on it, and the 'game boy' has a pedometer function, and that there would be other ways to have the two devices to interact.

Hawk, I think the idea of the more powerful handheld just wouldn't work in practice. I don't think the technology is there for a handheld with Wii U-like specs that hooks up to your TV. I don't see it catching on. The battery life would probably be horrendous. And I just don't get the point. Why would they have two handhelds? Theoretically, wouldn't having two handhelds reduce the market for the more powerful one?

Maybe I'm just not understanding your idea, I don't want to come across as abrasive here, but I just really don't understand your logic.

 

[EatChildren]

Mario Kart 7 came out in 2011 and now we are getting Mario Kart 8 with marginal changes aside from HD graphics a little over 2 years later. They need to give MK a break for a whole generation like how there was no Metroid game on n64. You need to give franchises a break so they can have a big revival later.

I don't really think you have any idea what you're talking about and are just looking for shit to point and moan at because you personally don't like it.

Having a new Mario Kart due this year isn't half the problem with Nintendo, if part of the problem at all, so much as everything surrounding that Mario Kart including the hardware itself.

 

[B.O.O.M]

New leadership would throw the company into turmoil and chances are it would actually put the company onto the path to death.

Holy shit what? Who do you think they will put in charge? Darth Vader?

Leaderships change all the time in large corporations. If one is not doing a good job and the results are not positive you move onto someone else who you believe could help. If these numbers and the sales of their main and only set of products don't tell you they need a new leadership, one who understands the global market, third parties and modern day features that are mandatory, then nothing will

 

[Aeriscloud]

Amazing post. Makes me wonder if Nintendo can ever really recover from this or are we watching a self inflicted mortally wounded company in it's slow death throws.

Well, they haven't started selling their corporate headquarters worldwide yet.

 

[ArchedThunder]

Moreover, I have a bad, bad feeling this isn't going to be a Nintendo-only problem.

NPD numbers for the Playstation 4 and Xbox One on the software revenue side were not very healthy either even if NPD was trying to spin it positively. Software revenues were flat relative to the past year despite new console launches and huge numbers of new SKUs - many of which had higher production and development costs - and that's before the retailer kickbacks and marketing outlays that inevitably ate into the gross margins of all publishers.
.

We can't really say one way or the other, but I think it has more to do with the fact that consumers already have to pay 400/500 bucks to get the systems, so it makes sense that software might not be selling the greatest right now. I think we will have a better picture of how well they will do on the software side at the end of the year.

 

[tehrik-e-insaaf]

Wouldn't the lack of digital tracking make things seem worse than they actually are? Or are we taking into account comments from the platform holders that I didn't see?

The ratio of digital to physical isn't high enough that it's going to make a big difference unfortunately. Activision has so much debt that they really bet the house on their portfolio doing well this Christmas - and unless they went 33/67 digital to physical on Call of Duty - I don't think they are going to come close to meeting their operating targets, particularly since they took a giant hit on their gross margin this time around to incentivize pre-orders.

 

[dragonbane]

JESUS CHRIST! Man that's horrible

 

[Mihael Mello Keehl]

They need to skip the handheld next time...

 

[UberTag]

Until Nintendo's shareholders start holding the company accountable, Iwata's going to maintain the status quo.

 

[Anticitizen One]

I don't really think you have any idea what you're talking about and are just looking for shit to point and moan at because you personally don't like it.

Having a new Mario Kart due this year isn't half the problem with Nintendo, if part of the problem at all, so much as everything surrounding that Mario Kart including the hardware itself.

I actually didn't mean to suggest MK is a problem someone had mentioned that it and Smash bros were gonna save the Wii U and I was just stating that I think it's not going to move systems. It will probably make some money but it's not gonna move the needle one way or the other.

 

[B.O.O.M]

It's not even worth arguing with these people defending Iwata. They are either too simple minded or lack any sense of business to be able to debate or comprehend what is happening in reality.

I'm not even gonna respond to the bullshit anymore because the proof is in the pudding. When Wii U and 3DS aren't moving systems despite 3DS (supposedly) being a "great system" and Mario 3D World supposedly being "a GOTY contender" (it isn't and the majority of gamers see that) and Knack easily outselling Mario in Europe there is a major problem going on. This is on top of Nintendo posting their first loses ever in their 200 year history under Iwata.

Yep I mean they are a gaming company and that's it. They don't have any other division to fall on to.

 

[Sandfox]

It's not even worth arguing with these people defending Iwata. They are either too simple minded or lack any sense of business to be able to debate or comprehend what is happening in reality.

