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A Wii Bit of Competition

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June 02, 2009 – Comments (5) | RELATED TICKERS: NTDOY , MSFT

The equivalent of a major auto show for the video game industry, E3, started a couple of days ago (forgive the example...I'm a car dude).  I suppose that it was bound to happen eventually, Microsoft (MSFT) introduced a new product that appears to be aimed squarely at the niche that Nintendo started and dominates with the Wii.

The new product is called "Project Natal." Like Wii it lets players interact with video games by moving around. However, rather than having people move the controllers Natal aims to take things one step further by using a camera to detect movement in players' bodies. It looks like it uses the motion capture technology that video game developers like EA use to map the movements of pro athletes when developing sports games.

Here's a link to the official Microsoft page for the product:

http://www.xbox.com/en-US/live/projectnatal/

Wii has been able to dominate this niche of the market practically unchallenged for the past several years. If Microsoft is able to come out with a new product that works like it's supposed to and is viable competition for it...and knowing Microsoft that's a big if...it could hurt Nintendo sales going forward. The video of how Natal is supposed to work looks pretty awesome.

Here's another article on the new Microsoft product:

Microsoft Whacks the Wii: A First Look

Here's a couple of pieces of new information that I was able to take away from the article:

- Don Mattrick who is the head of Microsoft's interactive-entertainment division is the former head of Electronic Arts. EA is an absolute gaming monster. It dominates the sports game sector, so while I don't know who Mattrick he has an excellent resume.

- In addition to infrared motion tracking, Natal will supposedly have a highly specialized microphone that can pick up voice commands.

- It has facial recognition which automatically logs players in under their unique id.

- Steven Spielberg was impressed with the project.

The Natal news wouldn't exactly make me run out and buy Microsoft stock, but it definitely would make me afraid to purchase Nintendo stock.  It's just one more headwind for a company that hasn't exactly been knocking the cover off of the ball lately.

Here's a great article on on Japanese console sales that I recently came across.  I realize that it is a little old, but it contains great data.  The graph of weekly video game hardware sales in Japan going back to 2000 are worth the price of admission alone.

Console Post Of the Week: Japan

The author of the piece concludes that Japanese love new video game systems, but they grow bored with systems very quickly. Here's a great quote from the piece:

Until I saw this graph, it hadn't even crossed my mind that we might have already peaked in hardware sales for this generation in Japan, but it certainly looks that way. And if peak to trough is as similar as trough to peak, the future is looking a bit ugly, because we would be looking at a four-year decline (as well as a 50% decline from current levels).

Wii sales in Japan are in an absolute freefall. I realize that Nintendo is a major, global company and that there's a lot more to its sales than its Japanese business, but any continued weakness in its home market certainly would act as a strong headwind for the company.

Like many companies in this recessionary environment, Nintendo has been able to improvve its profits by cutting costs.  It recently forecast a 7.5% increase in profit for its fiscal year ending in March 2010.  However, also like many other companies Nintendo expects its sales to fall, specifically by 2.1% in 2010.  Cost cutting will only take companies so far, in order to increase earnings in the long run companies will ultimately have to increase their sales.  I have seen nothing that leads me to believe that Nintendo will be able to do that going forward.

I personally would not be a buyer of Nintendo's stock (NTDOY.PK) even with its 50% drop since last summer.

Deej

No position in Nintendo, but I do own a Wii and an Xbox.

5 Comments – Post Your Own

#1) On June 02, 2009 at 7:55 AM, kaskoosek (92.46) wrote:

I was shorting Nintendo at 60.

The wii has reached the end of its llife cycle, so a p/e of 8 is still pretty high.

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#2) On June 02, 2009 at 8:58 AM, RodneyFarva (< 20) wrote:

Now that they're hands are free, the slobby gamers can now eat Cheetos and drink Mountain Dew while they're playing?  What a concept!

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#3) On June 02, 2009 at 9:00 AM, Melaschasm (65.13) wrote:

Great information, and you might be right about Nintendo.  However, there remains the possibility of third party software sales providing a bigger profit margin (minimal cost, with royalties being almost pure profit).  Plus their new hand held device is selling well, which should help them hold the line for the rest of this year profit wise.

At this point I am not a huge bull for Nintendo, but I think it still has some upside.

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#4) On June 02, 2009 at 12:16 PM, mode7 (84.87) wrote:

After seeing a system like Sega's Dreamcast fall from glory, the video game market is very, very difficult to predict. Before this generation of systems came out, most people thought Nintendo was crazy for releasing such underpowered systems (the DS & Wii).

 Nintendo's Wii has gotten a bit old for most gamers, but again, this holiday season they'll probably sell boatloads more. 

 I'd have to see Microsoft's motion control system in action before I make any judgements on it.

Microsoft has been trying to compete more with the Wii by releasing their Mii-like avatars in November of 2008 and now with the motion control system.

 Honestly though, I think the Xbox 360 will have trouble appealing to people outside the 15 to 25 year old "gamer" market. The Wii is just cheaper and easier to use, hence it's success with people outside the typical console crowd.

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#5) On June 02, 2009 at 1:16 PM, Tastylunch (29.54) wrote:

Nintendo had a chance to put MSFT and Sony away and didn't do it.

Their cheapness with developing online play and working with third party developers has possibly cost them their last great chance to control the market

However that being said the real money and growth is in handhelds not home consoles. In japan especially home consoles are no longer the dominant source of gaming. MSFT might be chasing last generations success again instead of thinking about next

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