Nintendo's Profit Declines

Published: November 19, 1993

The Nintendo Company, once the unchallenged king of the video-game industry, said today that it had suffered its first drop in earnings in 10 years in the face of fierce competition from Sega Enterprises Ltd.

Nintendo, the maker of Super Mario games, said its first-half pretax profit dropped 24 percent from a year earlier, to $576 million. Analysts, who had expected $741 million, said the result signaled the end of a 10-year boom that made Nintendo Japan's most profitable company.

"Competition from rival makers and the firm's structural problems were Nintendo's main problems," Takeo Naruse, an analyst at the Daiwa Institute of Research, said.

A Nintendo spokesman said the strong yen and sluggish worldwide consumer spending were the main reasons for the poor result.

Analysts said the end of the era of phenomenal sales growth in the video-game industry was also apparent from results Sega announced last week. Sega's half-year pretax profits inched up 4.3 percent, to $269 million.

Since 1989, Sega's pretax profits had risen 50 to 70 percent a year. But Nintendo is suffering more as it faces tough competition from Sega. Nintendo's decision to delay development of next-generation home entertainment systems with multimedia functions has allowed its rival to forge ahead in the United States with powerful game machines.

In addition, Sega appears to be better positioned to handle the yen's appreciation. To keep production costs down and reduce the risks of currency fluctuations, Sega now produces 50 percent of its products in Taiwan, Hong Kong and China. Nintendo exports all of its products for the American market from Japan.

Nintendo's stock has been sliding, falling this week below $66 for the first time in five years.

New technology adds fuel to video game fire.

The entry of new 16-bit video game systems into the video game market has intensified the competition between the two leading video game manufacturers, namely Nintendo Company Ltd and Sega Enterprises Ltd. Both companies expect sales increases ranging from 40% to 60% in 1993. Meanwhile, analysts predict that video game retail stores that want to capitalize on the expected video game boom in 1993 should try to stock up on new 16-bit systems, as well as portable and 8-bit video game segments.

Sales of 16-bit systems keep category sizzling

With two major competitors battling head-on in the now dominant 16-bit segment of the market, the video game category emerged from 1992 with more record sales and plenty of ongoing momentum. Estimates are that 16-bit hardware and software accounted for about $4 billion worth of the almost $6 billion U.S. video game business last year. The figure represents sales of some 11 million hardware units and 37 million game cartridges. In 1991, when 8-bit was the primary video game format, total volume for the category was placed at $4.7 billion. Nintendo, which entered the 16-bit field full-scale in mid-1992, reports that it sold 7 million hardware units, and that 22 million pieces of software were sold for its Super Nintendo system, for a total volume of $2.5 billion. Sega, in its third year in the 16-bit market, says it sold 4.5 million pieces of its Genesis system in 1992, and that 15 million software pieces were sold, for a total volume of $1.3 billion. Despite this vigorous performance, industry leaders believe that only a third of the 16-bit market has so far been tapped. They anticipate that another 8-10 million hardware units will be sold in 1993, and see software sales increasing from 40 to 60 percent to a possible total of 50 million units. General acceptance of the 16-bit format, with its more advanced sound and graphics, has come quicker than even industry executives had anticipated.

Both market leaders, Sega and Nintendo, have staked strong claims to consumer loyalties and are attempting to match each other in terms of products, competitive price points and aggressive promotion. While Nintendo controls the other two segments of the video game category--8-bit and portable--Sega is proving a scrappy competitor in 16-bit, despite being outspent more than 2-1 by Nintendo in advertising. Sega also created a stir in 1992 by selling some 200,000 pieces of a new CD-ROM video game attachment at a $300 retail price. The 16-bit competition began in 1990, when Sega marketed its first Genesis unit at a $189 retail price, including software. The company sold 440,000 pieces that year. By 1991, 1.6 million units were being sold, and that business more than doubled in 1992.

