Nintendo: Save Donkey Kong, Abandon the Console

(Originally published here.)

One of us had just found the elusive pair of RCP-90s. There was a lot of shouting, including some untoward remarks about the person who had managed to be so much shorter than the rest of us, making him harder to hit. It was the late 1990s, and we were playing one of the greatest video games of all time: “GoldenEye 007,” available only on the Nintendo 64.

A lot about Nintendo has changed since then. No longer universally admired, the storied Japanese gaming company is bleeding money because nobody wants to buy its latest console, the Wii-U. According to Bloomberg News, Nintendo is “considering a new business model.” I have a suggestion: Get out of the console business and focus exclusively on developing great games that can be played on any system.

Many analysts say that mobile devices willkill the console industry. That’s probably wrong — playing a high-end console game on a large television is a qualitatively different experience than wasting time on a cheap puzzle game during a commute.

Unfortunately for Nintendo, the company hasn’t been in the business of selling high-end console games for years. At some point in the 2000s, it made a strategic mistake to concentrate on “casual gamers” and family-friendly content. Investors were excited by the prospect that the Wii console, released in 2006, would make the company a fortune by introducing video games to the hundreds of millions of people who don’t play “Call of Duty” or “Grand Theft Auto.” Nintendo’s stock soared by more than 500 percent from the middle of 2005 until October 2007.

Investors’ hopes were dashed, however, when it became clear that casual gamers don’t spend money the way real gamers do. Even worse, the demographic that Nintendo was attempting to target was precisely the group most prone to switch to games that could be played on smartphones and tablets. Nintendo had abandoned the battle for serious gamers taking place between Microsoft and Sony only to expose itself to competition from Apple and Samsung. This is not a fight Nintendo can expect to win. As Bloomberg notes, the game maker’s total market cap is currently less than Samsung’s announced capital spending.

Fortunately for fans of Nintendo characters such as Mario, Link, Donkey Kong and Kirby, the company can survive, and maybe even thrive, by abandoning the console market entirely and focusing its efforts on making quality games that can be played across other platforms. Nintendo would be following in the well-trod footsteps of Atariand Sega. Both companies gave up the hardware business in the 1990s yet continue to make quality games for a range of systems. This path could be very profitable for Nintendo. After all, video-game hardware is usually sold at a loss to encourage the purchase of high-margin software. Why not let other companies pay that cost? Just look at how well Sega has done compared with Nintendo since the beginning of 2008:

Source: Bloomberg

Source: Bloomberg

If the traditionalist Japanese company rejects this strategy, I’d guess there are plenty of U.S. activist investors who would be willing to force it to consider changing course.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)

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About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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