Company is counting on strong software sales to turn a profit this year.
Nintendo is counting on a strong launch for the Wii U next month to help return the company to profitability this fiscal year, but the hardware itself isn't going to contribute anything to that bottom line. Nintendo has revealed that the Wii U will be sold below cost in order to attract more potential customers for what it hopes will be stronger-than-normal software launch sales.
"Rather than determining a price based on [the Wii U's] manufacturing cost, we selected one that consumers would consider to be reasonable," Nintendo President Satoru Iwata said in an investor conference call yesterday. Iwata didn't say how much of a loss the company would take on each system it sells, but he did indicate that the projected write-off from Wii U hardware is a big part of why "we cannot say that we will achieve 'Nintendo-like' profits within this fiscal year." Just yesterday, Nintendo slashed its profit forecast for the year by 70 percent, thanks in part to weaker than expected 3DS and Wii sales in the first half of the year.
Selling hardware at a loss is relatively common in the game industry: both the Xbox 360 and PlayStation 3 lost money when they were first put on the market, despite starting prices of $400 and $500, respectively. But Nintendo systems have recently been the exception to this rule: the low-powered Wii made a profit at its launch price of $250, and the 3DS was also profitable when it launched last year.
Of course, Nintendo stopped making a profit on the 3DS when it was forced to drastically cut the system's price just three months after launch to help slower-than-expected sales. The portable hardware has just recently returned to profitability, Nintendo said, thanks to lower component costs. Given that recent history, perhaps it's not surprising that Nintendo has decided to launch the Wii U at a below-cost price right out of the gate, rather than risking another embarrassing rapid price drop.
Expenses related to the Wii U's touchscreen-equipped GamePad seem to be a major contributor to the Wii U's overall manufacturing costs as well. While individual GamePads won't be available at launch in North America, they will be sold a la carte in Japan for ¥13,440 (about $172), or more than half the total price of a system and GamePad together.
Nintendo is optimistically projecting that it will sell an average of 4.4 games for each of the 5.5 million Wii U systems it expects to sell before the fiscal year is over in March. Those kinds of quick software sales will be important to make up for any accumulated hardware costs for the year, which the company has already written off as the system started production this fiscal quarter.
An attach rate of 4.4 out of the gate would be high but not out of the realm of possibility for the Wii U. Microsoft averaged 3.9 games per Xbox 360 just after the system launched in 2005, but the Wii only averaged 3 games per launch system, and the PS3 saw a paltry 1.5 games for each launch hardware unit sold. Everything is going to depend on how consumers react to the lineup of 50 launch window games Nintendo has revealed for the system, a list that is dominated by warmed over ports among a few promising original games.
Regardless of bottom line losses on hardware, it seems the price Nintendo has set for the Wii U isn't keeping away launch customers. Pre-orders for the system are sold out across major US retailers, leading to ridiculously inflated prices on auction sites. Nintendo says Gamestop already has a waiting list of 250,000 people asking to be notified about Wii U availability after its pre-order allocation is spoken for.
And Iwata is even optimistic that the original Wii will still be able to find new customers this holiday season after a recent $20 price cut to $130. "Since people will have time to enjoy family gatherings at the end of the year, we believe that Wii and Wii U will attract different consumer segments without cannibalizing each other," he told investors. That seems like a stretch to us—we find it hard to imagine the potential Wii customer who was just waiting for the system to break that mythical $140 barrier—but it might be Nintendo's best hope to actually juice its profits in what's shaping up to be a critical year for its financial future.
How do you all feel about them losing money on yet another system? Can it be helped or did they make the right decision?