Experts on Nintendo's immediate future, post-losses

Last week's news was tragic for Nintendo: Profits for its fiscal first half were deeply in the red to the tune of $926 million.

A near $1-billion six-month loss is potentially catastrophic for most companies, but for a game company like Nintendo the profits typically come at the end of the fiscal year, the period ending in March, which includes the heavy holiday buying season. First and second quarter losses are not unheard of; they're even expected. What isn't expected, at least for Nintendo, is a potential loss for the entire fiscal year, which is what Nintendo is facing this year, projecting revenues $264 million in the red for the first time since the company began reporting profits in 1981.

To get some perspective on what this means for Nintendo and, perhaps, the game industry, I spoke with two men who have been following recent events intently, and Nintendo as a whole for most of its existence: Kyle Orland, News Editor at Gamasutra, founder of Super Mario Bros. HQ and self-confessed "Nintendo fanboy," and Bill Harris, industry analyst and blogger at Dubious Quality.

"When you're used to generating a profit consistently for dozens of years, suddenly dipping into the other direction is bound to cause some soul-searching as a company," says Orland, suggesting this recent loss announcement is a potentially defining moment for the Japanese gaming juggernaut.

For 30 years, Nintendo has been a profitable company. It's been raking in cash longer than most of their competitors have existed. To put it into cultural short-hand, Nintendo has been profitable since Pac-Man Fever was cut into vinyl. Until last week, the white board at the company's Kyoto headquarters read "It has been 10,950 days since our last unprofitable fiscal year." Today, that white board reads "1."

"To be fair," says Harris, "Japanese companies are getting hammered in general: just this last week, Panasonic announced its worst quarterly earnings in a decade, and Honda's top American executive said that this year was the 'worst I've seen.' However, Nintendo has navigated choppy waters successfully for a long time, so this still stands out."

The "what happened" is arguable by degrees, but there's no disputing Nintendo could have (and probably should have) sold more games this year. According to Harris, it's not just games in general the company should have focused on, but games designed at extolling the virtues of the company's innovative products.

"Even with the pricing structure of games collapsing around them," says Harris, "Nintendo still made a terrible mistake not including a pack-in game [with the 3DS] as proof of concept for how 3D could work. Wii Sports was what made the Wii such a sensation, because it very clearly demonstrated why motion control was so much fun. It's incredible that Nintendo didn't absorb the lesson that something new and substantially different must be immediately demonstrated and explained with a high quality pack-in game."

Incredible, perhaps, but it happened. And it seems to happen over and again for the company which, at times, appears to be the most innovative voice in games development, and at others one of the most brain-dead companies in the world.

"Nintendo has historically been both incredibly brilliant and incredibly stupid," says Harris, "so it's not like they haven't gone through ups and downs before. But they always managed to make money, and I think that's because they've always been careful about managing risk. This time, though, they haven't done that well, and I think they're entering a very difficult period."

Difficult because of creeping instability in both the games market and the global economy, but also because of the market-shattering threat of mobile and social-based games. When looking
at how Nintendo has stumbled with 3DS, and the challenges that lie ahead, anyone not looking at how Apple's iOS and App Store have dramatically changed the landscape isn't seeing the whole picture.

"Apple and Google (with tablets and cell phones, along with the iPod Touch) have destroyed the
pricing model for games that gaming companies spent decades protecting," says Harris. "It's a massive democratization of content, with a focus on rapid development and ultra-low pricing, and it really strikes at the heart of what Nintendo does, which is make beautiful, hand-crafted, highly polished games ... [with] almost complete control of the pricing model. It's not just Nintendo who will struggle with this -- it's everyone, basically."

For now, the company's response strategy seems to be to aim for the short-term, focusing on minor course corrections that will hopefully energize demand for the 3DS and upcoming Wii and Wii U games. Nintendo announced late last week that it will be rolling out virtual item sales and DLC for the 3DS system, via a firmware update. This could be a crucial step for preserving the company's traditional edge in mobile gaming, but whether it will convince gamers to lug another device with them on the train or rather if they will stick to their smartphones remains to be seen.

"In-game virtual items are worth trying," says Harris, "but it certainly isn't going to address the real problem here, which is non-dedicated mobile devices that also play games."

On that front, Orland makes a case for cautious optimism: "It's possible that the prevalence of mobile/social gaming has fundamentally changed things this time around," he says, "but I think we need to wait at least three months -- to see the effect of Super Mario 3D Land, Mario Kart 7 and a lower price with holiday season promotions/gift buying -- before we can say that with any kind of certainty. Until then, I'd tell Nintendo to stay the course.

"Keep in mind the 3DS has yet to see its first holiday sales season or its first Mario game, two things that are about to change."

Yet while the experts may be conflicted over the wisdom of Nintendo's current focus, both are bullish about the company's ability to weather the storm. "Nintendo reportedly has about a $10 billion stockpile of cash," said Orland. "That means they're going to have quite a bit of time to find their footing, even if they stay in the red for the next few years."

Harris suggests another alternative: Plan B. "They can just stop making hardware, he said. "Even in a worst-case scenario I think they survive as a software developer. The Nintendo franchises are both successful and beloved to a degree that very few other franchises can match."

Whatever happens in the short term, whether the company makes good on its projected $264 million loss for the fiscal year or -- somehow -- pulls its collective ass out of the fire, it's indisputable we're talking about a company with a lot going for it and a long track record of succeeding where others have failed, starting with its phoenix-like rise from the game industry crash of the early 1980s.

If any of the current gaming Big Three can pull off a dramatic turnaround in the midst of staggering competitive threats and an unprecedented economic collapse, one has to assume it's Nintendo, although if it's by bottling lightning again with the 3DS And Wii U or by jettisoning the hardware business entirely and making Mario games until they drop remains to be seen. The good news: We'll know rather quickly.

"If the losses continue through the next fiscal year," says Orland, "that's when it's a panic-inducing turnaround of historic proportions."

Russ Pitts is the former editor-in-chief of The Escapist and the former producer of TechTV's The Screen Savers. He is currently writing freelance and blogging at False Gravity. Follow him on Twitter.