| Even before last week's announcement from | | | | the Nintendo 64 (N64) in 1996, and the |
| Sony (SNE), it seemed nearly certain that | | | | GameCube in 2001. |
| company's dominance in the PlayStation 2 | | | | Here are the worldwide unit sales for these four |
| generation of video game consoles would give | | | | systems as of March 31st of this year: |
| way to a much more level playing field for the | | | | NES: 61.9 million |
| PS3 generation. This time around, Sony faces | | | | SNES: 49.1 million |
| much stiffer competition from both Microsoft | | | | N64: 32.9 million |
| (MSFT) and Nintendo (NTDOY). | | | | GameCube: 20.9 million |
| While the Nintendo name is most closely | | | | That's not a pretty trend. To add injury to injury, |
| associated with a video game platform (the NES), | | | | the number of games sold per console had been |
| the company's real focus has always been the | | | | steadily declining until the GameCube dramatically |
| games rather than the platform. Herein lies the | | | | reversed that trend. |
| true distinction between Nintendo and its two | | | | Here are the number of games sold per console |
| larger rivals. Nintendo seeks to make good games. | | | | for each of the four systems: |
| Microsoft and Sony seek to control a distribution | | | | NES: 8.08 games |
| channel. | | | | SNES: 7.72 games |
| Nintendo is the only company among the three | | | | N64: 6.84 games |
| console makers that began life as an | | | | GameCube: 9.05 games |
| entertainment company - and it shows. Microsoft | | | | GameCube |
| is known for software; Sony is known for | | | | The above GameCube number is especially |
| hardware; and Nintendo is known for games. | | | | interesting, because sales of GameCube games in |
| American gamers are well acquainted with the | | | | the Americas has been extraordinarily strong |
| Nintendo brand; but, American investors generally | | | | considering its modest installed base relative to |
| know very little about the company. That's | | | | what previous Nintendo consoles had enjoyed. |
| unfortunate, because despite all the attention | | | | The GameCube has performed much better in |
| given to Sony and Microsoft's video game | | | | the U.S. than it has elsewhere. The Americas |
| operations, Nintendo is the ultimate pure play | | | | account for 58.37% of worldwide GameCube unit |
| video game company. | | | | sales while Japan accounts for merely 19.14% of |
| Nintendo is big. The company surpasses U.S. video | | | | worldwide sales. In the Americas, the number of |
| game publishing giant Electronic Arts (ERTS) in | | | | games sold per GameCube is approximately 10; |
| sales, earnings, and market cap. On the last count, | | | | while in Japan it is only 7. |
| some may argue that Nintendo only has a larger | | | | While a difference of 10 games per system to 7 |
| market cap than EA, because its stock price has | | | | games per system may not sound that |
| risen sharply over the past year, while EA's share | | | | important, it is a far greater difference in the |
| price has actually declined. However, there's a | | | | number of games sold per system between |
| much simpler explanation. | | | | geographic regions than exists with any other |
| Nintendo has a larger market cap than Electronic | | | | current Nintendo platform. As a result, the |
| Arts, because Nintendo (the business) is worth | | | | Americas account for nearly two out of every |
| more than EA (the business). The run-up in | | | | three games sold for the GameCube. |
| Nintendo's stock price may be entirely due to | | | | Nintendo DS |
| improved investor perceptions of the company's | | | | At first, it appears the situation is reversed with |
| future prospects as a result of the good press | | | | the Nintendo DS. Japan accounts for more than 4 |
| surrounding Nintendo's soon to be launched | | | | out of every 10 sales of both DS games and the |
| console, the Nintendo Wii. | | | | handheld platform itself. However, at the beginning |
| Regardless, such an increase in the price of | | | | of this year, the ratio of software to hardware |
| Nintendo's shares was justified by the rather low | | | | sales was still a bit higher in the Americas than it |
| value the market had previously placed on | | | | was in Japan. That's the case for all of Nintendo's |
| Nintendo's business. The same can't be said of | | | | platforms, although the games per platform gap |
| Electronic Arts. Even after underperforming the | | | | varies from very wide (GameCube) to quite |
| S&P 500 over the last three years, EA's | | | | narrow (DS). |
| stock price remains at levels that are nearly | | | | Game Boy Advance |
| impossible to justify using any form of rational | | | | Nintendo's Game Boy sales have always been |
| thought. So, Nintendo really is the world's largest | | | | pretty impressive. The Game Boy Advance, |
| pure play video game company. | | | | which launched in 2001, has sold more than 75 |
| Nintendo is an interesting business to write about | | | | million units and more than 325 million games. That |
| from an investor's perspective for several | | | | doesn't include sales of the various Game Boys of |
| reasons. The company operates in an exciting | | | | the 20th century (the original launched in 1989) |
| industry with excellent long-term prospects. It's | | | | which have sold well over 100 million units and 500 |
| more reasonably priced than many public | | | | million games. |
| companies in that industry (although that's not | | | | The Game Boy has helped Nintendo's financial |
| saying much). It's a truly unique business (with a | | | | results, because it has been a much more |
| unique past), and it has a clear vision of what it is | | | | consistent performer. Taking part in the "console |
| and what it isn't. Obviously, Nintendo's tremendous | | | | wars" is expensive, time-consuming, and risky. |
| intellectual properties add to its appeal both as a | | | | The risks are incurred upfront; the rewards come |
| subject of an article and as the object of an | | | | on the back half of the journey. Having the |
| investor's interest. | | | | support of regular revenues derived from the |
