Leaving Japan: What strategies should Nintendo adopt for the Wii U

There is trouble brewing for the Old Gods. On April 10th, Sony has released some very interesting numbers, announcing a ¥520 billion loss and an operating loss of ¥95 billion. It is the operating loss that matters, for it relates to their actual business activities. Last year Sony had an huge loss as well, but since there was some operating profit, so there wasn’t as much pressure on them as there is now.

Nintendo is quickly following suit. On January, it has announced a 61% drop in their quarterly operating profit and forecasted a ¥45 billion loss for the fiscal year of 2011 – a forecast that’s about to be confirmed as we get closer to April 26th, the day scheduled for Nintendo to announce their earnings.

These are perilous times for Japanese companies – and particularly for Nintendo, whose revenues had already suffered a serious blow with last year 3DS price cut. Sony is a more diversified company, with more fat to burn. Sony’s action plan will be rather obvious: cut the bleeding (aka, disinvest in their TV divisions: the biggest culprits for this year’s losses), bet on the length of the PlayStation 3’s product life until, at least if rumors can be trusted (they can’t), the end of 2013 and remaining crazy when it comes to handhelds. If, on one hand, PlayStation 3’s sales can still be kindled with price cuts and/or new models, on the other hand, we can’t expect much for the Vita: only a crazy person tries the same thing while expecting different results and that’s exactly what’s Sony’s been doing with the handheld line from their launch.

The thing is that companies in Japan in general are no longer competitive because the typically strong yen is getting – and will continue to get – even stronger. A stronger currency is always bad for an economy. If your market is local (i.e. you are a Japanese company selling exclusively in Japan), that means your product may now face a stronger competition with foreign goods. A stronger yen means that the same amount of yens can buy more dollars and, if you product is sold in dollar (i.e. is imported) that means I can buy more of the imported good.

For companies that rely heavily on foreign revenue, like Nintendo and Sony’s gaming division, whose earnings come mostly from the U.S., the reverse happens. The dollar they earn abroad is worth less in yens when put in their balance sheet. As Nintendo’s and Sony’s  are in Japan, the yen is the functional currency they must use.

Currently, the yen has breached the 80 yens a dollar barrier, which highest level the currency rate has hit since WWII.

Europe and the U.S. are to blame. In order to prevent their economies from going cold, government whose countries affected by the crisis are injecting money into their economies Keynesian-style. The method, government buyouts, aids, quantitative easing, is irrelevant. What matters is that this liquidity has to flow somewhere and in such risky times, investing in a strong currency, like the yen, makes sense.

Coupled with the foreign aid inflow that happened because of the tsunami and the following nuclear crisis, this will make the yen worth more and more. The console wars just got caught in the exchange rate wars. Sony and Nintendo might just be their next casualty.

The particular problem Nintendo faces, however, is that it got its business model hijacked by Apple. The blue ocean of casual gamers Nintendo gleefully dived in just got a lot redder when Apple’s App Store managed to amount a game library big enough to lure that very audience. This is perfectly clear once we take a look at the Wii’s highest selling titles in the U.S. from 2007 and 2011.

According to the NPD Group, the highest selling titles for the Wii were:

1. Wii Play (released in 2007)
2. Super Mario Galaxy (released in 2007)
3. Mario Party 8 (released in 2007)

Meanwhile, in 2011:

1. Just Dance 3 (released in 2011)
2. Just Dance 2 (released in 2010)
3. Zumba Fitness (released in 2010)

The minigames collections simply vanished from the Top Charts! The ranking shows consumer behavior – determined by both demand and supply. When the Wii was released, its market demanded mini game collections. Now there was a shift in the profile of demanded games. In the place of the mini-game collections, we see music games; incidentally, ones we cannot play on a tablet or smartphone. The demand for casual games has not died though; the numbers from the App store shows us that. What happened, therefore, was a consumer migration from the Wii to the more diverse and cheap offering from tablets and smartphones, reducing the Wii to a niche. The games from the App Store have another serious advantage, Nintendo never managed to tame: social-network and internet-delivered capabilities.

