Thursday, March 10, 2011

Why Nintendo is in no hurry for Wii2

Nintendo has three functions in the video game business of which most journalists and analysts seem to focus on just one. Today I'd like to look at the health of the Wii platform in reference to those three areas.

Hardware manufacture

Most Nintendo observers focus on it's hardware business. While Nintendo hardware has blown away the competition in recent years, so far this year the Wii platform seems to be falling behind.
Worldwide Hardware 2011 (YTD)
Console Yearly    Total
------- ------    -----
PS3     1,817,179  48,163,035
DS      1,743,582 145,707,365
X360    1,677,025  52,065,666
Wii     1,676,899  85,336,683
PSP     1,046,947  66,433,522
PS2       474,050 142,132,409
3DS       374,164     374,164
Total   8,809,846  
(All charts taken from VGChartz.)

Considering that the DS, in its various forms, has been the best selling game machine since 2006, Nintendo did well to shift to the 3DS, which seems to be off to a fast start. Meanwhile, the Wii maintains a large lead in total consoles sold among current systems, but is clearly losing momentum at an alarming rate. Since this is the number most people focus on, Nintendo seems to be in trouble. By 2010 the handwriting was on the wall for both of Nintendo's platforms:

Worldwide Hardware 2010
Console Yearly     (change) Total
------- ------     -------- -----
DS      21,445,632 (-25%)  143,963,783
Wii     18,345,329 (-15%)   83,659,784
PS3     14,443,529 (+11%)   46,345,856
X360    13,606,638 (+34%)   50,388,641
PSP      9,298,210 (-11%)   65,386,575
PS2      4,591,780 (-24%)  141,942,000
Total   81,731,118 (-9%)  

It's important to know that historically Sony and Microsoft lose money on each console sold and Nintendo makes a moderate profit. This late in the console cycle, it's likely that all three consoles are making money, but Nintendo has always profited from Wii sales. In addition, the Wii's already large install base makes selling new consoles harder.

Software publishing

Nintendo's second role in the industry is as game publisher. In this case, Nintendo's DS and Wii game sales far exceed all competitors with the possible exception of EA.
Worldwide Publisher Totals 2011 (YTD)
Pos     Publisher                    Yearly
---     ---------                    ------
1       Nintendo                    10,901,624
2       Electronic Arts              9,019,470
3       Activision                   6,813,847
4       Ubisoft                      6,694,007
5       Sony Computer Entertainment  4,922,930
6       Microsoft                    3,724,148
7       THQ                          3,303,488
8       Sega                         2,674,190
9       Capcom                       2,568,090
10      Namco Bandai                 2,540,164
While Nintendo has a big lead over EA in terms of unit sales, that seems to include games packed with hardware and does not include downloadable content. So while it's conceivable that EA and Activision have been more successful, by no means is Nintendo failing as a publisher.

Most publishers rely on a hit game system which results in huge sales in the months following a game's launch after which they move to the next title. Nintendo, which has been the leading publisher for years, has been able to create and market "evergreen" titles that sell well for several years. Along with Microsoft and Sony, Nintendo has the advantage that each software release increases the value of their hardware business. Nintendo re-releases titles from their back catalog more successfully than any other competitor. Each of these strategies minimize development costs and increase profits both for DS and Wii games.

Platform licencing

Finally, Nintendo takes a cut of every title sold for one of its platforms. When it comes to evaluating launching a new platform, total software sales has to be a primary consideration. A new console is a huge expense and risk for the manufacturer, consumer and game publishers. The only people who benefit with certainty from a console launch are the journalists who cover the story. As long as games are still selling on a hardware system, there's just no reason to replace it.
Worldwide Software Totals 2011 (YTD)
Console Yearly     Total       (tie ratio)
------- ------     -----       -----------
Wii     22,696,263 637,024,525 (7.46)
PS3     18,246,636 349,149,161 (7.25)
X360    18,227,812 476,688,453 (9.16)
DS      13,323,937 650,342,875 (4.46)
PSP      6,130,249 195,271,066 (2.94)
PS2      1,773,060     n/a
PC       1,349,242     n/a
3DS        344,446     n/a
Total 82,091,645
By game sales, the Wii is still the most successful console due in part to its massive install base. Notice that a console, such as the PS2, can enjoy a very long software life after production ends. A critical statistic for a console is the tie ratio, which compares the total games per console sold. The average Xbox owner has a library of 9 or so games while average Wii and PS libraries hold just over 7 titles. Since people continue to buy software after they buy the console, the number will tend to increase over the life of a system, which is why the oldest system has the highest number. Handheld tie ratios will naturally be lower if only because some households will buy multiple systems and share a software library. Tie ratios matter to the consumer because the more games they own and enjoy, the better value they wring from the console. They matter just as much to a hardware manufacturer because they represent incremental profit on top of the original hardware sale.

Worldwide Software Totals 2010
Console Yearly      (change) Total       (tie ratio)
------- ------      -------- -----       -----------
Wii     182,616,765 (+2%)    614,328,262 (7.34)
X360    141,041,533 (+24%)   458,460,641 (9.10)
PS3     126,996,359 (+38%)   330,902,525 (7.14)
DS      119,157,411 (-17%)   637,018,938 (4.42)
PSP      40,577,954 (+9%)    189,140,817 (2.89)
PS2      15,938,237 (-42%)       n/a
PC       10,153,009 (-)          n/a
Total   636,481,268 (+7%) 
This chart shows the 2010 sales by platform and reveals that Wii software actually increased year-over-year, though not nearly as much as its rivals. The DS, meanwhile, entered the decline portion of its life-cycle, which pushed the introduction of the 3DS. Since the company will not be able to support two simultaneous console launches, a Wii sequel wasn't in the cards for 2011. But if Wii sales slow this year, Nintendo may need to announce its next console soon.