Is console game over for Nintendo?

Nintendo is under pressure to consider exiting production of video-game machines after reporting disappointing sales of its Wii U console and forecasting a surprise loss. The company on Jan. 17 projected an operating loss for the year ending in March and cut its forecast for annual sales of the year-old Wii U by more than two-thirds.

President Satoru Iwata should concede defeat with the Wii U, shut down production and open up Nintendo’s iconic software characters including Zelda and Super Mario to the smartphones, tablets and consoles that have made a shambles of his strategy, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. Nintendo should exit hardware altogether, Pachter said.

Iwata “has to take responsibility for the Wii U missing the mark,” Pachter said. “He will be under pressure to make dramatic changes. If he can do so while remaining in charge, more power to him, but they need to make some changes.”

Iwata, 54, says he’s not going to step down and plans to see the company through its unspecified transition. To date, he has refused to offer Nintendo franchises for competing console systems or mobile devices. He’s considering changing the business model, he said Jan. 17 without offering specifics.

“Given the expansion of smart devices, we are naturally studying how smart devices can be used to grow the game-player business,” Iwata said at an Osaka press conference. “It’s not as simple as enabling Mario to move on a smartphone.”

Tying Nintendo’s iconic characters to its hardware helped boost demand for the original Wii, which sold more than 100 million units and became the world’s best-selling console.

This time, delays in its own titles hurt sales of the Wii U, which debuted in November 2012. The console’s failure in the marketplace is dragging down its higher-margin software sales. The company, which had projected a 100 billion yen ($959 million) operating profit for the fiscal year, now forecasts a 35 billion yen operating loss.

“Nintendo should offer Super Mario or Zelda games on smartphones and tablets and raise money,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Holdings in Tokyo. “If such games become popular, some people may want to play them on Nintendo’s machines.”

Nintendo on Jan. 17 lowered its annual sales forecast to 2.8 million Wii U units from 9 million, and halved its projection for game sales for the system to 19 million units. The company cut its forecast for the 3DS handheld player by 25 percent to 13.5 million units, a drop from a year earlier.

“What they ought to do is cut their losses now and probably shut the Wii U down,” Richard Windsor, an independent analyst at Radio Free Mobile, told Bloomberg Television on Jan. 17. “Looking at the history of Japanese management, they tend to fight it out for much longer than they should, and I suspect that is what Nintendo will do.”

The casual gamers who made Nintendo the leader of a $93 billion industry have abandoned its standalone machines, including the 3DS and the Wii U, for cheap downloads they can play on an Android phone or an Apple iPad.

New, faster consoles from Sony and Microsoft ran away with the hardcore players still willing to plunk down $400 or more for a machine and $60 for a title like “Call of Duty.”

Even at $300, the Wii U is doomed because it’s not popular enough for outside developers to make games for, said Ben Bajarin, an analyst with consulting firm Creative Strategies.

“They need to go back to the drawing board to reinvent themselves,” Bajarin said in an interview. “The Wii U didn’t move the needle in gaming, so they need to rethink the value of tightly integrated hardware, software and services.”

Iwata should focus on delivering Nintendo’s iconic characters to mobile devices and the PlayStation and Xbox consoles, Pachter said. Both the Wii U and 3DS handheld take advantage of touchscreen controls to play many Nintendo games, which would make it easier for the company to deliver versions of its games for smartphones and tablets, he said.

With more than 1.5 billion smartphones in consumers’ hands, Nintendo could release 10 games a year from its library of 1,500 titles, charge $5 to $10 per mobile game, and sell at least 50 million copies of each to a core Nintendo audience, Pachter said. These products alone would generate $2.5 billion to $5 billion a year in high-margin sales without the expense of making hardware.

In its most recent fiscal year, Nintendo generated the equivalent of $2.9 billion in software revenue and $4.8 billion in hardware, according to data.

The company had 845 billion yen in cash, near-cash and short-term investments as of Sept. 30 and no long-term debt, giving Iwata a cushion to develop a new strategy.

While Pachter recommends exiting the hardware business altogether, making even a temporary shift would buy Iwata time to develop a new console that leapfrogs Microsoft and Sony in three years.

“Nintendo’s console side is broken,” Pachter said in an interview. “They’re not even an also-ran there, they just don’t matter.”

Bloomberg