Reggie Fils-Aime, President of Nintendo of America, presented at the 19th Annual Digital Entertainment Conference put on by BMO Capital Markets recently. He attempted to reassure the audience that Nintendo was on top of things and that the future looks bright for games and Nintendo in particular. His remarks are noteworthy, both for what he said and for what he didn't say. His core message: “New forms of games are growing, but not necessarily at the expense of other forms of games.”
Fils-Aime began his remarks by noting the conventional wisdom isn't always correct. “When everyone agrees that there's a change coming, that doesn't necessarily mean that the change or the outcome is easy to predict. What maybe seemed like foolproof bets even a matter of weeks ago now seem a little less certain.”
Was he talking about the 3DS? Probably not, but it's one of the things that comes to mind. He is right about prediction being difficult, and he went on to talk about how Nintendo places its bets on the future. “Nintendo needs to make decisions not only by instinct and experience, but also based on where the market is, and a determination of where the market might be headed.” That's when Fils-Aime turned to presenting data gathered by the Entertainment Software Association in order to show some insights into the game market.
The ESA figures showed the total number of US households playing games is increasing, up from 67% in 2007 to 72% today (though it's bounced up and down in between). These figures show the use of a home console and/or a PC for gaming. Of course, those numbers didn't reflect exactly what games were being played; some of those are mobile and social games. The ESA figures also show a significant increase in the number of households with game consoles, up from 43.1% in 2010 to 50.5% in 2011, more than half of US households. Specific breakdowns showed the Wii in 31.2% of households, 14% for Xbox 360 and 10.6% for PS3.
"New forms of games are growing, but not necessarily at the expense of other forms of games." - Reggie Fils-Aime
Fils-Aime saw all of this as good news, but perhaps puzzling on the surface. “So home consoles are doing just fine, but we can see that people are playing more on social networks and portable devices. And if there's only 24 hours in a day, how can this be?” He showed more ESA figures that explained it: “Gamers aren't necessarily cannibalizing time from gaming so much as they're taking it from other forms of entertainment.” Nearly half of the gamers surveyed said they're watching less TV, movies, and other distractions from gaming. His point is that gamers are dedicated, but that's not the same as saying they're spending money on traditional console games, or on the games offered by Nintendo.
Fils-Aime got more specific. “Conventional wisdom says that all of this must be taking both passion and play time away from the dedicated portable game devices, namely the DS, the 3DS, and the PSP. The ESA asked owners if they were gaming more or less on dedicated handhelds, and 21.2% said less, 44.3% said more.” That means a net positive gain for game-playing on dedicated handhelds... among people who already own them. It's not helping to sell more handhelds, though. And those numbers don't indicate whether the gamers are actually buying more software at retail; Nintendo's declining sales for DS software would tend to indicate that no, those gamers aren't buying more software.
The common complaint among analysts has been that Nintendo is ignoring the booming digital distribution market, but Fils-Aime says that isn't so. He puts up a pie chart showing that, for “key franchises” like Mario and Zelda, Nintendo is deriving 14% of their sales from digital distribution. The eShop for the 3DS is also adding HuluPlus to Netflix, and moving to the web so you can order games for your 3DS via a PC or a smartphone. This is progress, indeed, but it's not the same as what's happening on iOS or Android. That's a good thing, according to Fils-Aime, because gamers want games that provide good value, and too many smartphone games don't provide good value, even if they're free or only a dollar or two.
The position that Fils-Aime puts forth is optimistic. NPD figures show that console game sales have been “holding remarkably steady,” according to Fils-Aime. “Growth in one category isn't necessarily stealing from another. In the case of our industry at least, the rising tide is lifting all boats.” It's an interesting position, but one not exactly supported by the facts. Game software sales through traditional channels, as measured by NPD, have been declining since 2008. NPD's latest report for October contains the opinion that sales for 2011 will end up, at best, level with last year, and perhaps down as much as 2%. This is while mobile and social games are growing at annual rates of 20% or more.
The bottom line question which Fils-Aime never answered was this: If gamers are dedicated and passionate about games, and are willing to pay for quality, why, then, is Nintendo suffering from lower sales of DS and Wii software, and losing so much money?
Fils-Aime makes some very good points about the nature of the market, but it still isn't clear how Nintendo intends to capitalize on the changes in the marketplace. Or, rather, if the changes that Nintendo is making will prove to be successful. It may be that Nintendo can be profitable while selling its own game hardware and software while other areas of gaming continue to grow much faster. As yet, though, Nintendo has still to demonstrate that its hardware and software can return to solid profits in a rapidly changing marketplace. This holiday season will be an important test for the 3DS, with its new low price point and a slate of strong software releases. If Nintendo can show strong sales for the 3DS moving into 2012, it will help them rally support for introduction of the Wii U. That will be an extremely important launch for Nintendo, as rumors are growing that Microsoft at least may not give Nintendo a big head start before a successor to the Xbox 360 is launched.
What do you think? Is Nintendo's outlook correct, and their strategy a sound one?