| Nintendo has been a good steward of its | | | | Game Boy certainly doesn't hurt when you're |
| intellectual properties. It's been very careful to | | | | involved in such an uncertain undertaking as |
| protect the image of its most beloved characters. | | | | launching a new console every half decade or so. |
| In fact, some would say the company has | | | | Financial Performance |
| occasionally been too protective of its strongest | | | | Considering the industry it operates in, Nintendo |
| franchises. | | | | has been a solid performer. The company |
| For instance, between 1994 and 2002 there were | | | | consistently turns a profit, which isn't easy when |
| no new Metroid games, despite the popularity of | | | | there aren't other divisions to smooth out any of |
| that franchise. The benefit of such a strategy is | | | | the bumps brought on by launching new consoles |
| that when Metroid Prime was released in 2002, it | | | | and essentially launching new products constantly. |
| received extraordinary reviews and sold over a | | | | After all, that is the greatest difference between |
| million units. The downside to this approach is | | | | the video game business and almost every other |
| obvious. Nintendo effectively surrendered the | | | | business around. All your sales are coming from |
| revenue (almost certainly more than $100 million) | | | | "new" products, even if they are variations on the |
| that could have been milked from the franchise | | | | same theme or sequels within an established |
| throughout the latter half of the 1990s. | | | | franchise. The lifecycle of each product is |
| Nintendo is one of only a few businesses in this | | | | unnervingly similar to the lifecycle of a fruit fly. |
| position. It's a rare and valuable property that can | | | | So, the business depends upon doing an adequate |
| benefit from spending some time "in the vault". | | | | job a great many times. As a general rule, |
| Nintendo has several such properties. For this | | | | businesses where you only have to do one really |
| reason, Nintendo has more in common with | | | | smart thing every couple of decades are better |
| companies like Disney (DIS) and Lucasfilm than it | | | | bets. |
| does with manufacturers of consumer electronics. | | | | Conclusion |
| Nintendo is an entertainment company; not an | | | | Apparently, most Japanese gamers now believe |
| electronics company. Console sales are inextricably | | | | the Nintendo Wii will come out on top in this round |
| intertwined with games sales. Hardware sales | | | | of the console wars. That's a surprising and |
| account for a large portion of Nintendo's total | | | | somewhat disturbing finding. If the Wii really is a |
| sales; however, hardware sales don't drive a large | | | | revolution in the making, I suppose they'll be right. |
| portion of Nintendo's total sales. At Nintendo, the | | | | But, I still think this is Sony's race to lose. |
| games sell the consoles. Of course, the console | | | | What will the price of a PS3 be in December of |
| itself can affect the gameplay experience in its | | | | 2007? Until I know that, I can't predict anything |
| role as a platform. For instance, the console itself | | | | other than a much tighter race this time around. |
| is expected to be a differentiating gameplay | | | | What about Nintendo as an investment? The |
| factor when the Wii launches later this year. | | | | stock isn't expensive, if you expect it to win the |
| Whether it's a positive or negative factor, we | | | | next round of the console wars. Otherwise, it's |
| don't know. But, the Wii itself will certainly help | | | | difficult to value. There are two big issues: the Wii |
| differentiate Nintendo's games from their | | | | and handheld gaming. |
| competition. | | | | I'm not convinced there are going to be serious |
| Third party publisher support for the Wii has been | | | | competitive threats to Nintendo's position in |
| the subject of much debate and speculation. | | | | handheld gaming coming from high-tech cell |
| Nintendo's consoles have enjoyed less support | | | | phones that are quickly becoming the Swiss |
| from third parties than the competing consoles, | | | | Army Knife of the 21st century. I just don't think |
| because Nintendo has been less willing to work | | | | the three great obstacles of clumsy controls, a |
| with third parties on their terms. | | | | lack of focus from the manufacturer, and a lack |
| While many publishers are now interested in | | | | of interest from the user are going to be easy to |
| releasing titles for the Wii, there is a new and | | | | overcome. Nintendo is in the best position of any |
| substantial impediment to successful third party | | | | company to profit from handheld gaming in the |
| titles. Games will have to be designed around the | | | | future. They will face competition; but, they will |
| Wii. In the past, it was easier for third parties to | | | | start with the advantage of knowing what their |
| offer titles for Nintendo's consoles, without | | | | product is (a game machine). |
| targeting that console in particular. Now, it will be a | | | | So, if you are comfortable with Nintendo's position |
| lot harder to do that. Expect a few botched | | | | in handheld gaming and you truly believe in both |
| attempts early on. | | | | the company and the Wii, it would be a |
| A Long, Slow Decline | | | | reasonable long-term investment at this price. |
| Nintendo's position in hardware has been declining | | | | However, even considering the large amount of |
| for well over a decade now. In fact, the zenith of | | | | cash and securities on the balance sheet relative |
| Nintendo's fortunes in the console business was | | | | to Nintendo's market cap, it isn't a "value" style |
| the NES itself (launched in 1985). It's been downhill | | | | purchase based on past performance alone. |
| since then. Nintendo launched the Nintendo | | | | Buying shares at the current price is a bet on a |
| Entertainment System (NES) in 1985, the Super | | | | brighter future. |
| Nintendo Entertainment System (SNES) in 1991, | | | | |