Last year, two new games consoles were released to the market: the PlayStation 4 and the Xbox One, which sold more than 1m each on their first few days on sale. By the end of the year they’d blown away all previous sales records. Their success has re-energised a games industry that was flagging thanks to years-old technology and a consequent stagnation in creativity that was beginning to harm consumer interest.

There is one loser in this equation, however. In 2012, Nintendo, the oldest games company in the world and quite probably the most respected, released the follow-up to its phenomenally successful Wii - and it has failed to sell in more than a year what the Xbox One and PS4 managed in just a few months. The Wii U started strong, selling through 3.6m by the end of 2012. But after that it tanked. In the UK, estimates put it at around 150,000 total units, an embarrassing total that places it behind every other games console in recent history. Last week, Nintendo revised its sales estimates for the 2013-2014 financial year downwards from 9m to 2.8m units and forecast a 35bn yen operating loss, precipitating an 18% drop in the company’s share price. Things are so bad, the company's top executives have promised to take large pay cuts.

Big N, big headache

Against a backdrop of rejuvenation for the wider video games industry, then, Nintendo is struggling to keep up. Analysts predict lifetime sales of the Wii U will approach 25% of that achieved by its predecessor, the Wii. In the face of this failure, and at this stage, it’s difficult to call the Wii U anything other than a failure. Speculation around Nintendo’s next move has centred heavily on whether this oldest and most respected of games creators should consider getting out of hardware and putting its games on other platforms, particularly smartphones. But although Nintendo desperately needs to move with the times, “doing a Sega” might well sacrifice the long-term integrity of its golden gaming brands like Mario and Zelda for short-term gains. Nintendo’s vast wealth – despite its current troubles, the company had around $10bn in cash assets and short-term bonds at the end of the last financial year – has been built upon owning its platforms, making money not just from its games, but from its often-revolutionary hardware.

“I think it is highly unlikely that Nintendo will exit the home console market, although it is true that the business model behind dedicated games hardware sales has been steadily undermined for Nintendo since the launch of the 3DS,” says Piers Harding-Rolls, Head of Games at analyst and consulting firm IHS. “The company has the major challenge of transitioning to this commercial reality when developing its new products. At present handheld sales are driving sales, but we still consider the product strategy across both home and handheld console is legitimate and holds strong synergies for the company.”

Rob Fahey, a games industry commentator based in Japan, agrees. “Exiting the hardware business altogether simply isn't on the cards, to the best of my knowledge. Those who say that Nintendo's primary value lies in its software brands aren't wrong, but they're viewing the company in a very warped way - analysing it like a western hedge fund manager wielding a scalpel, which is not how Japanese business culture works and certainly isn't how Nintendo perceives its own value. The company has perfected, perhaps more than any other technology firm, the art of joining up hardware design with software design and it believes that this is its core strength. A single tough year will do little to shake that belief, any more than a couple of financial tumbles would convince Apple to abandon hardware and license iOS and OSX to other companies.

“Bear in mind," says Fahey, "that Apple was told over and over again to do exactly that in the late 1990s - to license MacOS and stop building its own hardware. That drive was ignorant of the true value of Apple as a company, just as people trying to push Nintendo onto smartphones are missing the whole point of the company today.”

Hardware is everything

Nonetheless, long-term Nintendo president Satoru Iwata expressed scepticism about the ongoing viability of Nintendo’s old business model. “We cannot continue a business without winning,” he stated in a recent investor call. “We must take a sceptical approach whether we can still simply make [games consoles], offer them in the same way as in the past for ¥20,000 or ¥30,000, and sell titles for a couple of thousand yen each.”

Iwata indicated that the company was looking at ways to incorporate smartphones into its strategy, but that things were, “not as simple as moving Mario onto smartphones”. Now that the iPhone and its competitors are fast becoming ubiquitous even in Nintendo’s home country of Japan, where they were slower to catch on thanks to established and already-advanced Japanese cellphone technology, Nintendo is, “naturally studying how smart devices can be used to grow the game-player business.”

This indicates that although Nintendo isn’t going to be selling its games on smartphones in the near future, it might release complementary or promotional software on phones to help support its core business. A recent report from Nikkei suggests that Nintendo intends to offer game trailers, information and even, “free minigames” on smartphones - like demos, perhaps, for 3DS and Wii U software. It wouldn’t be unprecedented, given that a complementary Pokemon iOS app was released after Pokemon Black and White became available in Japan on the 3DS. Nintendo’s Miiverse social network, meanwhile, is also viewable from smartphones, with dedicated apps coming soon. A presence on mobile is necessary for Nintendo, but that does not mean sacrificing its own hardware business.

