Revising forecasts
This revision should have definitely occurred last quarter. Most analysis observed at the time that failing to revise the forecast was asinine as it was obvious they wouldn't hit their targets. Even noting that the holiday quarter is by far the biggest sales driver, when you're half-way through the year and less than 10% of the way towards your expected forecast and nothing that would materially change the forecast during the holiday quarter, it's time to revise. In the last quarter, Nintendo had Pikmin 3 and TW101's second quarters and Super Mario 3d World. There was no reason to assume based on past sales that 3d World would have sold materially better than NSMBU. Donkey Kong Country was delayed to cover gaps in the release calendar, which is sort of shocking in and of itself. So either way, every single person here would have told you the 9 million wasn't going to happen. I had expected a revision to 4-4.5 million prior to now--was it just a case of Nintendo preferring to do one enormous guidance revision rather than two smaller ones?
Iwata
It's not clear to me that Iwata stepping down would be productive. Who would you replace him with within Japan? It's true Nintendo could easily poach a GREE executive, but I think the single biggest structural problem Nintendo faces is a misunderstanding of the global market, and while pivoting towards (not entirely!) Japanese mobile concerns might help make investors feel better, I don't think it's a long-term solution to Nintendo's woes.
Home market
- Short term Wii U: Wii U is not going to reach any kind of lofty goals. As a result, it makes sense to concede this instead of stringing people along by saying "We expect <our next title> to help significantly drive hardware". I don't think there's a need to kill the system and I don't think any new system being launched would work any better. I also don't think dropping the GamePad would really benefit them. I don't think a price drop would materially change demand at this point. So I think set modest forecasts, work on software that's going to sell big, work on global instead of Japanese-focused software, use outsourcing to plug holes in the release calendar. In terms of third parties, it's a write-off at this point. I'd focus on securing Wii U's niche for stuff like Skylanders, LEGO games, dancing and fitness games. It's not a good sign to me that Just Dance is still mostly on Wii, and that Xbox 360 and Xbox One appear to have inherited the rest of the audience rather than Wii U. If the war chest is big enough to start working to secure
- Medium term Wii U: Try to pump internal money into aggressive cost-reduction plans on Wii U. I recognize Nintendo's in a worse position to cost-reduce than Sony or Microsoft because they have no internal production at all, relatively little engineering capacity, and lower scale with fabrication plants. But I still think they could probably reduce cost quickly if they made it priority 1. It's better to be in a situation where you're selling 5 million units of hardware a year but making a profit on each. This also takes some pressure off software performance.
- Long term Home Market: Consider not replacing the console. Sunset it within 5 years of release or so (end of 2017). Look to low cost, globally focused solutions for future hardware. Look into how network services are driving profit for a lot of companies. Look at the needs of individual markets beyond Japan. Don't make anything a hardware design priority that won't lead to global success--"it fits well in Japanese living rooms" is absolutely not something that matters at all. If hardware doesn't make sense, don't do hardware. It's healthier to have a company that shrinks but is more sustainable than preserving the size of the company at all costs.
Portable Market
- Short term 3DS: Given that most of the 3DS' major software has been depleted, much of it at a significant decline from DS highs (although not all! Yay Fire Emblem!), I think the short term plan means recognizing that 2012 and 2013 were high years and there's no immediate strategy to replicate them through software. Getting software costs down so that there's a broad reason for buy-in is probably a good move. $20 and $10 software would really help the hardware pick up, I think. Make software as easy to buy as possible.
- Medium term 3DS: Start moving internal teams into smaller, more agile configurations making quickly iterated games. This pays dividends in two ways. First, if you ever do need the escape hatch for Mobile, your teams are more ready. Second, you can lower effective software pricepoints to be able to compete with and head off Mobile. You should also get used to the mobile style of releasing a product and constantly updating it in order to keep attention on it.
- Long term Portables: Future hardware will probably need to be always-connected (both for software benefits and for hardware usage benefits). If this means you need to make a phone, then you need to learn how to make a phone and how to partner with various countries telecom firms. If this means it's not a phone but something more like a tablet, then your OS and software situation will be way behind and you should have a plan for catching up that relies on actually understanding competitors. If this means getting out of hardware, your company will get massively smaller and you should be prepared for that.
