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Can Mario and Luigi Save the Day?

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With the passing of Hiroshi Yamauchi, the legendary former Nintendo president, there's no doubt that the company is asking itself if it can keep evolving to survive.

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What recently released entertainment icon cost more to make than any motion picture this summer? It's the video game Grand Theft Auto V, which, at a production cost of $266 million, trumps nearly every cinematic blockbuster made in the past few years.

The transformation of the video game from its humble roots in the technologically crude Pong of the late 1970s into a lucrative entertainment business is thanks to visionaries like Hiroshi Yamauchi. The video game executive, who ran the Japanese gaming giant Nintendo (OTCMKTS:NTDOY) for a whopping 53 years, died last week. He was 85.

That Yamauchi should die within weeks of the hotly anticipated debut of Grand Theft Auto V isn't lost on gaming aficionados. That's because the global video game industry is at a crossroads. Mobile gaming, for example, is exploding in popularity because handhelds will be sporting HTML5 browsers as soon as 2016. Plus, companies like Apple (NASDAQ:AAPL) are betting their platforms like the iPad will replace the traditional "box" consoles from Nintendo and Sony (NYSE:SNE). In fact, with 55 million iPads sold, Apple might soon overtake entrenched gaming companies like Sony, with 62 million PS3 consoles sold, and Microsoft (NASDAQ:MSFT), with 65 million Xbox units sold.

There's very little difference between an Internet-enabled home computer and recent versions of consoles like Sony's PlayStation and Microsoft's XBox. Nintendo's Wii U, its latest Wii offering, is more in line with the traditional game console model even though it connects to online features. Nintendo's strategy has been to depend less on the hardware and more on its jointly developed software. For Nintendo, content has always been king.

That strategy grew out of the spectacular reign of Yamauchi. As a young man he inherited his family's beleaguered playing-card company in post-World War II Japan. After flirtations with board games and other products, Nintendo built a small electronic console that played cartridges whose subjects – like Donkey Kong and Mario Brothers – were unusual but nevertheless popular with children around the world.

Nintendo insists that new versions of its Donkey Kong, Mario Brothers, and Legend of Zelda games will ensure that it attracts a new and loyal generation of gamers. Yet there's nobody like Yamauchi (at least not at the moment) in the traditional video game industry to introduce new and innovate disruptions to what's become a mature market.

The global economic crisis is five years on, but one of the few industries to buck the trend is video gaming. The video gaming sector's 10% growth rate between 2005 and 2009 outpaced the US economy's anemic 2%. The global research firm NPD Group estimates that video gaming companies sold a total of 273 million units in 2009 alone, accounting for more than $10.5 billion in revenue. That's nearly one gaming console for everyone in the United States.

Just as Yamauchi defined a new market for the easily affordable Nintendo console, new gaming companies are offering online subscriptions services that are rendering the older boxes obsolete. "Interoperability" is what makes today's gaming consoles successful. It's not unheard of for customers to buy a Sony PlayStation only to use it to play Blu-ray DVDs. Those consoles are also popular with role-playing smash hits like Madden Football and the aforementioned Grand Theft Auto series. Nintendo has positioned its Wii, on the other hand, to play to a more physically active crowd. Child-friendly games like Just Dance promote exercise over more adult, shoot-'em-up roll-playing situations.

Content might continue to be king. But the future of Nintendo could very well rest with any number of wearable computing platforms that will allow gamers to download games with crystal-clear graphics onto a smartwatch with the flick of a wrist. Nintendo's DS handheld device, which allows users to download hundreds of games, is already one of its best-selling products.

With the passing of Yamauchi, there's no doubt that Nintendo is asking itself if it still has the ability to transform what was once a playing-card company into a gaming company that can stay one step ahead of a fickle, global customer base.

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No positions in stocks mentioned.
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