Sunday, August 7, 2011

Nintendo's Predicament - Shrinking Sales and Salaries

Nintendo has been in the headlines of the gaming world a lot lately, due to positive factors such as their showcasing at the E3 expo and the hype surrounding their next console, as well as less-positive factors such as the 3DS hitting below projection and the revelation that Nintendo is reporting a staggering 50% loss in earnings over the same quarter last year. The 3DS is the likely culprit and Satoru Iwata, president of Nintendo, has taken "personal responsibility" and a 50% cut in his salary. This has many gamers thinking that Nintendo is on point and making amends in a classy and sincere way, however I am looking at this more as a PR move to save face and shift more units. 

To address the first point about the loss in earnings, it is indeed disheartening that Nintendo, which has dominated console sales in recent years and has long since owned the handheld market, is losing steam. The Wii and Nintendo DS has sold phenomenally well, however both have since slowed down as the other consoles have caught up. The 3DS launch was lukewarm because, in my opinion, the high price combined with the paucity of A-list titles available. Like many people, I was disappointed that the launch didn't include games like Kid Icarus, Starfox, Mario and Zelda. Some quality games were made available, but certainly not enough to entice me to shell out $250. Nintendo has blamed a "changing market" combined with stiff competition from Apple as factors in the 3DS not hitting sales projections, however I think the outcome would have been different had better titles been available right out of the gate and the price slightly lower. That's my take on it, anyway.

The second point is the controversial price cut for the 3DS, which occurred within the first few months of the system's like and jilted those who paid full price. Nintendo has apologized for this and offered some compensation, but I believe the price cut to be strategic as well. Knowing Nintendo, being a business like any other, they would sooner drop a system altogether instead of selling it at a loss, so the price cut is a move to shift more units in a shorter period of time, especially with the holidays only being a few months away. While Nintendo might not make as much money per unit, the real money is in the game sales and this is really the sweetest plum. The purchase of the console is (one would hope) a one-time investment and it's the software titles and the DLC that keep the money flowing, so more units sold means more games sold. Added to which, the sales of games from the Nintendo online store and the virtual console will pad the coffers nicely. Make no mistake, Nintendo is not going to sell the 3DS at a loss or lower the price only to see increasingly diminishing returns - this is all strategic and I hope it works. Heck, the price cut has enticed me further, especially with better games on the horizon.

The last point and one that I've seen some very interesting discussion on, is the paycut that Iwata and the other executives at Nintendo have taken. Some feel that this is an altruistic move that shows both that the humble brass at Nintendo has heart, and an exemplification of the cultural difference between the Japanese business ethics and the greedy, money-grubbing American executives. Others, myself included, don't doubt that it's well intended but we view it more as PR stunt to save face and restore some consumer confidence. Iwata was making, with conversion, close to $2 million and his paycut now brings that down to less than $1 million. This seems like a lot and one could argue that other CEOs get paid many times that much, but what has not been published is how much Iwata makes in stocks, shares and bonuses. This is based on pure conjecture on my part, but I'm willing to bet that anything he loses in salary will be made up for in his other interests in Nintendo. 

Believe it or not, it is very common for CEOs and other company executives to have low salaries because they are often big shareholders. For example, Steve Jobs of Apple only makes an annual salary of $1.00. That's right, one measly dollar. His millions come from shares in Apple that have rocketed in recent years thanks to the iPod and iPhone and the growing popularity of Mac computers. Similarly, Eric Schmidt of Google took home just under $315,000 in 2010 while Jeff Bezos of made less than $2 million (Source). Given that these are massively profitable companies, certainly leaps and bounds ahead of Nintendo, you would think their CEOs and presidents take home massive paychecks...and you'd be right, just not in the sense of where the money actually comes from. 

My point in this article is that Nintendo seems to be going into panic mode at the first sign of shrinking profits, and this is understandable given how well they have performed over the past years. This is a sign of changing times in the game industry and Nintendo is feeling the pain like so many others, but I hope people understand that they are still a business whose primary objective is to make money and they will adjust their business model accordingly. The 3DS price cut and the PR machine kicking into hyperdrive is just the first wave.,

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