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Losing control: Nintendo's long fall in the gaming wars

Shoppers walk under the logo of Nintendo and Super Mario characters at an electronics store in Tokyo Wednesday, May 7, 2014.

Shizuo Kambayashi/AP

As more and more consumers opt for gaming devices that can do much more than just play games, Nintendo's stubbornness is beginning to hurt its bottom line.

The iconic Japanese game maker posted weaker than expected earnings and sales numbers this week for its most recent fiscal year. An operating loss of roughly $450-million (U.S.) not only fell far short of the almost $1-billion in operating profit Nintendo Co. Ltd. expected last year, it also missed the newly revised estimate of a $340-million loss predicted by the company earlier this year.

Even more alarming were the company's sales numbers. Its flagship gaming console, the Wii U, sold only 2.72 million units during the last fiscal year – Nintendo had predicted more than three times that amount. Sales of the hand-held 3DS gaming unit also fell far short of expectations, at only 12.2 million units sold (the company expected to sell 18 million). Even compared to the sharply reduced estimates Nintendo issued in January, the actual sales figures came in low.

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While rivals such as Sony and Microsoft have increasingly positioned their gaming consoles as living room entertainment hubs – capable of doing everything from streaming movies to surfing the web – Nintendo has retained its laser focus exclusively on making the most innovative and adventurous gaming experiences in the industry.

"When the Wii U came out I was very bullish about it – in the same way original Wii did, it enables different styles of gameplay," said Nicholas Graham, a game design expert and professor at the Queen's University school of computing. He pointed to innovations such as the Wii U's controller, which is a sort of mini-tablet that lets users take advantage of a built-in second screen.

However, those innovations make Nintendo's device a substantially different beast from others in the gaming market. They have also made it somewhat more difficult for game designers to quickly take existing games for other consoles (for example, Microsoft's Xbox or Sony's Playstation) and cheaply convert them to Wii U games – a process known as "porting."

"[Nintendo is] getting into a bit of a negative cycle now," Mr. Graham said. "The low install base makes it difficult for developers to justify building innovative titles for the platform."

Nintendo's investor relations team, based in Japan, was not able to provide comment for this story by deadline on Wednesday.

In a way, Nintendo faces a variation of the same problem facing companies such as BlackBerry – a dwindling user makes it less attractive for developers to build applications for the hardware, and a lack of applications makes it less likely the user base will grow.

To add insult to injury, not only is Nintendo suffering from alarmingly anemic sales of its gaming devices – it's also watching as many of its competitors reap massive profits from re-purposing the innovations those Nintendo devices pioneered. The concept of motion-controlled games, for example, introduced in the original Nintendo Wii, is now an industry norm. The Wii U's second-screen tablet controller has prompted a number of hardware and software makers to design games that can run on a big-screen TV but utilize a tablet or a smartphone as a controller.

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However Nintendo's biggest challenge may well be its core user base. According to research conducted by market research firm Mintel, roughly half of Nintendo Wii users described themselves as casual gamers – a far higher percentage than the 35 per cent of Sony Playstation users and the 15 per cent of Microsoft Xbox users who described themselves the same way. It is that demographic, more than any other, that is likely to opt for the sort of inexpensive games that can be played on a smartphone or tablet.

Nintendo has tried to ward off competition from the mobile industry by designing mobile gaming hardware with features not found on most smartphones and tablets – chiefly, the three-dimensional gaming ability of the 3DS hand-held device. However, despite many positive critical reviews, the 3DS also sold far fewer units than expected last year.

At the same time, mobile gaming has also seen a number of innovations in the last two years. Graphics companies such as Nvidia have designed chips and circuitry to greatly improve the appearance of games on smartphones and tablets, while peripherals-makers such as Logitech have built custom controllers that wrap around mobile devices, recreating the experience of a traditional gaming controller.

Those innovations, combined with the lower cost of most mobile games, has put Nintendo in a difficult position.

"Why buy a dedicated gaming device when smartphones can do the same thing?" Mintel analyst Bryant Harland said. "A casual audience is going to be asking why they should buy something that can only play games."

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