The Wii U, after all, is only part of the Nintendo story. The handheld 3DS, meanwhile, has been selling like crazy, propelled by an incredible run of excellent games over the past year - it was the best-selling console of 2013 in Japan, the US and the UK. “The 3DS handheld was being written off a couple of years ago and is now performing excellently," says Fahey. "It undershot its sales targets in 2013 but that speaks more to some poorly considered and over-ambitious targets than it does to weakness in the 3DS' sales". True, smartphones have already encroached upon Nintendo’s handheld business, but with more than 40 million 3DS console sold and more than three games per unit, now is not the time to abandon it.

Even with its vast war chest of ready cash and one successful console, though, Nintendo is still left with the question of what on earth to do with the Wii U. Is it possible to salvage it, or should the company move on to something new?

“Following this weak Christmas performance, we believe the chance of a major turnaround has decreased significantly,” says Piers Harding-Rolls. “There remains a window of opportunity to build some momentum in the middle part of 2014, when we expect the launch hype for PS4 and Xbox One to fall away and new games releases for these platforms to enter a lull. However, having 'kept its powder dry' in relation to its marketing spend in 2013 because of a lack of content, Nintendo now has a major challenge to kick start momentum through its marketing efforts in a much noisier market in 2014.”

Harding-Rolls thinks that withdrawing the Wii U might not be a bad idea, if conditions don’t improve in the next year. “I'm sure that Nintendo is already working on a successor and probably examining how the current console could be changed to improve it, as this is the nature of product development within console companies. I don't think Nintendo will consider retiring the Wii U until a new product is ready to bring to market but it would be right to change its product lifecycle strategy if the Wii U continues to underperform as it has.”

Not everyone is as pessimistic, though. It’s nearly impossible that the Wii U will become a mega-success along the lines of the Wii at this stage, but it could still find its niche. “I think Wii U will never rival the numbers achieved by the Wii, but wouldn't be surprised to see solid software releases and perhaps some judicious price-cutting restoring it to some measure of dignity in 2014,” says Fahey. “It's worth noting that Nintendo made a profit on the GameCube [which, at the time, was a distant third behind the PlayStation 2 and Xbox] and may well do so on the Wii U in the final analysis as well - but the console seems destined, at best, for a very small niche, which is an embarrassment after dominating sales figures in the last hardware cycle.”

But then, abandoning the Wii U early in its lifestyle would also alienate the people who actually have bought one - who are likely to be Nintendo’s biggest fans. “It would be hugely damaging to the prospects for any future system," says Fahey. "While working hard to resuscitate the Wii U and eke a niche success out of it will further cement the company's reputation in the eyes of its fans."

Salvaging the Wii U will be difficult, then, but abandoning it altogether could prove just as damaging to Nintendo’s reputation. Harding-Rolls reckons that the only possible answer lies in marketing. “There is no social buzz or marketing momentum behind the Wii U in the West and until this is built, sales will not perform to expectation for the company. Nintendo should invest heavily in marketing the Wii U and educating the consumer about the platform over the next six to eight months to give it an opportunity to build some momentum running into the second half of 2014,” he says. "The content pipeline looks strong, so there is plenty to shout about, but Nintendo needs to commit to the marketing spend, which may be difficult considering the recent profit warning.”

This seems to be the thinking within the company. In the statement made by Iwata for the recent third quarter financial results, he said the immediate future would be about supporting big Wii U titles like Mario Kart 8 and exploring the possibilities of the GamePad. There was even talk of a new market – health – and some kind of fresh strategy based around using Nintendo's skill with entertainment products to promote fitness. Whatever happens, though, Nintendo is not on the brink of collapse, and with its extraordinarily deep pockets - which are unique within the games industry - it won’t be anytime soon. Rather than put its prized franchises onto other people’s platforms or start porting to smartphones, it’s far more likely that Nintendo will do what it always has done: make something new. “[Nintendo] regards itself as a toy company and knows that any given toy it launches may fail to find an audience, despite being a bet costing tens or even hundreds of millions of dollars,” says Farley.

“Satoru Iwata told me when the Wii launched that the company was prepared for the eventuality that it could fail completely - and then Nintendo would just go and design something else. I don't think that philosophy has changed in the intervening years.”

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