Decision Making Nintendo

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While the Nintendo name is most closely associated with a video game platform (the NES), the company's real focus has always been the games rather than the platform. Herein lies the true distinction between Nintendo and its two larger rivals. Nintendo seeks to make good games. Microsoft and Sony seek to control a distribution channel.

Nintendo is the only company among the three console makers that began life as an entertainment company - and it shows. Microsoft is known for software; Sony is known for hardware; and Nintendo is known for games.

American gamers are well acquainted with the Nintendo brand; but, American investors generally know very little about the company. That's unfortunate, because despite all the attention given to Sony and Microsoft's video game operations, Nintendo is the ultimate pure play video game company.

Nintendo is an interesting business to write about from an investor's perspective for several reasons. The company operates in an exciting industry with excellent long-term prospects. It's more reasonably priced than many public companies in that industry (although that's not saying much). It's a truly unique business (with a unique past), and it has a clear vision of what it is and what it isn't. Obviously, Nintendo's tremendous intellectual properties add to its appeal both as a subject of an article and as the object of an investor's interest.

Nintendo has been a good steward of its intellectual properties. It's been very careful to protect the image of its most beloved characters. In fact, some would say the company has occasionally been too protective of its strongest franchises.

For instance, between 1994 and 2002 there were no new Metroid games, despite the popularity of that franchise. The benefit of such a strategy is that when Metroid Prime was released in 2002, it received extraordinary reviews and sold over a million units. The downside to this approach is obvious. Nintendo effectively surrendered the revenue (almost certainly more than $100 million) that could have been milked from the franchise throughout the latter half of the 1990s. Nintendo is an entertainment company; not an electronics company. Console sales are inextricably intertwined with games sales. Hardware sales account for a large portion of Nintendo's total sales; however, hardware sales don't drive a large portion of Nintendo's total sales. At Nintendo, the games sell the consoles. Of course, the console itself can affect the game play experience in its role as a platform. For instance, the console itself is expected to be a differentiating game play factor when the Wii launches later this year. Whether it's a positive or negative factor, we don't know. But, the Wii itself will certainly help differentiate Nintendo's games from their competition.

Third party publisher support for the Wii has been the subject of much debate and speculation. Nintendo's consoles have enjoyed less support from third parties than the competing consoles, because Nintendo has been less willing to work with third parties on their terms.

While many publishers are now interested in releasing titles for the Wii, there is a new and substantial impediment to successful third party titles. Games will have to be designed around the Wii. In the past, it was easier for third parties to offer titles for Nintendo's consoles, without targeting that console in particular. Now, it will be a lot harder to do that. Expect a few botched attempts early on.

Financial Performance

Considering the industry it operates in, Nintendo has been a solid performer. The company consistently turns a profit, which isn't easy when there aren't other divisions to smooth out any of the bumps brought on by launching new consoles and essentially launching new products constantly.

After all, that is the greatest difference between the video game business and almost every other business around. All your sales are coming from "new" products,...
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