I'm not even gonna respond to the bullshit anymore because the proof is in the pudding. When Wii U and 3DS aren't moving systems despite 3DS (supposedly) being a "great system" and Mario 3D World supposedly being "a GOTY contender" (it isn't and the majority of gamers see that) and Knack easily outselling Mario in Europe there is a major problem going on. This is on top of Nintendo posting their first loses ever in their 200 year history under Iwata.

I think its kinda BS to insult people for wanting Iwata to stay because one could make that argument depending on what they want Nintendo to do.

 

[JoeM86]

I'm a shareholder as well and I want Iwata to stay. Further changes are necessary, but replacing Iwata would improve nothing. It's not our call though as the regular shares come without voting rights.

I am going to be one soon too, and I also want Iwata to stay. He is the only CEO who gets gaming. The others are too worried about monetisation. Iwata is truly the CEO gaming needs. Sure, he made some mis-steps with the Wii U and inital 3DS, but he's one who was against microtransacting Animal Crossing and a variety of other things.

I see this through the industry sense, not the "crap, they need to make money" idea, which is ridiculous considering the other two and how they completely haemorrhaged money last gen

 

[thepotatoman]

Yeah this situation is reminding me more and more of BlackBerry in 2010. Even BB fans would point out the billions in the war chest as proof that everything is going to be fine. You can still have a war chest of money and be irrelevant in a specific industry.

I also remember in 2010 everyone was saying Research in Motion was going to go bankrupt or sell of the company or radically change the cellphone market, and yet they're still in it to this day, selling blackberries to the small but die hard blackberry fans that can't imagine ever switching to any iPhone styled cellphone.

Blackberry really is a great example to look at both for the positives and the negatives.

 

[urfe]

I am against the idea of changing the person in charge when the going gets tough, and I like the idea of long terms of employment.

I hope Iwata learns from his mistakes, and makes things happen.

That said, I love my Wii U. It's fault is that it was made for people like me, and we're not bi in number.

 

[nhlducks35]

New leadership would throw the company into turmoil and chances are it would actually put the company onto the path to death.

Well their current path isn't doing jack shit for them right now, so...

 

[Anticitizen One]

I think its kinda BS to insult people for wanting Iwata to stay because one could make that argument depending on what they want Nintendo to do.

There is this place outside your window that i'm not sure if you have heard of but it is commonly referred to as the real world. In this real world when someone does a lousy job over a period of time they get fired.

 

[Kosma]

The ratio of digital to physical isn't high enough that it's going to make a big difference unfortunately. Activision has so much debt that they really bet the house on their portfolio doing well this Christmas - and unless they went 33/67 digital to physical on Call of Duty - I don't think they are going to come close to meeting their operating targets, particularly since they took a giant hit on their gross margin this time around to incentivize pre-orders.

That's really silly.

How much is retail softwate down? 2% yoy?

I'm pretty sure digital grew more then 2% yoy.

NPD is a dinosaur in this digital age of steam, app store, psn and xbl.

 

[MisterHero]

I'm not buying this because free PSN was and is lightyears ahead of what Nintendo has currently on both the 3ds and the Wii U. Just because its free doesnt mean it has to be crappy.

I agree mostly because of the 3rd-party and budget game variety. IMO the quality of services varies on the games themselves though. For example, GTA V requires a Rockstar account to use some features that could've worked without one. Simple stuff like saving pictures, extra vehicle customizations, or training your dog could be done without a Rockstar account+smart device. The game has terrible online implementation and it was pretty much ignored in reviews.

If the developer wanted to make it work they could. Likewise they can bork it despite the foundation.

 

[Solid Samus]

3D World goty contender (it isn't and the majority of gamers see that)

Look man I'm actually in agreeance with much of what you're saying in this thread (I do not believe that Nintendo will drop the Wii U outright but there's gonna be some massive changes moving forward - and iwata is a total goner) but this one is up there with "this is the common opinion" on the stop pulling stuff of your ass scale

the majority of gamers haven't even played 3D World :3

 

[amardilo]

When people say the 3DS is doing well for Nintendo are those numbers still OK (I don't know if 13.5 is good or not for a handheld and the profit made on it)?

I'd buy a Wii U as a secondary/supplementary console (not my primary gaming platform), but it's a bit too expensive right now for me to be able to afford that.

If the 32GB Premium was £150 with a game I want (such as Mario 3D World) or £180 with 2 games I want then I would go for it. But right now I have to really look to find one and those places that have it are not doing it at a discount (places like Sainsbury's and Curry's have it on sale but my local store are not in stock).

