Will Digital Keep Nintendo in Hardware?

From a revenue standpoint, Wii U had a stronger launch than the original Wii. Analysts, however, feel that Nintendo's been underwhelming with Wii U so far, and that "many Wii U systems were sitting unsold on shelves at year end." From a fiscal standpoint, the last year for Nintendo was not a good one and there's no doubt that the pressure is on from investors. The argument has been made that Nintendo could fare far better with a software only approach, and it's something that RW Baird analyst Colin Sebastian believes could become a serious consideration in the new console cycle.

"In a negative scenario, Nintendo will be forced to prematurely lower the Wii U price, and over the course of this cycle, we expect consideration will be given to extending first party franchises to other platforms," Sebastian commented this week. In a follow-up email, he told GamesIndustry International, "I think the pressure is on Nintendo to deliver better momentum with consumers in the next 9 months; some view into the next holiday title lineup would help."

While it's interesting to think about how much money Nintendo might generate with a platform agnostic approach (imagine something like Pokemon on iOS and Android), is there any real chance of this happening?

"Nintendo can realize strong profits with a smaller base if Wii U (and 3DS) gamers buy more software, particularly paid digital downloads"

Billy Pidgeon

"Going the way of Sega and only doing software is simply not the best route. But if they are going to do hardware they need to do some marketing for that hardware," said DFC Intelligence's David Cole.

He added, "Nintendo's performance the last year was a disaster. It was almost like they rolled over and played dead with less than zero marketing for both the Wii U and the 3DSXL. This is something that can be changed. I don't understand what their thinking was, but in an age when consumers are clamoring for portable/tablet hardware it would seem to be a huge opportunity for Nintendo. Nintendo used to be great at marketing hardware and if they could bring that back I think there is opportunity."

Michael Pachter of Wedbush Securities doesn't believe current Nintendo management would ever let the company become a third-party software firm. "So long as [Satoru] Iwata is CEO, I don't think there is a prayer that they allow their software to show up on third-party platforms. If they are considering it, we'll see GBA software on mobile phones first... If Nintendo decides to go the way of Sega, it will be because a new CEO takes them in that direction. I don't see Iwata making a decision like that, it is not his nature," he said.

EEDAR's Jesse Divnich largely agrees, but he doesn't completely rule out a switch to software only. While Nintendo's intellectual property has been a strength, the hardware has been crucial to Nintendo's overall strategy and how they present certain IP. "Nintendo's market dominance has always come on the back of its hardware. Their hardware has been a key factor in driving the growth of their brands and products," Divnich noted.

"While I do agree that Nintendo should explore releasing products on other platforms, there holds a significant risk that it could marginalize the benefits of owning a piece of Nintendo hardware and could create a cascading impact on the health of their hardware division," he continued. "If the Wii U turns into a market failure, I'd suspect that a software only approach becomes a serious consideration; however, it would likely cut the company's valuation in half. The transition alone would spiritually kill the company for many years."

Perhaps the solution lies in the digital realm. Nintendo is increasing its efforts to sell games digitally, and the early feedback on the eShop on Wii U has been positive. As Inside Network's Billy Pidgeon commented to us, to remain profitable in the hardware business, Nintendo just needs to sell more software, and doing so digitally could provide a big lift. In fact, it's a likely scenario for all "big three" console manufacturers.

"I believe the console business has changed fundamentally, and there will be slow uptake and increased downward price pressure not only for the Wii U but also for the next generation from Microsoft and Sony. Hardware expectations will be overly high for all three vendors, but I don't expect the numbers to match this generation. Nintendo can realize strong profits with a smaller base if Wii U (and 3DS) gamers buy more software, particularly paid digital downloads," Pidgeon said.

"I think Sony and Microsoft will also need to sell more digital downloads to increase the software spend to base ratio. Microsoft will have an advantage here because of the lead Xbox LIVE has in PC, tablet and smartphone integration. Nintendo and Sony should both reconsider competition and potential co-operation with Android and iOS devices," he added.

2013 should be very telling. If Wii U struggles, Nintendo may be forced to take action. A radical price cut on 3DS did wonders for the handheld. Will Wii U get similar treatment?