Editorial -- Nintendo's creeping doom: how the company came to misplace $926 million

More terrible news from Japan: Nintendo has posted a $926 million loss for the first half of the fiscal year ending in March 2012. Take a second look at that number. That's 926 million dollars. As in "very close to a billion."

The sheer volume of that amount of cash is staggering. In ones, it would fill a room roughly the size of the one Scrooge McDuck uses to hold his gold. Now imagine simply handing that money over to ... someone. Iwata, perhaps. The point is, you had it and now it's gone. Sucks, right? OK, now you know how Nintendo feels. It gets worse.

While Nintendo regularly loses money in the first half of the fiscal year (that's the period between April and September, approximately) last year it only lost $26 million (a chunk the size of Scrooge's bathroom). This year, then, it lost about $900 million more than last. That's a 3000% percent increase in its decrease, for those who like numbers.

"OK," you might say. "So what? This is Nintendo. It'll make it up over the holidays, like most game companies." And, apart from being a bit pretentiously cavalier about other people's money, you'd be correct. Except, here's the problem with that: Every year for the past 30 years, no matter how much money Nintendo has lost in the first half of the fiscal year, it's shown a profit for the year as a whole. Every year. Except for this one.

Nintendo is now projecting that it will post a total loss of $264 million for the fiscal year, Its first red year since at least 1981. Ouch. To quote Fred Willard from A Mighty Wind, "Eh? Wha'happen?"

Nintendo is blaming the strong yen for its losses, which is a typically diplomatic, Japanese way of saying "the US dollar is in the toilet." And since most of its Japanese plastic is exchanged for US dollars, a strong yen compared to a weak dollar will dramatically shrink its revenues. It's also blaming poor sales of the 3DS, which is spot on. It's the first device it's rolled out in a decade that hasn't flown off the shelves. Nintendo's August price cut increased 3DS sales by 206%, barely edging its sales performance into line with historical expectations. But there's also a third reason, and one it isn't talking about, but should.

First, let's look at the problems with the yen. As a Japanese company, Nintendo pays its executives, administrative staff and suppliers in yen, but its income, derived, as it is, largely from purchases of their products in the US, comes mainly in dollars. As the value of the dollar shrinks compared to an increasingly valuable yen, the amount of money it owes increases while the amount of money it is taking in decreases. Simply put, it could be selling the same number of products and employing the same number of workers, but the changes in value of the two respective currencies with which it does business means it makes less money in the process. These are the dangers of a globalized economy.

This global economic hoodoo is also a key component of the long-enjoyed success of Nintendo (and other Japanese companies). The global economic collapse starting in 2008 marked the first time in 20+ years that the yen has held a long-term advantage over the dollar. Meaning that for much of its existence as a company, Nintendo has been able to design and build their products relatively cheaply and sell them for a relative premium. For the past three years however, the local Japanese currency has been stronger than that of their principal market, which could ironically destroy the market for Japanese electronics, including Nintendo's.

While a strong currency is good for consumer nations, like the US, for nations with a largely export-driven economy, like Japan, having strong currency is extremely dangerous in the short term. It would be similar to the situation we'd face in the US if Mexican money suddenly skyrocketed in value versus the dollar. Americans would be swimming over the border to Mexico to make a quick peso, and Mexican goods would immediately increase in price.

Currency devaluation, while serious, is not the most serious issue facing Nintendo right now. Neither is it the most serious issue Nintendo's willing to own up to -- that would be the shortcomings of the 3DS.

While the 3DS device made an impressive showing at E3 2010, initial sales were underwhelming enough to prompt a price reduction less than six months after its release. The magic company that, for the past decade, could do no wrong had made a misstep and, according to its earnings report, it cost Nintendo severely. To the tune of $926 million, more or less.

Exactly how and why the 3DS failed to set the world on fire will have to be a topic for another day, but it's easy to see how Nintendo led itself down that primrose path. In the seven years since the DS platform was released, the company has produced five different models, and each and every one of them has done nothing but print money. Except the successor, the 3DS. Yeah, that hurts, but it's still not Nintendo's core problem.

So what is it then? It's the games, stupid.

I've said it before and I'll say it again: You can build the best, most advanced and most visually appealing hardware ever devised by man and you will still crash and burn if you do not follow through with great games. This is a mistake that cost Sega their hardware business. It's also a trap that Nintendo has fallen into on three separate platforms, the GameCube, the Wii and now the 3DS.

While there are plenty of playable (and quite good) games available for the DS system, having games at all is not enough to compete in an increasingly broadening and competitive games market. Most of the major sellers on both Nintendo's Wii and DS platforms were, by necessity, platform exclusive. The DS family has additionally suffered from dramatic competition in the "in transit" demographic from Apple's iOS devices, where games are easier to come by and vastly less expensive.

Absent the company's traditional crutches of a strong yen and an innovative hardware lineup, the importance of remaining competitive with in-demand core game experiences is a fact of life in the games industry that Nintendo now has to seriously come to terms with. It can think about this while pacing around in the empty room that used to hold its $926 million.

[Update: added a note about sales increase since August price cut.]

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.