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Is the Wii U's Weak Holiday Performance an Indication of Its Future?

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Nintendo's new system seems to be coming up short in what should have been its best season.

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MINYANVILLE ORIGINAL The last time I wrote an article on the Wii U, some readers didn't agree with Michael Pachter's claims that Nintendo's (PINK:NTDOY) new system would sell out through March, but falter afterwards. Well, Pachter was wrong…apparently the Wii U is having trouble selling out even now, in what is supposed to be its best season.

While the system sold well in the days leading up to Christmas, there has been a notable drop off in sales since. According to BGR, Japanese Wii U sales went from an impressive high of 433,000 units before the holidays to a measly 122,000 in the week after. Putting it in perspective, Sony's (NYSE:SNE) eight-year-old PSP managed to sell 58,000 units in that same week. The North American numbers have yet to be released, but in a recent episode of Pachter's show The Pach Attack, the console was revealed to be sitting in store shelves untouched in major areas, indicating that actual sales numbers may not be that great. For the most part, Pachter attributes the Wii U's underwhelming sales to a weak marketing effort and an inaccurate distribution strategy, so perhaps with these failures in mind Nintendo can make a rebound early in 2013.

A lukewarm launch sets up the worst case scenario for Nintendo, as many analysts are casting doubt on its ability to compete with its rivals. In the coming months, Sony and Microsoft (NASDAQ:MSFT) are due to announce the specs and features of their next-generation consoles, and from the information leaked by developers, it seems sure that their specs will dwarf the Wii U.

More concerning for Nintendo investors is the worry that Nintendo will fail in getting developers to support its system. Since the Wii U is being built at a loss, Nintendo's profits will mostly be coming from game sales rather than console sales. Nintendo has arguably the best franchise library in gaming, but it's doubtful that the company's development teams can produce the quantity needed to keep the system competitive, so support from major game studios is a must. This is an issue, because, while it was wildly profitable, Nintendo's Wii and its motion controls scared away many major developers, who aren't likely to be won over by the Wii U's similar setup and unimpressive specs.

However, it's becoming more and more clear that Nintendo's biggest problem might not be coming from the video game industry, but from the rise of smartphones and tablets. Believe it or not, analysts and journalists alike feel that Nintendo's focus on the casual gamer puts it in the line of fire with Apple's (NASDAQ:AAPL) iOS and Google's (NASDAQ:GOOG) Android devices, whose presence in the gaming market are growing at a rapid rate.

It's thought that casual gamers, who aren't that concerned with quality, would be more likely to buy an iPad or Nexus than a Wii U, because it could adequately fulfill their gaming needs while offering other services that the Wii U can't. As tablets and smartphones become more technologically advanced and accepted by the public, it's likely that they will grow to dominate the market for casual games and erode the profitability of handhelds, such as the Nintendo's 3DS and Sony's PSP Vita.

Disregarding the long-term speculation, Nintendo needs to ramp up its efforts to make 2013 a strong year for the Wii U. A strong marketing campaign could easily bolster sales in the first part of the year, and acquiring and promoting new games, or even console exclusives, for its line-up could definitely dissuade naysayers. Nintendo has to make this year count, because once the next Xbox and Playstation are released, the Wii U may very well fall behind.
No positions in stocks mentioned.
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