Nintendo sent the industry scrambling this morning with the one-two combination of a dreary earnings report and surprising price cut for the 3DS. Reporting on its April-June quarter, Nintendo said revenues slipped 50 percent over last year, leading to a ¥25.5 billion ($328 million) loss. That weakness was due in part to anemic 3DS sales of just 710,000 units during the quarter.
Speaking to GameSpot, EEDAR VP of capital research & communications Jesse Divnich said that while the 3DS's new $170 price point was a severe move, the industry should hold its judgment on Nintendo until after the all-important holiday quarter.
"The price cut was drastic, there's no doubt about that," he said. "I think it was certainly necessary for Nintendo to go this route. Definitely, I think right now that the market is very concerned about the long-term potential of the 3DS…We really need to give Nintendo the benefit of the doubt. This is a company that has historically and consistently outperformed expectations. We tend to forget that over 40 percent of their revenue comes in this short holiday window."
Divnich went on to note that this holiday quarter is shaping up to be not just one of the most critical in Nintendo's history, but also for the portable hardware market at large.
"This is probably by far one of the most critical holiday seasons for Nintendo in the company's history," he said. "For the last 20 years, they have dominated and owned the portable market. They're still doing that today, but the question is, 'Is that portable category as big as it was five years ago, or are we starting to see a transition into mobile and tablet gaming?'"
"At the end of the day, consumers are still willing to pay premium price for premium content," he continued. "But as we saw with the DS, a significant portion of revenue came from a lot of these casual-based games, like your Sudokus, your My Pets, your Imagine series. Now, these games can be delivered at the same quality to the portable markets at a fraction of the price to the consumer, so I think that's certainly in jeopardy. We all agree that this casual market might be transitioning over toward tablets and mobile phones."
Sony, in particular, will be watching what happens with the 3DS and its new price point as it prepares to launch the PlayStation Vita, perhaps as early as this fall.
"It's very tough to tell, but I think this does put a lot of pressure on the Vita," Divnich said. "Not because of the competitive price difference, but rather, the size of this market may not be what it was a few years ago. I don't think the actual price cut is pressuring Sony; but rather, what the price cut means for the market. But the core gaming market, what built Nintendo, what is Nintendo, that's never going to go away. We will pay $30 for a Mario title."
And while this move could be construed as pushing the panic button by the industry at large, Divnich believes it's actually a positive move where third-party publishers are concerned.
"What this move does is show that Nintendo is willing to give up a little bit of profitability to ensure that the console's installed base grows to support profitability for third-party publishers," he said. "It certainly sends a positive message. There's no doubt there are red flags that are raised about the long-term health of the 3DS, but I think unanimously publishers agree that this is a step in the right direction for the 3DS platform."
Divnich also believes that Nintendo cut the price now, as opposed to after the holiday quarter, in order to assuage retailers' and third parties' fears over the viability of the platform.
"It's really hard for third-party publishers to come out and dedicate themselves to the 3DS platform just on the word of mouth and the word of good faith on the part of Nintendo that things will get better," he said. "This move is an action to show developers that Nintendo is going to try to build that installed base for the holiday season. More so than anything else, just to make sure that third-party publishers continue to dedicate proper development and marketing to potential 3DS products."
Divnich does not believe that the 3DS's current travails will impact Wii U development. According the analyst, the home console and portable gaming markets operate largely independent of one another, despite sharing games and brands. With Nintendo specifically, he pointed to the relative weakness of the GameCube compared to the dominant performance of the Game Boy Advance.
"I don't think that this will impact at all the development schedule and the release of the Wii U," he said. "It's going to come out summer to fall next year."
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