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Nintendo Crushed Again as Apple, Facebook Keep Moving the Cheese

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Nintendo lowered its financial forecasts as demand for its 3DS and Wii collapsed.

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Japanese video-game giant Nintendo (NTDOY.PK) just reported its financial results, showing once again that the traditional gaming business just ain't what it used to be.

Nintendo reported a loss of 48.35 billion yen, and said it now expects a full-year loss of 65 billion yen, up from October 2011's forecast of a 20 billion yen loss.

Why? Nintendo just isn't moving product.

The company now expects to sell 14 million 3DS units for the full year, down from an earlier forecast of 16 million. This is despite a significant price cut for the 3DS last July (see: Nintendo Joins the Long List of Apple Victims), and an incredibly silly press release in November 2011 in which Nintendo tried to fool people into thinking the 3DS was back on top. (See: Is the Nintendo 3DS Making a Comeback?) Wii demand also slackened, as Nintendo's full-year forecast just went from 12 million to 10 million.

But most alarmingly, a Nintendo spokesman said that despite the lousy results, "...we are upbeat about hardware and software sales for next fiscal year."

Ugh.

I've been arguing for well over a year that the old-school business model of pushing $30 to $40 mobile games looked troublesome in an era of skyrocketing smartphone adoption. (See: Smartphone Games Likely to Hinder Nintendo 3DS Success.)

Here's how I saw things back then in September 2010, which was five months ahead of the 3DS debut:

For one, millions upon millions of people are carrying around smartphones, for which most games cost somewhere in the neighborhood of free to $4.99. As of the time I'm writing this, nine of the top 10 selling games in Apple's app store cost just $0.99.

So I can't see the average person (as in not a hardcore gamer) getting excited about ponying up $200 to $300 for a 3DS and $30 to $40 for a game when they already own a gaming device.

Consumers are also rapidly embracing tablet computers like the Apple iPad, which provide a better gaming experience than smartphones -- and another excuse not to carry a separate gaming device like a 3DS around.

Think of it this way, there's almost zero chance that an iPad owner doesn't own a smartphone as well. And if that person's already carrying an iPad and a smartphone, they're not going to want to drag around a
3DS.

I've also been incredibly concerned about the health of the console business, given my disappointment with console sales relative to the last cycle, among other reasons (see: "Modern Warfare 3" Will Mark the End of the Video Game Console Era):

Is the money going to companies like Zynga coming straight out of the console-gaming industry?

I'd say that at least some of it is, based upon the fact that literally hundreds of millions of people are playing games on Facebook and other social-gaming outlets. And if that many people are spending more time online playing cheap or free games, then some of them are spending less money on console games.

One could argue that weak sales of consoles and games simply means that we're late in the cycle, where things normally slow before the next generation comes.

However, that would indicate a pretty weak cycle, considering that life-to-date sales of the Nintendo Wii, Sony (SNE) PS3, and Microsoft (MSFT) Xbox 360 now stand at 194 million units, or 15% below the combined sales of last generation's consoles.

Just recently, we've seen Nintendo bomb, GameStop (GME) offer a lousy holiday sales update, THQ (THQI) announce another restructuring, and NPD report an awful December 2011 industry sales number. Aside from a few bright spots, like Activision's (ATVI) blockbuster Call of Duty: Modern Warfare 3 numbers, and Microsoft Xbox 360 and Kinect sales, the industry is in awful shape.

Again, I can see why people argue that we're just coming to the tail end of the current cycle, where sales typically weaken. And I'll respond that this conclusion implies a pretty lousy cycle compared to the last one, which doesn't exactly bode well for the next.

In fact, I think the next video-game cycle will be way weaker than this one for two reasons:

1. People only have so much money to spend on gadgetry, and that money is increasingly being thrown at expensive smartphones and tablets.

2. Apple (AAPL), Facebook, and Google (GOOG), have moved the video-game industry's cheese by enabling access to games that are incredibly cheap and/or free. This is destroying the traditional mobile gaming business, and hurting the console business at the margins.

Hardcore gamers will always demand and pay up for cutting-edge hardware and software, but the reality is that the average person just doesn't give a damn. Angry Birds is good enough. That would be fine if the hardcore gaming audience was growing, but it just isn't.

I've noticed that serious gamers tend to get very emotional when I broach the topic of the disruption of the old school. They act as if I'm going to personally take their games away while laughing maniacally. Consoles and old-school handhelds aren't dying, and in no way do I want them to die.

I'm just pointing out that they're becoming less and less relevant to the mass market (as in everyday people) as time goes on. And it's simply my job to identify those types of trends for investors. If you disagree, I'm all ears, so post comments below.

So to wrap this up, when I look at the video-game industry landscape, all I see are value traps. I suspect that these stocks can skyrocket after expectations bottom out, but I just don't believe that many people are yet grasping the evolution of gaming.

Follow me on Twitter: @MichaelComeau

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