This is incredibly interesting because, as the Wii was launched Apple was Nintendo’s muse and Iwata was more than inspired by the iPod’s success.  For a time, it worked. But as Apple started to invade its territory, the relationship changed. First there were public declarations of love, then Iwata started to become uncomfortable, and now he publicly declares Apple to be the enemy of the future. He is only partially right, of course. Apple is the enemy of the now.

And here is the pickle of following a trendsetter like Apple, who came into the frame as an outsider: thinking that it’s the features that make the market. It’s not. What matters is the price tag and how the features are used. That’s why sticking a control stick on a tablet just won’t do.

So, what will?

My first answer to Nintendo is: leave Japan. For 20 years, Nintendo of Japan treats Nintendo of America (NOA) as nothing more than a publishing and marketing company. NOA needs to start having a greater voice inside the cavernous lair where Nintendo makes its strategic decisions. This is not only a question of having more diverse opinions – and opinions, in particular, that come from the same place their market base is. Nintendo needs a balance sheet in dollars and its stocks must be traded in the country where the heart of gaming lies. Finally, Nintendo’s development arm needs to become stronger and more daring. NOA sits at Digipen’s footsteps and yet they are not absorbing any of the game design talent flowing from that place. In short, the company needs to take the full benefits of its strategic, financial and human assets. There are lots of tactical obstacles on the way of achieving this, sure, but leaving Japan should be a strategic direction on the long term.

My second answer: carefully evaluate who the Wii U’s market is going to be; because, once you go upmarket, you won’t be able to come down again. If you offer the same kind of games the Wii did, the only result is an even smaller market share. If you try to offer mobile games to be played at a console, like the Wii originally did, you better off just making your own cell phone instead. Finally, whatever you do, make sure the Wii U is the “ultimate console”, for there shall not be a third generation. The time of growth from consoles is night; there may be a last generation but hardly anything beyond that, due to the accelerated rise of digital distribution models and current saturation of graphics/sound/engine improvements a console can offer. We are quickly arriving on the point companies find that investing 4 years in console development for minimal improvements no longer makes sense.

I see two options. The first one is Nintendo to go offer a cheaper option to the iPad, by managing to make the Wii U portable: a target Nintendo has been trying to hit for quite a while now, the idea of unplugging your controller and taking it with you. It’s something that can only work if the Wii U is built on that concept from the get-go. Launching “connectivity cables” or any other similar accessory is just a shortcut to disaster, for when you launch an console accessory, its success lays hostage to the acceptance of developers. This idea also implies that the controller will have more capabilities other than gaming. Eventually, it would position itself as the iPad for Kids, if there is such a position to be filled.

Note that a portable Wii U would not cannibalize the 3DS due to not only different audiences, but also the fact Nintendo always (and smartly) tries to have their systems feature as little feature overlap as possible. Sony usually does the opposite and end up having their portables to serve as nothing more than a port collecting for games released in the previous generation.

The biggest obstacle for this idea, however, is that it implies the Wii U is not a mere console anymore – but a full-fledged platform. In the mind of the customer the bottom-line is simple: iOS is a platform and the 3DS is a toy. Sure, some customers may want a toy – not a platform, but the limited uses of a toy imply we get tired of them faster. Having no information on the philosophy behind the Wii U design, I can’t say how it plans to position itself.

But if the Wii U wasn’t developed with a platform framework in mind, then the second option is to follow the Just Dance route and transform the Wii U into a party toy. By staying on the toy route, the Wii U would compete with other toys and staying away from Apple’s gaze. This idea implies on Nintendo becoming a leaner company, in order to profit from a smaller niche than its cost structure was built for.

Ha! But here is a bonus idea! One as outrageous and likely as it is genius: parasite the smartphone/tablet market! Design an App that transforms your phone or table into a controller for the Wii U, with a standard touch interface.  Again, this won’t cannibalize the 3DS as we are using tablets and smartphones as a controller, not a handheld (and remember that the issue of cannibalization is not about the features, but how the features are used). What this would do is to provide a nice incentive for people to acquire the Wii U – but that’s it. The longevity of the console will be determined by the profile of its game library.

Whatever the solution Nintendo creates, one thing is for certain: it has to develop a new business model …again. With the Apple TV, the core idea sold at the last E3 – a device that could create synergies by using two screens at the same time – just won’t be enough. But let’s take baby steps first, Nintendo. Start by applying for U.S. citizenship.

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