 

[JordanN]

I am going to be one soon too, and I also want Iwata to stay. He is the only CEO who gets gaming. The others are too worried about monetisation. Iwata is truly the CEO gaming needs. Sure, he made some mis-steps with the Wii U and inital 3DS, but he's one who was against microtransacting Animal Crossing and a variety of other things.

Just because Iwata does one thing right, doesn't make him a gaming ceo.

Nintendo is still the only company that upholds region locking. That's not "for the gamers".

 

[NSoul1972]

If Iawata worked in the west he would long gone. Shareholders, rightly, would deem it irresponsible to issue a 69% drop at this stage. It makes a mockery of all the "financial controls" in the company. Imagine going to your boss after 75% of the financial year and telling them your forecasts were this far wrong.

You: "Sorry boss, I bullshitted you all year, I didn't want to face the truth"
Boss: "Face it now sunshine, your fired"

 

[PopeReal]

There is this place outside your window that i'm not sure if you have heard of but it is commonly referred to as the real world. In this real world when someone does a lousy job over a period of time they get fired.

He was saying you don't need to insult people for disagreeing with you...

 

[Effer]

who the fuck cares about the wii U? That shit is deader than disco. I'm talking as a shareholder about turning the company around and making it both competitive and profitable again.

I would encourage you to conduct yourself with greater respect for the other forumgoers here (and their differing opinions). Some of your comments are coming across as wildly hostile.

 

[69wpm]

You know, you guys can engage Anticitizen One and disagree with him without strawmanning his posts.

He wasn't arguing a causal link between "Fire Iwata = Wii U sales!" and it's pretty disingenuous to act like he was.

It's fairly clear that management is to blame here and that Iwata's vision of Nintendo's place in the industry (as a non-competitor, above the fray of all other gaming and entertainment companies) is not a market reality.

He's not solely at fault (I'd lay more blame on the BOD and Miyamoto), but his paradigm isn't suited for the moment in the least.

I'm sick of people screaming "fire Iwata" left and right without saying anything about who should replace him. And I'm very curios who could take his place, because I can't think of anybody who would cut his paycheck multiple times and refuse to fire people for the sake of the company. I'm also quite sure nobody with his background and knowledge would step up to lead such a huge company. It's a huge deal and people here think it's so easy.

 

[Triggerhappytel]

The Wii U's fate was sealed at e3 2013 when it was revealed that Kingdom Hearts 3 and Final Fantasy XV would be skipping Wii U in favor of the PS4 and even the Xbox One. How do you secure Kingdom Hearts 3D for your handheld, but not KH3, which was arguably the most hyped up game reveal since Zelda Twilight Princess. If I was Iwata, I would be trying to fund down ports of those key titles which are definitely going to be commercial darlings. You don't need all 3rd Party support, Nintendo. Just the ones that matter most. But, again, it's too late.

My Wii U will be used for Smash Bros, Mario Kart, and whatever other quirky games they deliver, until the next gen. But I feel like Sony has already won my time and attention.

I would argue this. I know you're a self-confessed Nomura fanboy, but this is just nonsense.

And besides, Squeenix games have barely graced Nintendo platforms since the SNES era, so I don't know why now not getting a couple of big SE games would be an issue for them.

 

[batteryLeakage]

Well yes that is why I would say that Valve working with Nintendo would help them with lot of the areas they struggle with.

In a similar way Nintendo would be a fucking unstoppable name to have backing their steam machines concept for the living room. Valve has almost no familiarity with the console/living room customer, Nintendo could really help them push into the living room.

I know that this scenario totally isn't going to happen, but wouldn't that be something.

People do not want to buy a $300 Mario box. They don't want to buy this, and wait three/four/five months for the next noteworthy game, one that might not even be a franchise or genre they're interested in. Not everybody who likes Mario likes Zelda, or likes The Wonderful 101, or likes Metroid, or F-Zero, or everything else. And that just makes the situation worse, when someone can put that $300 towards another platform that's going to have far more software released far quicker.

It's an investment, for customers and shareholders, and at the moment Nintendo is a bad investment.

Sadly this is very much the case for me. Anecdotally, this is the case with pretty much every gamer I know, even those who were ardent Nintendo supporters (I'd go as far as to say fanboys) in the past. There have been plenty of Nintendo games released this year that I am interested in, but I would need to pay $250-300 upfront for outdated hardware in addition to the cost of the games. The fact that big releases outside of Nintendo's own titles are practically non-existent and the fact that I am finding so much value through Steam on hardware I already own makes a Nintendo console a tough sell. Plus there is the matter of finding room for another box by the TV etc. etc.

