Lex 2008-11-03
Nintendo has walked on water in recent years. The Japanese computer games company made covetable consoles – the Wii is outselling Sony's PlayStation 3 three-to-one this year – and minted money. Last year, it revised up profit forecasts three times, while its market capitalisation swelled to about $100bn. Now, halfway through this year, it is joining the band of Japanese companies to miss forecasts, revise down profits, and is worth just $44bn.
It was not meant to be this way. Hardcore gamers are not supposed to stop spending on their addiction when recession looms; and you do not need a fat bonus to buy the kids a new game. But selling hardware and software is not the issue; unit sales are rising. The problem is currency. More than a third of production costs are dollar denominated, but the US and Europe account for four-fifths of sales. Weaker currencies there translate into less yen back home. Lower interest rates overseas will meanwhile hit Nintendo's $8.5bn cash kitty, heavily held in dollars and euros. Last year, this garnered the game-maker $450m of interest income, equal to a 10th of profits before income taxes and extraordinary items.
Given the profit downgrades, what to make of those unit sales? Nintendo's full-year forecasts imply a normal Christmas, in spite of the abnormal times: hardware sales were revised up by 9-10 per cent and software by 11-13 per cent. That would mean, for example, selling roughly half as many Wiis again as last year. That may be a bit ambitious. Fatigue is setting in. In Japan, where almost one in every seven households has a Wii, sales were down by a third year-on-year in the latest quarter. Over the same time frame, European software sales for Nintendo's handheld DS game player dipped slightly. It is not game over, but Nintendo has moved on to a new and more challenging level.
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