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How Nintendo Lost Its Stride


Where's the innovation in the Wii?

Let every company with a staggeringly successful product take a cue from Apple's (AAPL) iPod line: If you fail to upgrade and innovate, there's no reason for the consumer to tag along for the ride.

On Thursday, Nintendo announced its grim full-year forecasts after a significant drop-off in Wii sales. Interim net profit plummeted by 52% to 69.49 billion yen, or roughly $770 million, from 144.83 billion this time last year. With operating profit dropping 58.6% to 104.36 billion yen, the Tokyo-based company was forced to slash its net-profit forecast for its full fiscal year to 230 billion yen -- a sizable reduction from its previous projection of 300 billion.

What's it all mean? It means Nintendo desperately needs to quit resting on its laurels and work a little harder on its Wii line if it wants to remain the console king. But judging from the Wii's history, it isn't likely.

Despite having noticeably weaker technical specs than Sony's (SNE) Playstation 3 and Microsoft's (MSFT) Xbox 360, the Nintendo Wii capitalized on its unique motion controls which appealed to folks who never touched a gamepad in their lives. Likewise, its family-friendly lineup didn't cater to hardcore gamers but rather tapped into older demographics who could now play along with their kids. Nintendo went on to sell over 56 million Wii consoles -- occasionally surpassing monthly sales of the PS3 and Xbox combined -- by capturing the non-gamer market.

But therein lies the problem: Once Nintendo became so focused on appealing to undiscerning non-gamers with a flood of terrible titles -- also known as "shovelware" -- it lost its drive to produce long-lasting, quality games and innovate upon past successes. When awful releases like Game Party -- which scored a dismal 25 out of 100 on Metacritic -- became one of its most successful third-party games, there wasn't a dire need to put much effort into developing better titles.

As a result, lasting appeal declined and customers abandoned the underwhelming console and lineup. Current sales are down 48% from last year and the company expects to sell 20 million Wiis worldwide in 2009 -- six million fewer than a previous estimate.

Making matters worse, the future looks just as bleak.

A supersized version of its portable Nintendo DS failed to excite investors, and rumors of a hi-def version of the Wii for 2010's third quarter feels too insignificant to warrant an upgrade -- especially when it won't affect previous releases. And while Netflix (NFLX) reportedly waits for the new Wii to drop before streaming content support, the window for Sony and Microsoft to pull ahead grows wider.

As for now, until the end of the year, Nintendo has to pray that New Super Mario Bros. Wii sells like hotcakes and its version of DJ Hero (ATVI) outsells the Xbox and PS3 versions. (See also Peripherals Controlling Video Game Market.) With such a dismal outlook on an even more dismal future, things aren't looking good for the Wii folks.

Sorry, Nintendo. It was fun while it lasted.

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