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Stakeholders in the video game industry should reconsider the impact Nintendo (OTCPK:NTDOY) had back in the 80's, bringing the industry back to life. It's time to show some respect to Nintendo again, as its DS handhelds and forthcoming Wii console are set to have a profound impact on the industry.

The Economist carried a piece on Nintendo in its latest print edition (Oct. 28) that really makes Nintendo's strategy hit home, if it hasn't already. I'd argue that Nintendo is the only worthy gaming (console) investment play among its rivals Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE). It is the purest play, with a solid balance sheet, increasing emphasis on enhancing shareholder value (expect consistent dividend hikes and more liquid trading as it tweaks its unit trading in Japan), and its business is relatively easy to understand and analyze.

Sure, one can argue that Microsoft and Sony (especially the former; note that a majority of Sony's debt is associated with its financial services division) have strong balance sheets, and there's shareholder value adding activity (again, especially with Microsoft, think share buybacks, rising dividend payout and special dividends). However, the point is, if you spin off their gaming divisions, you have a very cyclical business with high R&D costs, and usually a not insignificant period for recouping costs and becoming profitable.

Now, on to the point of this post, to reiterate Nintendo's strategy, here are some key extracts from the Economist's article, "Nintendo: Playing a different game." Be sure to pay particular attention to the end of the post.

[...] Mr. Iwata [Nintendo's president] believes the industry has reached a crossroads: by designing products for existing gamers and neglecting non-gamers, it undermines the prospects for future growth. There have even been signs in Japan that the market was starting to shrink. “We need something radical to change the situation."

Nintendo's DS handheld has been a big hit and its software sales have been equally as successful. In fact, Sony was forced to lower its guidance for PlayStation Portable shipments and operating profit, clearly due to the DS, for which Nintendo raised its guidance.

The most popular DS game, "Nintendogs," which allows players to "take dogs for walks, teaches them tricks and enters them in competitions," among other things, has attracted female players. "Brain Training," a puzzle game designed to stimulate the player's brain, has attracted an older audience.

[...] Nintendo's research found that 60% of sales in Japan were to new users who bought DS consoles specifically to play it.

Mr. Iwata comments that he hopes 'existing gamers will act as ambassadors, encouraging friends and family to give the Wii a try.'

The end of the article offers perhaps the most important message in conjunction with the appeal of games to females and the elderly:

Mr. Iwata: Nintendo is not fighting against Sony and Microsoft.

Its real enemy is the indifference that many people still feel towards gaming.

Mr. Iwata: Of course I'd be happy if Nintendo became the leading console-maker again as a result of our new approach. But a victory over Sony and Microsoft in a shrinking market would not be a victory at all. (emphasis added)

Nintendo (OTCPK:NTDOY), Sony (SNE), Microsoft (MSFT) 1-year comparison chart:

Disclosure: The author does not own share in any companies mentioned in this article.

Source: Nintendo's Strategy Significant for its Business and the Video Game Industry