Raising the Bar

The phenomenal success of Nintendo over the last three years is hardly a new topic, either for this column or for the industry in general. You know the drill by now; by innovating with proven technology and delivering low-cost products with new user interfaces, the firm has propelled itself back to the top of the market, and is handing Sony and Microsoft their backsides on a week to week basis in every major territory on the planet.

Despite occasional lapses where people who should know better argue that the Wii is a "fad" (if that's true, what does it make the Xbox 360 or the PS3?) or that it isn't a "proper" games console, Nintendo's success is largely accepted as a major feature of the new territory games firms must learn to navigate.

As we've discussed in the past, not every firm has grasped quite what needs to be done, or just how urgently it needs to be done, to take advantage of this situation. However, it's universally accepted, at least, that the ground has shifted - and that corporate strategy must shift with it.

What hasn't been discussed in the same level of depth, however, is that Nintendo's sudden market dominance with the DS and Wii is strengthening more than just the firm's installed base.

The century-old Kyoto-based company is also in the unique position of making money from its consoles early in their lifespan - an unusual thing in an industry where consoles are more traditionally sold as loss leaders for several years. The firm's reliance on trustworthy, tried and tested components, cheap and dependable, may have earned criticism of the DS and Wii's graphical capabilities, but on the other hand, it has also earned wads of cash.

Great big wads of cash, at that. Analyst figures cited by Reuters this week suggest that Nintendo is in line to report an operating profit of JPY 415 billion for the present financial year - that's EUR 2.6 billion, or USD 3.6 billion. That's a little over 10 per cent higher than the firm's own projection for the year, but its share price on Tokyo's Nikkei index has soared to record levels on the expectation that it will revise its guidance upwards in the near future.

Nintendo has always been noted for keeping large reserves of cash and other assets, and indeed, it's the company's firm financial grounding that allowed it to take a risk on the DS and the Wii.

On the day he revealed the Wii to the world at the Tokyo Game Show, Nintendo president Satoru Iwata told me that the firm's outlay on the console, although high, was low enough that should it fail, the company could simply try again with a new concept. It is clear that the Wii has been no failure, but it's enlightening to consider that Nintendo's toy company approach allows for products to fail without taking the entire firm with them - a lesson its rivals would do well to ponder.

That firm financial grounding can only be getting firmer. Critics of Nintendo's approach - or those who talk in terms of Microsoft's "deep pockets" - might consider that at its current rate of operating profit, two years of Nintendo's success could just about cover Microsoft's entire loss on the Xbox and the Xbox 360 to date. With billions of dollars of operating profit flowing into the company's coffers, Nintendo's recent success sets itself on a different level to that of its rivals - the Wii and DS are no mere land-grab for market share and installed base, they are fully profitable businesses from day one.

The single most jaw-dropping result of this entire affair is that Nintendo is now the third most valuable company on the Japanese stock market - lying behind only the Toyota Motor Corp, the world's largest automobile manufacturer, and the staggeringly huge Mitsubishi UFJ Financial Group.

Whether the firm's performance justifies its position alongside such giants (Toyota's profits last year rang up at around USD 15 billion) is another question entirely - but the stock market values companies according to perceived potential more than any other factor, and the market clearly sees Nintendo's rapid ascent as being only the beginning of the curve, not the climax.

The task ahead of Nintendo now, from the market's perspective, is to keep up the momentum. In the immediate term, it clearly needs to improve the rate at which it is delivering Wii hardware to the market, as sales continue to be restricted by availability rather than demand - and software, too, needs some work, with the tie ratio of the Wii in particular looking slightly anaemic.

Such minor adjustments and fixes, though, pale in comparison with the overall task. Nintendo needs to continue to deliver hits - software hits, but also hardware hits, huge above-the-line products that garner column inches, queues at retail and a "Halo Effect" around its overall product range. It's a challenge no other console manufacturer has faced, but if Nintendo wishes to retain its incredible stock value, it's a challenge they must meet head-on.

It's certainly possible. Apple, for example, has managed to consistently buoy its share price with revisions, updates and refreshes of its various iPod, desktop and laptop offerings, and more recently with the new iPhone - all fundamentally part of the same product family, to a large extent, and all impressive enough to keep customers, media, and the markets alike on board.

Comparisons between Nintendo and Apple don't end at the similarity between the iPod and the Wii / DS (all built from older, cheaper and more reliable technology than their rivals, and comparatively underspecced as a result, but delivering innovation through great user interfaces and slick design). The task facing both companies in satisfying their shareholders is also now very similar.

However, just because Apple did it with MP3 players doesn't mean it'll be easy for Nintendo to do it with games consoles. Wii Fit, with its interesting "step" interface device, will be the first real test of the company's mettle - and its ability to continue delivering innovation that creates real buzz around its products.

If it stumbles on that front, it won't be the end of the Wii or the DS as major forces in the gaming sector - but Nintendo's present stock market bubble may well be pierced. Success, wonderful as it is, brings a whole new tightrope for the industry's wunderkind to walk.