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Nintendo's Simple Secret


While Microsoft and Sony fought it out over the traditional gaming market of young males, Nintendo had a crazy idea to target a different group altogether - everyone else!

Nintendo (NTDOY) announced this week its net income more than doubled in the last six months, year-over-year. This stock has been a unique example of Main Street being well ahead of Wall Street and its unusual marketing strategy may explain why.

They decided to let Microsoft's (MSFT) Xbox and Sony's (SNY) Playstation fight it out over the traditional gaming market of 18-34 year old males, while Nintendo had a crazy idea to target a different group altogether - everyone else! From cruise ships and senior citizen communities to actually hosting mommy parties all over the U.S., Nintendo did the opposite of what their competition would even consider. They executed a brilliant strategy of going to parent bloggers, especially mothers (noting they carry "veto power") in a grassroots campaign.

For those not familiar or unable to grasp the simple beauty of their concept, I'll share my own personal experience. My son is three years old and cannot read or write but can jump right into the middle of a game on the Wii with his 8-year-old friend anytime. There is not another game I've ever seen where each end of an age gap like that is equally excited about the same game, with their parents waiting to play next!

I have noted the heavy expense to make and then market complex games from Electronic Arts (ERTS) which was not alone in underestimating that consumers were secretly wishing for something else – simplicity. Think about why Google (GOOG) and Apple (AAPL) have been so wildly successful. Their websites alone give away the clues - clarity. If you want to protect a secret formula the best way is to make it so simple that smart people and their egos find it impossible to mimic.

Check out this chart below which has NTDOY and a +446% return on top, and ERTS with a 0% return underneath over the past two years.

Click here to enlarge.

The explosion in the video game growth has, like most industries, treated different stocks differently. Yet the crowds remain clustered around what they think they know about this business. Rule #36 in the K&C Trading Diary: "It's not what you don't know that will hurt you, it's what you think you know that just ain't so." Over 1,400 mutual funds own ERTS shares as of latest filings while NTDOY's less liquid ADRs were sitting inside of only 32. Revenues over the past four quarters at ERTS have grown 2% while at NTDOY they are up 88%, while 24 Wall Street analysts dissect the former and a grand total of one cover the latter.

Too much too fast for NTDOY shares? Yes, for several hundred percent, just like Apple and Google. The brilliantly simple do something that few investors even consider – it doesn't compete well in existing markets in which they are modeled, it creates new customers entirely, in this case generations of folks who had never even played a video game. A funny thing happened to even the most aggressive expectations for the video gamers whose estimates focused on what the 18-34 males wanted: NTDOY was busy selling to everybody else.

It just started selling the Wii into Europe several months ago, and it is just about to start selling into China next year. And those sales get translated into a lotta Yen back home, especially against strengthening currencies elsewhere.
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