10 years ago I would roll my eyes at the people saying that Nintendo should go third-party, but I think it would make sense now if they committed to true cross-platform development (having one game launch across all the platforms; not the post-Dreamcast Sega's idea of multiplatform). Their strength is in software and their incredible catalog of IP. If they handled the transition right I'm sure there would be plenty of a market for them.

Also, whether or not it makes business sense, I really don't want to see them putting all their development into mobile and tablet gaming. If there is one interface that is unsuited for the type of games Nintendo makes its the touch-only interface.

 

[AzaK]

I'm a shareholder as well and I want Iwata to stay. Further changes are necessary, but replacing Iwata would improve nothing. It's not our call though as the regular shares come without voting rights.

I'm one as well and I seriously hate Nintendo's attitude as I'm sure you know by now at some point the CEO needs to step down to show he's taking the blame. Now, maybe Iwata has a real plan unlike the fantasy they seem to have lived in the last two years so I'm keen to see what he says after the next financials. However if all he wants to do is stay the current course then I think there needs to be a change seriously looked at. I have no idea who I'd want to replace him but I'd like to hear candidates vision for the company.

As you say, we get no votes but it sucks that I'd get more value by wiping my arse with my stocks than selling them now.

 

[Anticitizen One]

If Iawata worked in the west he would long gone. Shareholders, rightly, would deem it irresponsible to issue a 69% drop at this stage. It makes a mockery of all the "financial controls" in the company. Imagine going to your boss after 75% of the financial year and telling them your forecasts were this far wrong.

You: "Sorry boss, I bullshitted you all year, I didn't want to face the truth"
Boss: "Face it now sunshine, your fired"

well said

 

[JoeM86]

Just because Iwata does one thing right, doesn't make him a gaming ceo.

Nintendo is still the only company that upholds region locking. That's not "for the gamers".

A very small, yet very vocal minority want region locking removed. Sure, I do too, but it's not something that the majority care about or even know about.

 

[kmax]

Well, I hope this is a wakeup call for Nintendo. They're terribly stubborn, so it's actually nice to see that they're brought back to reality again, since it hopefully will force them to find solutions to their actual problems, rather than living in denial.

If they ever want to see green numbers again in their console department, they better listen and adjust to the market.

 

[wsippel]

I'm not buying this because free PSN was and is lightyears ahead of what Nintendo has currently on both the 3ds and the Wii U. Just because its free doesnt mean it has to be crappy.

You know, I see such statements all the time, but owning and using both a PS3 and a Wii U, I really don't see what's supposed to be superior about PSN. Pretty much everything online related is considerably slower, more clunky and just plain worse. Not to mention you have to pay for half-assed implementations of features Nintendo offers for free. PSN's superiority is a myth as far as I'm concerned.

 

[Linkstrikesback]

I am going to be one soon too, and I also want Iwata to stay. He is the only CEO who gets gaming. The others are too worried about monetisation. Iwata is truly the CEO gaming needs. Sure, he made some mis-steps with the Wii U and inital 3DS, but he's one who was against microtransacting Animal Crossing and a variety of other things.

I see this through the industry sense, not the "crap, they need to make money" idea, which is ridiculous considering the other two and how they completely haemorrhaged money last gen

If Nintendo follows this path much further, it won't matter what Iwata thinks because the company will run out of money and dissolve.

But you'd take whatever he says and does as gospel since you've already decided every decision they make is the absolute right one even when it causes Nintendo to be less successful than it has ever been, since the company was created over a hundred years ago.

A very small, yet very vocal minority want region locking removed. Sure, I do too, but it's not something that the majority care about or even know about.

And a small, yet very vocal minority absolutely hate microtransactions and consider them a dealbreaker when buying games, but you're using that as a point in favour of Iwata. Picking and choosing as usual.

 

[Vire]

Well this is incredibly depressing...

 

[GamerSoul]

They need to skip the handheld next time...

I think it would be better if they drop the 3D aspect of it and work on adding better features that consumers expect out of a mobile type device.

 

[cyberheater]

Well, they haven't started selling their corporate headquarters worldwide yet.

Surely they would be the last to go.

 

[MarkusRJR]

New leadership would throw the company into turmoil and chances are it would actually put the company onto the path to death.