Overall company
- Short term overall company: Transfer as much power as possible out of Japan to make the company more global. More autonomy for regional divisions. Look to Sony and Sega as model companies that are still very Japanese but that have recognize that this market sector might benefit from control and power being vested outside Japan. Start looking at what competitors are doing, because when you're an iconoclast and successful everyone loves it, but when you're an iconoclast and failing and confused as to why, everyone else has an answer for you. What are other companies doing that you're not? What assumptions have you internalized?
- Medium term overall company: Minimize burn rate so that the loss of the hardware business would not cause as much of an immediate system shock or massive layoffs. Lower software prices to reflect structural erosion in value of software.
I think investors want to see mobile, rightly or wrongly. I think it would be an error if Nintendo became a MORE Japanese company by eventually giving in to investor demands by focusing on GREE type situations. I think it'd be more sustainable to operate on a more global basis. I think if they do choose to participate in Mobile, it shouldn't be in the extremely limited Japanese context. But I think being able to see with a more global horizon requires a more global company. So to me, Nintendo's #1 challenge going forward is becoming a more global company.
Sombre, but it feels like you can see the writing on the wall for Nintendo's hardware business with all the long term outs you've proposed and I agree with. A few pointers:
- WiiU Price Cut through means of GamePad removal. Many cry foul whats the point, and really the only one is whether they ever want to make a home console again. A 3rd place console survives its twilight years by reaching the impulse "oh why not" extra-console buy.
The GamePad is the obstacle to that right now, but then in kind theres no doubt Zelda U is going to be so all up in the GamePad's functions it may be impossible to cut. Essentially the WiiU's failure has written off the entire home console future for them one way or another. Theres also no chance of third parties buying the same line for the 3rd or 4th time and show up on another.
- Globalisation. This is something that absolutely needs to happen, but is probably also the most expensive beyond hardware. Iwata can't be fired right off, but he should have a timer placed on him on setting the new team up in a years time that includes a totally freshblooded Japanese arm, and an independant and equally executive powered western arm. Essentially they have to do what MS/Xbox is doing right now in a way and poach a high level western CEO, and re-create an autonomous Nintendo America again. I'm not sure who that is, since a couple years ago was the time to pick up skeleton western crews across the globe and build from there (Nokia, Blackberry before it was terminal, etc) and even companies like Amazon are absorbing more game world talent.
-Software. Push new internal japanese teams cut free from Miyamoto legacy. Koizumi team needs to be allowed to make his own "Mario", "Zelda", or whatever.
I wholeheartedly agree Mobile and GREE isn't the way to go, even though thats the only idea in investors head right now. They absolutely must get dedicated handheld prices down because I can't bring myself to pay £30 for 3DS games and e-Shop is a joke. They need to create their own subscription service steeped in a ritualistic celebration of what videogames used to mean and make themselves totally inseparable from that movement.
The "unwrapping" of e-Shop items is like the tiniest baby step of what I mean, and Miiverse too, but it needs to be all encompassing and massively exciting. Stop selling roms for £6 a pop, and start using them as weapons. Animal Crossing used to have NES games to incite as 'rewards', why not tie your Achievement/Stamp system to earning weird, rare, unsellable in their unfinished state stuff like Starfox 2, the satellaview versions of Zeldas and so on. StreetPass is... sort of on the right track, just needs to be for the internet and not ridiculously limited broadcast range of portables.
- Hardware. Try one more time, all in on a dedciated handheld (Vita level) with an HDMI out and a cheap extra controller with touchpad and see if they can reverse fortunes and go from a potentially 70 mill 3DS back up to a system that can sell 100 mill with all the eggs in that basket.
No they can't make a phone, no they can't make a tablet with an OS unless they merge with HTC, Asus, or someone else. No I dont think they have the money or tech nouse to popularise VR before everyone else. I think theres one more "maybe we can make a go of this hardware thing" before earnest and real moves to going third party/subscription only. They could probably push out a low-rent 5DS as a final hurrah legacy lap if a 4DS doesnt achieve what it must (say it aimed for 100 mill, only hit 40-50), but only while they were also mobilising on transitioning out of the hardware game entirely.
(about how Nintendo could quickly change the situation)
