Why Nintendo's Wii U Failed

Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nintendo (NASDAQOTH: NTDOY.PK) is the largest video game company in the world by measure of revenue. The company produces handhelds and home console hardware and has created some of the most valuable intellectual properties in the industry.

The company’s Wii U console is off to an abysmal start, shipping low numbers and failing to capture consumer interest. Nintendo stock currently trades at around $16, and I believe that it is overvalued at that price. 

Some have speculated that Nintendo’s rivals, Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE), will face similar difficulties in establishing their respective Xbox One and PlayStation 4 systems. In order to gauge the validity of those estimates and the possibility of a complete collapse in the console hardware market, it is worth examining why the Wii U failed.

Nintendo killed support for the Wii

Wii U’s predecessor, the Wii, was a breakout sales hit and reshaped the gaming industry landscape. What’s more, the system utilized hardware that was very similar to what Nintendo had used for its previous 2001 home console, the GameCube, thus making the system very cheap to produce.

The runaway success of the Wii meant that Nintendo was selling massively profitable hardware in addition to broadening its software base and making the case that third party support was a viable endeavor. The early years of the Wii were characterized by sales hits like "Wii Play," "Wii Fit," "New Super Mario Bros. Wii," and "Mario Kart Wii." But, other than "Donkey Kong Country Returns" and "The Legend of Zelda: Skyward Sword," Nintendo didn’t offer the Wii much support after 2010.

The company had its 3DS handheld to save after a rocky launch and also needed to start diverting resources to next-gen development. As the casual audience that the company so brilliantly courted migrated to smartphone and tablet games, some of the new gamers it had created began migrating to the Xbox 360 and PlayStation 3. 

Nintendo failed to support the Wii U

As of Nintendo’s March 2012 fiscal year report, "New Super Mario Bros. Wii" had sold 26.26 million copies, a decidedly phenomenal figure. It is clear that Nintendo mistakenly thought that the game’s sequel, "New Super Mario Bros. U", could carry its fledgling Wii U console until the next year, when the company could deliver more titles. 

In that interim, Wii U owners have been left with a dearth of games to play and prospective buyers with little incentive to invest in the device. It also needs to be said that the Wii U’s Gamepad is a failed experiment. Roughly nine months after release, there is no software that justifies its existence in the same way that Wii Sports championed the Wii Remote. This might not be such a big problem if the company were better equipped to innovate in services and the digital space.

Couldn’t pick 'em out of a lineup

Nintendo made a conscious decision to make its Wii U system casing very similar in appearance to that of the Wii. The company did an excellent job of making “Wii” a brand back in 2006. Its "Wii Sports," "Wii Fit," and "Wii Play" games all proved to be massive hits and shaped the ecosystem on the console. However, in naming and designing the Wii U, Nintendo invited the idea that the new system is merely an add on or marginal upgrade to the Wii.

Nintendo President, Satoru Iwata has stated that these misconceptions are one of the major reasons that Wii U has continued to disappoint. Yet, the same product identity issues arose during the launch of the 3DS. What does it say about Nintendo that the company was brazen enough to repeat the same mistakes? 

Being able to generate revenue from its hardware, software, and third party licensing is essential to Nintendo’s current business model. With the company's hardware sales eroding on both console and handheld fronts, it is poorly situated to navigate the industry’s shifting landscape and faces some very tough questions in the coming years.

Will Sony and Microsoft follow in Nintendo’s missteps?

It is my position that Sony and Microsoft should be able to avoid many of the blunders and mismanagements that have sunk the Wii U. To be sure, success in the gaming business is of less importance to the two conglomerates than it is to Nintendo. PlayStation is more integral to Sony’s business than the Xbox division is to Microsoft, but both companies have a strategic interest in the battle for the living room and the boons of online services.

It’s worth noting that while Microsoft has done an impressive job negating much of the mindshare gains it made with the Xbox 360, it at least has the chance to turn the Xbox One into a success. Both the PlayStation 4 and the Xbox One should enjoy healthy support form third party publishers and independent developers and are unlikely to experience the same type of post-launch drought that has plagued Wii U. 

There are, however, certain parallels to be drawn between the Wii U Gamepad and Xbox One’s new Kinect camera. The rapid decline of the Wii and Xbox 360’s Kinect hardware and software sales indicates that motion gaming is no longer in vogue. Luckily for Microsoft, it has not made the Kinect 2.0 the focal selling point for the Xbox One. Still, the expensive camera technology that contributes to Xbox One’s $499 price tag could drive customers to Sony’s $399 PlayStation 4.

If Microsoft can't get the MSRP for the Xbox One closer to that of the PlayStation 4 within the first year on the market, I anticipate the PS4 to build a substantial global sales lead. As for the Wii U, Nintendo's commitment to a 100 billion yen operating profit for the year means that a substantial price cut for the holiday season is highly unlikely. As such, I estimate that the Wii U is a lost cause and one that will prompt Nintendo to seriously reconsider its participation in the console space.  

Keith Noonan has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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