Analysis – Nintendo's Tough Hardware Choices May Test Consumer Confidence

This morning, Nintendo reported its fiscal third quarter financials. The news was largely positive, with Wii U sales up, strong attach rates for Mario Kart 8 and Super Smash Bros., and a slight increase in projected net income for the fiscal year.

One note did stand out as concerning, though. The company lowered sales forecasts overall and for the 3DS. The company previously projected total unit sales of 12 million worldwide for fiscal 2015. That has been cut by 25 percent, even as the publisher is set to release the New 3DS XL in North America.

What is also concerning is that net profits were skewed by currency exchange rates. While this is great for the bottom line, it obscures weakness that is still present as Nintendo faces a market that doesn’t know what to make of the Wii U.

The Wii U – Planning for the future
Bluntly, the Wii U has almost no chance of recapturing third party support. The company hasn't crossed the 10 million unit threshold in over two years. At the same point in its life cycle, the Wii had trucked past 40 million units. This leaves the platform as a strong secondary device that has one selling point (albeit a strong one) – it’s the only way to play Nintendo’s newest games on your big television in HD.

Given the polish on Mario Kart 8 and Super Smash Bros., for many fans that’s enough. But Nintendo isn’t going to push the console into the mainstream market without blockbusters (something Nintendo America president Reggie Fils-Aime recently equivocated on). For one-platform homes, this remains a significant disadvantage.

I expect that Nintendo will have a solid fiscal 2016, provided it can fulfill its promises. That means both Star Fox and Zelda arriving before March 31, 2016. It means Xenoblade Chronicles X arriving worldwide. And it means a regular pace of first-party titles that rival the big attention-getters on PlayStation 4, Xbox One, and PC.

What I don’t see is a long life ahead for the Wii U. I think that when all is said and done and Nintendo moves ahead with its next hardware announcement, the console’s legacy will be a respectable one based on its small number of standout titles (like Super Smash Bros.). People will look more fondly on Nintendo’s efforts with it in hindsight than they do right now, as the sales struggles become obfuscated by time.

Hopefully, the company learns lessons from this experience. It made a mistake straddling the line between niche first-party system and third-party powerhouse. It didn’t go all-in with publishing partners. 

But in order to not just survive (a given) but succeed (the true goal), Nintendo must recapture its spirit of differentiation. The GamePad could have been enough to separate the Wii U from the pack (as the Wii Remote was for its predecessor), but it simply isn’t used to great effect, even by most first-party titles.

The 3DS – Planning For Now
With the New 3DS XL on the horizon, the message Nintendo is sending is that it isn’t quite time for a completely new hardware product. Unfortunately, some Japanese analysts beg to differ. 

Speaking with Bloomberg today, SMBC Nikko Securities analyst Eiji Maeda said that the 3DS is “passed the peak of its hardware cycle.” That’s even taking into account the New 3DS. “The device is the next one in line for a refresh,” he says. “It would make sense to have a new model next year, so we can expect the news flow to begin from the middle of this year.”

For the sake of those rushing to buy up those precious Majora’s Mask New 3DS consoles, I hope he’s wrong for two reasons. First, releasing a new product geared toward upgrading hints that the next handheld is further down the line. Remember, Nintendo shipped the New 3DS without a power supply, citing that users might already have one from a previous purchase. 

Second, it means that beyond the Xenoblade Chronicles port, there likely wouldn’t be many software reasons to own a New 3DS. That kind of frequent turnover is wearying for consumers and erodes confidence. The new hardware features solid improvements compared to its predecessor, but if Nintendo is using the New 3DS as a stop-gap, it’s making a short-term bet at the cost of long-term consumer care.  

I don’t disagree with Maeda that Nintendo has become overconfident in its handheld. The company today reduced sales expectations by 3 million units (25 percent), and missed targets last year, too. Mobile phones and tablets aren’t a strict replacement for the 3DS, but they are eating away at interest at the fringes.

Amiibo – Planning for yesterday
The Amiibo phenomenon is a tough one to parse. On one hand, Nintendo is off to a strong start with sales considering 5.7 million of the figures have been shipped around the world, and there are still more coming.

On the other hand, Nintendo is spreading itself very thin. It didn’t meet demand for many figures, and is offering an almost exhausting amount of options (with many Smash Bros. characters not even revealed yet).

The tiny toys have great shelf appeal, despite a significant downgrade from prototypes shown at E3 2014, but there aren't many compelling reasons to use them in games. Sure, they unlock costumes in Mario Kart or give you weapons in Hyrule Warriors. But even the Super Smash Bros. use that takes advantage of the figures’ onboard memory isn’t that impressive. The promised 3DS portal has disappeared from the discussion, with Nintendo putting focus on the onboard functions in the New 3DS.

The compatibility with different titles is confusing (we’re keeping track in a regularly updated feature in case you’re curious), but there’s no strong hook. I keep buying Skylanders because I know that every one I purchase will work in future games. Disney Infinity characters put me in control of iconic movie and comic personalities. Amiibo don’t have the same allure.

Right now, people are extremely interested in picking them up because they are new and many of them have strong nostalgic connections to the characters. However, this is a short-term pull, especially as they remain difficult to acquire.

Nintendo needs to advance its strategy for the figures to the next stage (a roadmap it should have laid out before the first one ever arrived at retail). Even hinting that there is a broader purpose would keep people engaged. But until we know that there is something more to them, I’m not confident of the long-term appeal. There’s no magic there yet.

Making The Most Of The Next Hardware Cycle
Nintendo is in an unenviable position. It is staring down a potential shortened console life-cycle and might be about to begin a push toward a brand new handheld presence. The best scenario is a mingling of those two concepts (and, please, with a universal account system), but there is no guarantee that the merger of the home and portable software units will yield a unified hardware solution.

This iconic company isn’t going away any time soon, and the Wii U still could have its best days ahead (Zelda on the Wii U is looking great). I’m just not sure that the Wii U has much time left, with sales that have failed to impress and even the most stalwart of partners walking away. After all, the dream presented by the announcement sizzle reel is far from reality.