Message to Nintendo: call a smartphone maker fast

July 29, 2011

By Wayne Arnold
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Nintendo slashed its profit forecast and the price of its newest hand-held gaming device, and its stock plummeted. The strong yen and weak U.S. consumer spending are problems, but Nintendo’s nemesis is the iPhone. If it doesn’t make a forceful entry into the smartphone market, the game could be up.

Nintendo joins a growing list of Japanese and other Asian electronics makers hit by the slowdown in consumer spending. It reported that sales in the second quarter dropped 50 percent compared to the same period of 2010, leaving it with a 25 billion yen loss. Sales in the Americas, usually its biggest market, fell by 69 percent.

With unemployment at 9.2 percent and housing still soft, U.S. consumers are increasingly spendthrift. Hurt also by rising currencies, Asia’s largest electronics companies — Samsung, Panasonic and Hitachi — all reported sharply lower results. Panasonic posted a 30.4 billion yen loss.

The pressures may have hurt Sony,  which makes the rival PlayStation Vita, too. But while broad bearish trends afflict the global electronics industry, Nintendo appears to be in a particularly tough position. The growing popularity of games on Facebook makes for formidable competition.

Nintendo revised down its estimate of sales of its Wii gaming system, for the year ending March 2012, by 7.7 percent. More significant, though, is consumers’ growing preference to play games on their smartphones rather than a dedicated gaming console. Sales of Nintendo’s 3D device, launched just five months ago, fell 81 percent in the second quarter.

Nintendo’s response, to slash the price of the device by 40 percent, looks like a desperate measure. It will probably now lose money on every one it sells.

Judging by the emerging evidence, Nintendo needs to engage in some pretty fundamental strategic thinking. Is has to decide if it is best at hardware or software? It might license its games to Apple or the many companies making phones on the Android system. It could team up with a phone maker to make combination product or use its $10.3 billion cash pile to help buy one. One way or another, Nintendo needs to get much smarter about smartphones.

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Cellular phones. Once they were phones that could do computing. Now they are computers that can do phoning. All info and entertainment is going online and to a singular device (think Atrix). We have been saying good bye to books, CD’s, and DVD’s because we have ereaders, mp3, and Netflix. All available on a phone. Now we start to say good bye to game disks and cartridges: Anyone heard of OnLive? And there’s the real issue. The fact that games of the future are played off low latency servers not consoles using traditional media. Nintendo clearly needs a smartphone presence but primarily in the form of apps linked to online game servers. If Nintendo is in danger of sharing Sega’s fate it is from failing to create an online service like OnLive and then sell that service to smartphone owners as apps at premium price points. They still have room in the market for a handheld but it should/would/will be in the form of the Xperia Play running a custom Android that could be set to different user/safety levels. Imagine the Atrix meets Xperia Play meets Onlive. The bottom line is this: Nintendo needs a gaming model like OnLive more than it needs a smartphone. If it could manage both than there’s no danger of suffering SEGA’s fate.

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