Nintendo Co., Ltd (ADR) (NTDOY): More Reasons To Avoid This Video Game Giant

Sony Corporation (ADR) (NYSE:SNE) and Microsoft Corporation (NASDAQ:MSFT) are both bringing out new versions of their hit video game consoles to much fanfare. Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) brought a new system out last year, and nobody noticed. Its latest move to save the Wii U won’t change much.

Casual Games

Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) was really the first company to popularize casual games with the launch of its Wii game system. The revolutionary motion sensitive controller captivated audiences and brought a whole new customer base to video games. The Wii was so popular that sales more than tripled between 2003 and 2008, going from $500 million to $1.8 billion.

The company’s top line has been in decline since that time and earnings dipped into the red last year. Sales are about a third of their high water mark in 2008. The company launched the Wii U last year, an update of its aging Wii system, but it hasn’t resonated with customers. Bloomberg quotes Citigroup as saying that sales of Wii U trail its predecessor’s sales trends by 40%, with only about half the number of games sold.

New Competition

Clearly, Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) has a problem on its hands. Sony and Microsoft, meanwhile, are set to make that problem worse later this year. PlayStation 4 and Xbox One are both set to hit stores over the holiday season. The updates in these consoles are making big headlines, as is the fight between the two companies.

The biggest changes are the integration of the Internet, including for game sales, and a shift toward becoming living room media centers. Microsoft has been the more aggressive of the duo on the latter front, designing Xbox One to handle cable box duties among many other mundane chores. Sony Corporation (ADR) (NYSE:SNE), meanwhile, has been working hard to differentiate its product as the best, and cheapest, choice for dedicated gamers before making the living room pivot.

A Turnaround

That’s given Sony Corporation (ADR) (NYSE:SNE) an early leg up. That’s important for Sony because it is struggling today. The company’s Game unit accounts for around 10% of the company’s sales. While that isn’t a make or break business, a win here would help turn the company’s fortunes on the consumer electronics side of its business. That group has dragged the bottom line into the red for three years running.

Those losses have led hedge fund manager Daniel Loeb to push Sony for a breakup, splitting its successful content business from its struggling electronics arm. The company doesn’t want to do that. So, a win with the PlayStation 4 could help Sony give Loeb the brush off. Although the shares have seen a big advance of late, there’s still turnaround potential here. Particularly if the new console is a hit.

Gaining Support

Microsoft Corporation (NASDAQ:MSFT)’s efforts with Xbox One have upset some core customers because it has leaned too heavily toward the living room in its early marketing. That plus it’s priced $100 higher than the PlayStation 4. The company’s Entertainment & Devices division made up about 13% of Microsoft’s top line last year and the company has more than $60 billion in cash and investments, net of debt, at the end of the March quarter. This launch is important, but Microsoft has the time and money to work through mistakes.