TheStreet.com

TheStreet.com8/3/2006 12:00 AM ET

Nintendo hits the next level

By TheStreet.com

Despite the woes in the video-game sector, Nintendo (NTDOY, news, msgs) posted solid second-quarter results and is cruising toward an exciting Christmas season. A possible global recession would be just the ticket for this specialist in low-cost gaming.

Playing and winning against high-priced, technologically superior rivals is Nintendo's specialty. So far, Sony's (SNE, news, msgs) PSP has been the ideal foil -- a fancy, expensive rival with lackluster software support. I expect Microsoft's (MSFT, news, msgs) offerings to follow suit. (Microsoft is the publisher of MSN Money.)

This Christmas is billed as the battle of tabletop consoles. Sony PS3 hype is mounting as Microsoft tries to ramp Xbox 360 volumes above 10 million units ahead of the rival launch. But the combination of DS and the cheap Wii tabletop machine could well turn out to be a winning formula for Nintendo -- particularly if consumers grow wary of spending more than $600 on a new console/game package.

Portable power surge

Nintendo's share price has performed strongly over the summer, moving from $17 to $23 during the past six months. It's a fairly solid performance, considering how wobbly software companies like Electronic Arts (ERTS, news, msgs) and Activision (ATVI, news, msgs) have been during the same period.

In its latest quarter, Nintendo delivered an 85% revenue increase and a tolerable 10% EPS hike. That's a good performance, considering it's coming just ahead of the launch of its new tabletop console, Wii, in the fourth quarter.

Nintendo's resurgence is anchored by two products, both cheaper and in some ways more idiosyncratic than its main competitors'. The portable game console DS is enjoying a spectacular second year and has started overpowering the rival Sony PSP console, particularly in Japan. The upcoming tabletop console Wii is now expected to launch in the October-November time frame and possibly beat the PS3 to the market by at least a month.

The original DS console was a relatively clunky piece of hardware; however, its second iteration, the DS Lite, is one of the big consumer-electronics success stories of 2006. The two color screens of the original unit are now squeezed into a slim, cheap, iPod-like clamshell that offers portable gaming at $130.

Last week, the pink version of the DS Lite triggered another buying frenzy in Japan, boosting the weekly sales above 250,000 units. In June, the U.S. launch of the DS Lite gave a major boost to Nintendo's DS games and helped Nintendo grab two of the top three positions on U.S. sales charts for video-game market software.

The reason why DS is turning into a real gold mine for Nintendo is simple:

DS is a game console that has become a mainstream success basically on the back of the software sold by the console provider. In Japan, Nintendo has sold more than 21 million units of DS games -- the second-biggest DS software supplier has moved only 2 million units. Usually, console vendors have to grovel for the support of third-party game developers in order to gain strong sales of their game consoles, but Nintendo has the ability to sell 50 million units of its portable consoles on the back of its own game development. That's an edge no company can match.

The launch of the DS Lite has helped Nintendo open a lead over Sony PSP in America -- 590,000 vs. 220,000 in June. But more importantly, DS is now clobbering PSP in Japan -- 260,000 vs. 35,000 in the latest weekly data.

Over the past couple of months, Sony has been trying to stage a comeback by aggressively marketing innovative new titles. But the key summer PSP titles have now flopped in Japan -- both Bleach and LocoRoco debuted to barely 30,000-unit weekly sales, getting trampled by several month-old DS games.

The dead-on-arrival debut of LocoRoco must be particularly galling to Sony -- it's a methodically constructed copy of a typical Nintendo title.

This whimsical game features brightly colored blobs in a psychedelic fantasy world and has an interesting and intuitive control scheme. It got extensive media coverage and high marks for originality and playability from industry people months ahead of its launch.

Unleashing a monster

But consumers aren't buying the Sony-in-Nintendo's-clothing act.

DS has acted as a launch pad for several brand-new franchises, a tough feat in an industry increasingly hooked on sequels: Sony's PSP has remained highly dependent on life support from aging PS2 franchises like Monster Hunters and Wipeout. The DS Lite's performance this summer is hammering the last nails into PSP's coffin. Both Japanese and U.S. developers are flocking to DS, indicating a swell in software support in 2007 and 2008.

For Christmas 2006, DS is unleashing the monster -- Pokemon is coming back, with new creatures and moderately revamped graphics. This may well be the biggest software hit of the fourth quarter in Japan. It's remarkable that DS has done as well as it has before its lead franchise even arrives.

Sony likely will be forced to launch PS3 earlier than planned, trying to drum up new support by boosting hardware specifications (notably memory) radically. Microsoft's possible portable-device launch in the first half of 2007 is likely to help push Sony into this decision. This would leave Nintendo's DS as the only portable game device with a substantial global user base for Christmas 2007. By then, its price is likely to be below $100, which is going to be an even more enticing price point if the economy continues to cool.

By Tero Kuittinen. At the time of publication, Kuittinen held none of the issues mentioned, although positions can change at any time. Kuittinen is a senior product specialist for Nordic Partners, a pan-Nordic brokerage firm. Although Kuittinen is an employee of Nordic Partners, the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Nordic Partners, nor attributable to the company. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

Rate this Article

Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowHigh