Contrary to numerous complaints regarding Wii-U in the social media, Nintendo Corp. (NTDOF.PK), which has significant representation in SPDR S&P International Technology Sector ETF (IPK), has revealed that it sold more than 400,000 consoles in the first week of its release in the U.S. as Thanksgiving shoppers lined up to purchase the latest hardware from the Super Mario developer. The original Wii console was such a hit for so long that anticipation has been very high for the new one. Moreover, Nintendo is the first to market with the so-called next-gen consoles, beating both Sony's (SNE) latest Playstation and Microsoft's (MSFT) successor to the best-selling Xbox to market.
The struggling company is relying on its new console that came after a gap of six years and is equipped with touchscreen controller called "GamePad," to turn itself around. The video game industry is currently dominated by Microsoft's Xbox 360 in terms of sales. But, Nintendo Wii's innovative hardware revolutionized console gaming by focusing on fun and usability rather than relying on stunning graphics and geek-cred. For its troubles, the Wii was a cross-over smash hit and the company sold 97 million units. Nintendo's notoriously shallow supply chain is in action now as the new Wii-U is "effectively sold out."
Although Wii-U's first week sales are about 200,000 less than the Wii's in 2006, it is significantly more than Sony's Playstation 3 or Xbox 360, both of which sold 197,000 and 326,000 units in their first two weeks of release. Following the launch, Nintendo's American boss Reggie Fils-Aime boasted that Microsoft and Sony need to react to what Nintendo is doing. His comments were similar to Sony's CEO and President's famous remark prior to the release of Playstation-3, "The next generation doesn't start until we say it does," In many ways he was right, as the Wii's interactive interface has spawned responses from its rivals. For the Xbox, it was the release of the Kinect system that finally put that console's sales over the top. And in the past few years, Xbox 360 has established its dominance in the industry. Nintendo had to get to market with its new Wii well ahead of Sony and Microsoft to counteract a lack of any other support network behind it. Microsoft as Windows/Windows Phone while Sony is trying to coalesce a similar experience around its home entertainment and Xperia smartphones. For Nintendo, it had to get first mover's advantage, provided it actually offers the next generation of gaming.
Nintendo is generally considered for the casual gamer and offers very little "hard-core" gaming experience. The Nintendo universe is stocked with its core of flagship titles: Zelda, Mario, Metroid and Spyro. It always takes care of those franchises first and has effectively created its own niche, while the needs of hardcore gamers are fulfilled by the other two consoles that offer hardware with much higher processing and superior graphics. Again, it's the fun of the 4-color Nintendo Universe vs. the geek-cred photo-realism of the Skyrim / Call of Duty / Gran Turismo set.
For Nintendo, the updated Wii console was an imperative. The success for Nintendo will lie in how well it continues to take care of its core market while providing a platform for good cross-over appeal. The Wii's engine was so far behind the others that for years those titles were effectively shut out of its platform. So far, Wii-U comes with 23 original titles and some third party games such as Activision Blizzard's (ATVI) Call of Duty: Black Ops 2. Nintendo says that it will maintain its long-term strategy to focus on product innovation rather than processing power or in-game graphics, which is smart. The Wii proved there was a gaming market beyond 16-25 year old men with Asperger's living in their parents' basements (I am, of course, kidding). After legitimizing gaming to a whole new audience in the same way that World Of Warcraft did for MMORPG's, it would be suicide for Nintendo to give up its unique position in the market.
*Nintendo Co. Ltd (TYO:7974)
All three leading consoles; Wii, Xbox and Playstation are now facing increasing competition from smartphones and mobiles who wish to get a large chunk out of the $78 billion gaming industry. Although Fils-Aime believes that consoles offer a much better gaming experience than smartphones or tablets, Apple (AAPL) has created a platform that is easy for game developers and affordable for game's consumers and Microsoft is actively trying to merge the smartphone and the console into a seamless media consumption unit which seems the most likely model to be successful.
Game developers can simply put their titles up on iOS and bypass the middleman. Analysts have also identified that gaming console manufacturers as well as game publishers, such as Activision and Ubisoft, have to adapt their business model to the changing trend of free-to-play games ecosystem. The new $99 Ouya console that runs on Google's (GOOG) Android 4.0 OS and is equipped with 1GB RAM, quad-core processor and 8GB flash memory looks to challenge the console industry's status quo by offering "freemium" games - free to play the basics but a price for better versions.
I've written about "freemium" in the past, and while it is slowly gaining acceptance in the U.S., it is, by far, the preferred model for Asians, who will continue to assert even more dominance over the gaming industry as the revenues and middle class expands.
For a company like Nintendo where the lion's share of their revenue comes from their exclusive titles, I have to wonder however. I don't think the company is going anywhere and the cross-over appeal of the Wii may pull forward to the Wii-U but early reviews are mixed at best. It has lead over Sony and Microsoft - whose next X-box will not be out for a year as Bloomberg reported recently - but Microsoft's building momentum with Windows 8 looks a much better bet at this point.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.