But the company's latest console, the GameCube, has proved to be an unmitigated disaster, giving this holiday season the potential to become the Winter of Iwata's Discontent. Nintendo has suffered such a string of bad news over the past few months and posted such disappointing financial results over the past few quarters that many investors, analysts and industry watchers are wondering whether the onetime industry giant can hit restart—or at least pause—in an increasingly competitive video-game industry. Not only is Nintendo struggling to keep pace with its larger, better-funded rivals—Sony and Microsoft—in the console business, but its Game Boy division, Nintendo's previously unassailable monopoly in handheld games, is suddenly facing a host of formidable foes.
Due to an inventory clogged with millions of unwanted GameCubes, Nintendo had to suspend production on the boxes for the first nine months of this year. Such operations snafus contributed to the company's first half-yearly loss since going public in 1962. Breaking the firm's profitability streak became an embarrassing black eye for Iwata, who had the great misfortune of taking over the company from legendary CEO Hiroshi Yamauchi a year-and-a-half ago—just as the bottom was falling out. Coming off its worst year in history, the company desperately needs a successful Christmas season if it is to regain the confidence of investors, who have pushed its stock down 24% over the past 12 months.
Sitting in a giant conference room in the company's white, castle-like headquarters, Iwata offers up a series of deeply held yet utterly contrarian beliefs about where this nearly $30 billion industry (which makes it larger than the movie business) is headed. Online video games have been a false start so far, Iwata asserts, which is why he has no plans to lead Nintendo in that direction. The current path taken by game developers toward more cinematic graphics, richer story lines and complicated controls is a blind alley that, he says, will only worsen the current "nothing's new" ennui felt by many consumers.
What people want, Iwata says, are simpler, more accessible games that are easier to play and solve—think thumb candy for dummies. Acknowledging that he cannot hope to win a technological arms race against deep-pocketed Sony and Microsoft, he says that his company's salvation is its in-house creative team and the firm's ability to launch groundbreaking games that spawn blockbuster franchises such as the hugely popular Mario Brothers and Zelda series. "Nintendo's basic strategy is to do things differently," he says. "The key lies in developing games that customers have never come across."
Yet, for a company whose executives claim a Disney-like imaginative edge as its most important asset, the place seems to be suffering from game-development gridlock. Not even Shigeru Miyamoto, Nintendo's legendary creative director and gaming deity—Miyamoto created Mario and Zelda—has been able to break the slump. Miyamoto's latest attempt to launch a revolutionary franchise was a bizarre entry called Pikmin, in which users play an astronaut stranded on a remote planet who must enlist the aid of the local aliens (who look like ambulatory onion sprouts) to rebuild his ship—all set to a country-and-western music soundtrack. Pikmin failed to take off, forcing Nintendo to rely heavily on recycled fare such as Donkey Kong, Zelda, and Pikachu and all his Pokémon friends. When asked about original games and concepts—and potential new growth drivers—that are in the works, Iwata hesitates. "Verbalizing a concept that is entirely new is very difficult," he says. "We hope to rediscover what has been lost between the introduction of video games and now." Earlier in the day, the company had demonstrated one such initiative: a game that connects Game Boy handhelds to the GameCube console, allowing for multi-player action without annoying split screens. The fact that the program itself was an update of Pac-Man (which debuted in 1980), however, tended to undercut the message that this was a particularly thrilling innovation.
Nintendo's slide can be traced back to 1990, when plans for a game-platform joint venture with Sony broke down and the consumer-electronics giant decided to build its own machine. At that time, Nintendo made the Cadillac of consoles—but in coming years a challenge was fielded by the Sega Genesis, which for a time became the No. 1 machine on the market. (Sega abandoned the hardware business in 2001.) Failing to strike an agreement with Sony proved to be fateful, because as that company's PlayStation become more popular, Nintendo made a series of what analysts say were strategic mistakes. Sony, for example, opted to allow its game software to be written on standard storage devices like CDs and, later, DVDs; Nintendo insisted on using its own cartridges for the Nintendo 64, which increased development costs for independent gamemakers (the company belatedly switched to mini-DVDs when it brought out the GameCube in 2001). Because Nintendo depends far more on its own games for profits than other console makers do (it produces about 60% of its own games, compared with Sony's 20%), the company has historically treated outside game companies more like competitors than partners, requiring them to accept unfavorable licensing deals and demanding a greater editorial say in game content. Alienated by Nintendo's heavy-handed ways, coders took their products to Sony, making the PlayStation the machine of choice for most consumers in part because that's where the hit games were.
Perhaps more devastating was Nintendo's initial reluctance to market itself to older teenagers and adults, sticking too long to the low-growth market for kids under 14. Sony identified adult gamers as one of its key markets early on and encouraged game developers to produce titles with sophisticated themes (read: crime and violence, including titles such as Grand Theft Auto 3). While Nintendo still emphasizes the family-friendly nature of its products, it's since brought out more mature games but it is struggling to convince consumers it is anything but a toymaker. At this fall's giant Tokyo Game Show, Konami, one of the largest game producers, introduced 23 PlayStation games—but only three for GameCube. "Our target is high school students and older, not Nintendo's grade school demographics," says Minako Gotoh, an executive at FromSoftware, which currently makes 15 titles for the PlayStation 2 but just two for the GameCube.
At least Iwata can still count on his steady handheld business, right? After all, Nintendo's Game Boy has become practically synonymous with portable gaming—and the bleeping scourge of every family road trip. But all those gaming boys and girls are growing up; Sony hopes to repeat its console success in handhelds by focusing on adult customers. The stakes for Nintendo are high, because Game Boy hardware and software now account for about 60% of the company's annual sales and a similar share of its profits. Sony recently announced plans to enter the handheld market next year with the PlayStation Portable. Meanwhile, other companies, especially mobile-phone makers, are hoping to beat Sony to the punch by converting millions of cell-phone users into game addicts via their handsets. Nokia just debuted its N-Gage phone-plus-games gadget, while many 3G mobile phones available in Japan already rival Game Boy in graphics and playability.
Despite its troubles, no one is seriously suggesting that Nintendo is going to be squeezed out of the hardware business almost overnight, as Sega was. Nintendo is sitting on $6 billion in cash and carries no debt, which could provide a war chest with which to outsource a competitive next-generation hardware system. The threats to its Game Boy monopoly are, at this point, hypothetical; and it does have a core excellence in producing seductive software, which makes it (still) one of the largest game publishers in the world.
The key question among analysts is whether Nintendo—a company that is almost proudly antitechnology—can compete against Microsoft and Sony at a time when the industry is poised for a major transformation. Digital devices of all shapes and sizes—such as entertainment-enabled personal computers that can link up with a TV and stereo; and Web-surfing, TiVo-style video recorders—will over the next several years invade the living room. Microsoft and Sony are already selling game machines capable of connecting to the Internet, anticipating the shift to multipurpose entertainment devices. And Nintendo? Iwata recently declared that the company is already working on a revolutionary new hardware unit, but says he won't divulge any details until next spring.
According to many experts, Nintendo's most likely route is to eventually follow Sega's lead: get out of the brutally competitive console business and focus on software. By doing this Nintendo's growth might become limited, but the company could become a profitable boutique video-game brand that caters to children, newcomers and enthusiasts. In fact, game analyst Hisakazu Hirabayashi insists that scenario has already happened. "Since around 2000, Nintendo was no longer a member of the video-game industry. Its philosophy and method are fundamentally different from the other console and software companies. It's not a loser only because it's taken itself out of the race." Every kid who's booted up Super Mario for the first time knows what happens when you run out of lives and can't secure enough gold coins: game over.