Wait, what? You're against replacing the CEO who's plan has failed twice in a row, brought losses three years in a row, and continues to make the same mistakes because you're worried there might be someone worse than them? I can't even.

I understand that Iwata has some beliefs you agree with (limited micro-transactions and sticking to what they know) but it's clear he's not cut out for a management position. He'd be much better as a game director/designer.

 

[Sandfox]

There is this place outside your window that i'm not sure if you have heard of but it is commonly referred to as the real world. In this real world when someone does a lousy job over a period of time they get fired.

So? There are a lot of people who think Iwata can fix things with a better and more modern approach to the current Nintendo philosophy or simply like Iwata for the things he has done right. There is no reason to insult people like that just because they have a different opinion on how they would like Nintendo to be run going forward.

 

[DieH@rd]

Horrible numbers. Simply horrible. This misses everyone's most pessimistic expectations for operating income expectations by $400M+ USD and baseline estimates by over $650M+ USD. No one seriously thought they were going to hit $1 B USD in operating profits. Most people were seeing Nintendo hitting 30% of the target as a baseline. That they are expecting a loss for the year of $350M USD is mind-boggling.

Only four things can explain these losses IMHO:

1. Nintendo's gross margins on software must have shrunk dramatically. Meaning that they are barely making any money on their own software much less third party software which has all dramatically dried up on both of their platforms globally. This bodes very badly for Nintendo in general - even if they were able to go third-party and hypothetically sell 2-3X the number of games (which I very much doubt) - what this shows is that Nintendo has lost its pricing power at retail - people aren't ready and willing to pay the Nintendo premium.

2. Nintendo bled money at retail trying to push hardware - far more than anyone expected - they must be eating close to a $100+ loss per Wii U sold right now or more - not just because of manufacturing cost - but because they are literally having to compensate retailers to provide them with shelf space and having to eat the price drop at the same time. This is horrible - because even if they take that much of a loss - the low gross margins on their own first-party games isn't sufficient to help them break even.

3. Nintendo isn't going to get Mario Kart or Smash out by early April - otherwise they would have been able to book orders under the current fiscal year. It looks like both games are going to be delayed well into the summer or into the Fall now. I am almost 100% positive that if it were even possible to get the games out by April or May - Nintendo would have done everything in their power to do so. It looks like Nintendo still hasn't effectively transitioned to HD development - not because of capability - but because they want to preserve gross margin based on their lower expected revenue numbers - and it's compromising their ability to get projects out the door on-time.

4. Nintendo is playing shell games with their accounting - booking contractual payments to Intelligent Systems and their other closely related entities as operating losses for tax purposes but which are effectively asset purchases - it means that they are dramatically restructuring their teams and it's going to be far more expensive than we thought.

If these estimates hold up - Nintendo will have generated a $1 B+ operating loss over the past three years. Here's the kicker though: Nintendo is still sitting on over $1 B+ in inventory that they haven't impaired yet (the IR report makes no mention of it). There is a good chance that over 80% of that is Wii U hardware which means that it's going to continue to be a drag on earnings over the next twelve months.

In any case, I don't foresee any major changes for Q3 happening. Nintendo is still going to engage in a buyback of 5% - which is going to drain their cash by another $1 B USD.

That means in three years Nintendo's war chest will have been depleted close to $2.5 billion USD from inventory impairment, operating losses, and share repurchases. Another $500M USD is going to be gone for asset / real estate purchases and capital investments. Their next hardware projects are going to require about ~$1.5 B USD in capital reserves at a minimum that are going to be tied up in the next two years as they wind down their existing platforms, and I don't see third-party licensing revenue coming back in a big way to offset declining gross margins on their first-party software.

Basically that means Nintendo could burn through ~$4 B in cash throughout this entire cycle and in anticipation of the next, with a very high cost structure intact. Like Sony, they will have effectively wiped out cumulative years of profit.

If we assume that Nintendo keeps building up human resources this coming year to meet their hiring targets, they are probably going to break-even in terms of operating profit for the next fiscal year or make a slight profit - but I'm even second guessing my own ability to understand Nintendo's gross margins now - someone at NOA or NOE is effectively writing giant checks to retailers to keep the channel alive - and that's really not good at all - Apple was in this same position in the late 90s and had to create their own retail stores to stop bleeding money to major retailers. Nintendo isn't going to have the investor support to launch a giant retail project in the US and EU, particularly when they no longer have proven pricing power which would be the primary argument to go that route.

Difficult time to be a Nintendo shareholder.

 

[Aeriscloud]

Surely they would be the last to go.

I don't know, ask Hirai.