The market exploded in early summer 1992, when stripped down 16-bit sets became available from both Nintendo and Sega at list prices below $100 This compared with a previous $150 price point for a hardware unit with only one controller. Sega and Nintendo also began marketing deluxe sets featuring two controllers and a high-demand software title, at lower retail price points than previously. Consumer response to these moves was highly positive, and heavy demand carried into the fourth quarter. Spurred by the high number of 16-bit game systems sold at Christmas time, software sales should be especially brisk in early 1993, believe industry executives. While the bulk of hardware sales will still be made in the final quarter, 16-bit game systems are also expected to continue selling year-round. Ultimately, say the executives, as many as 35 million 16-bit units could be installed in American homes.

Purchasers of the new 16-bit units and cartridges are primarily those persons who already own 8-bit systems, but who have decided to upgrade into a new generation of video games featuring technological innovation. About 50 percent of Nintendo's 16-bit purchasers are under the age of 15, and these persons account for some 65 percent of the company's 16-bit software volume. Yet the more sophisticated games, particularly in the sports area, are also drawing a number of older buyers to video game sections. Sega finds that 30 percent of its game users are 17 years of age or older, and that 40 percent are between the ages of 12 and 17. That's great for the toy chains, maintained Tom Kalinske, Sega's president, because it brings older consumers into the stores who would not normally be there.

In a new three-tiered market, 8-bit video games and systems now represent about 20 percent of the category's volume, amounting to $1.3 billion in 1992. Nintendo, which accounts for more than 95 percent of this business, says that 3 million of its 8-bit hardware units and 30 million software units were sold last year. Portable games amounted to a $1 billion business in 1992. During the year Nintendo sold four million Game Boy units, and 25 million software pieces for these units, according to Bill White, the company's director of marketing and corporate communications. Despite the impact of 16-bit, industry executives stress that a large, viable market remains for 8-bit games. White points out that at present 33 million Nintendo 8-bit systems are installed in U.S. homes. He anticipated that 3 to 4 million 8-b

Nintendo presents three essential rules for success.

Playthings; May 6, 1991

When the votes are tallied, Nintendo remains #1

The players keep playing and the numbers tell the story. The Nintendo Entertainment System and Game Boy are far and away America's favorite video game entertainment systems.

According to a recent survey of Nintendo players, 93 percent of NES home systems are still in active use. In the first quarter of this year alone, those loyal players purchased eight million game paks for the 8-bit NES," said Peter Main, Nintendo's vice president of marketing. "And we're adding even more active players to the group - more than one million in the first quarter alone," Main explained. Nintendo retailers saw first quarter sell-through of one million NES units. Sales numbers in perspective Main puts those NES hardware sales into perspective. Remember, we're working from an established NES household penetration of 30 percent, with sales over the past five years in excess of 27 million units. But in the first three months of 1991 alone, the NES outperformed the total sales activity of Sega's Genesis system and NEC TurboGrafx-16, which have sold approximately one million units in some 21 months, Main added.

PROMISING NEW ENTERTAINMENT PRODUCTS BUOY SPIRITS AT CES

Video Business Date: February 21, 1992

Sega vs. Nintendo The 16-bit videogame war was turning into a true clash of the titans (VB, 1/24). At the show, Sega of America predicted 3.5 million Genesis consoles will be sold in 1992, along with 20 million pieces of software. More than 150 new titles will be released as well. Nintendo of America said it will sell 6 million 16-bit Super NES sets plus 20 million pieces of software. It predicts 50 new titles will be available this year. NEC's TurboGrafx-16 was not about to throw in the towel, having sold more than 750,000 units of TG-16 players in 1991. Now reorganizing under game expert Hudson Soft (VB, 1/10), the company promised many more cartridges for Turbo. At the show was a combination cartridge/CD game console that will be available by mid-year. No pricing plans - or even a name - were announced. Nintendo, to counter stiff competition from Sega, lowered the price at CES on all of its game units, slicing $20 from Super NES, $10 from the original 8-bit console and $10 from Game Boy. Sega will have a CD accessory for Genesis available this year, called Genesis Mega CD. Nintendo announced specs for its CD drive, an accessory that will be available in January 1993. TurboGrafx will be the leader in this category for the foreseeable future. It has 100 titles on disc in Japan while Sega has five and Nintendo none. Recession or not, it's expected videogames will be a $4 billion-plus business in 1992.