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Nintendo Co., Ltd (ADR) (NTDOY), Microsoft Corporation (MSFT): Seven Years Later…

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Why Nintendo Shares are Wilting Despite Strong Wii U SalesOver the last seven years, the video game industry has grown over 289%. Gaming consoles entered into mainstream consciousness with technology advances such as Nintendo Co., Ltd (ADR) (NASDAQOTH:NTDOY)‘s release of motion controls for the Wii console in 2006 and such blockbuster games such as Activision Blizzard, Inc. (NASDAQ:ATVI)‘s Call of Duty series that pulls in over $1 billion in revenue with each new reiteration.

The video game industry, according to a report from Avista Partners, is expected to break $70 billion in game sales alone by 2015. It would appear that the game industry would be an easy haven for investment. That being said, there are some caveats that need addressing before investing.

Seven years later…

The Xbox 360, Wii, and Playstation 3 are massive revenue winners for their respective companies.

In its latest quarterly report, Microsoft Corporation (NASDAQ:MSFT) stated that the Xbox 360 increased revenue by 55% compared to the same quarter in 2012. Even though Xbox 360 is a system that is over seven years old, the console has managed to muster 290,000 sales within the last month, according to Wedbush analyst Michael Pachter, and a global sales total of around 75.2 million.

Sony Corporation (ADR) (NYSE:SNE) Playstation 3 has recently become profitable, partly due to the success of Playstation Plus, a value-adding service for Playstation 3 owners, which breached $1 billion in revenue in 2010. Despite being a six year old piece of hardware, Pachter estimated that 260,000 Playstation 3 units were sold in the month of March. Bringing the global total of Playstation 3 units to around 74.2 million sold.

Nintendo Co., Ltd (ADR) (NASDAQOTH:NTDOY)’s Wii, launched in 2006, has been a wild success for Nintendo Co., Ltd (ADR) (NASDAQOTH:NTDOY) and nearing 100 million units sold globally. From the start, Nintendo Co., Ltd (ADR) (NASDAQOTH:NTDOY) made money from every Wii sold. Flipping the conventional console-adage of, initially, selling hardware at a loss. With each unit sold adding to Nintendo Co., Ltd (ADR) (NASDAQOTH:NTDOY)’s coffers, Nintendo quickly became the second biggest Japanese company in late 2007, behind car maker Toyota.

While the predecessor to the Wii, dubbed Wii U, has already been launched, the Xbox 360 and Playstation 3 are still considered successful and provide decent revenue streams for their respective companies. With slow global recovery and uncertainty, the average citizen still struggles to make ends meet and with the low-end Xbox 360 selling for $180 and Playstation 3 selling at $250 (which comes bundled with two games), asking a parent to spend $400 – $500 for the Playstation 4 or next generation Xbox will be a tough sell.

Slow sales of next-gen products

If the past is any primer, then expect the sales of Sony’s Playstation 4 and Microsoft Corporation (NASDAQ:MSFT)’s next Xbox to realize slow sales numbers in the short-term. In 2011 and 2012, Nintendo and Sony released the next generation of handheld gaming devices with the 3DS and Playstation Vita, respectively. Both handhelds struggled to find an audience, despite each company’s previous handheld device selling well and a loyal install base. Sales figures for the 3DS have finally found momentum, selling 1.24 million within the last quarter; however, it has taken Nintendo 25 months to reach this point.

The same story is playing out for the release of Nintendo Co., Ltd (ADR) (NASDAQOTH:NTDOY)’s next generation console, Wii U, with dismal sales numbers since its launch in November 2012. Six months later, the Wii U has only sold 3.45 million units world-wide and only 390,000 units for the last three months.

AAA games: Unrealistic expectations

Not too long ago, it was a common standard that a game that sold over one million units was a blockbuster title and potential for a trilogy-esque exploit. That concept changed when Call of Duty: Modern Warfare launched in the fall of 2007. Call of Duty series sold so well that, with each new title launch, Call of Duty would be responsible for up to,$1 billion of that fiscal quarter’s revenue for Activision.

Title One Month Sales Figures Revenue (5 days)
Call of Duty: Modern Warfare 2.9 million
Call of Duty: World at War 4.2 million
Call of Duty: Modern Warfare 2 11.2 million $550 million
Call of Duty: Black Ops 14.5 million $650 million
Call of Duty: Modern Warfare 3 17.9 million $755 million
Call of Duty: Black Ops 2 15.9 million $1 billion* (15 days)

Data gathered from ATVI Press Releases (here, here, and here) also from this article, here. Sales figures gathered from VGChartz. 5-Day revenue figures unavailable for Modern Warfare and World at War.

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