I was alerted to a recent article on the CIO site, penned by Thomas Wailgum that declares the heyday of Nintendo’s success with the Wii is over.  The article notes that Nintendo’s manufacturing and supply chain entities have always risen to the challenge to make the Wii console the number one selling gaming console for multiple years.  Wailgum makes a new argument that while the Wii may have had its light in the sun, the story is dramatically different for the upcoming holiday period.

There are a number of evidence points cited.  Sales of the Wii have already plunged 43 percent from April through September of this year, and Nintendo executives have now downplayed expectations for the remainder of the company’s fiscal year. Two other arguments brought forth in the article note that Nintendo has delivered just a few hit videogames thus far in 2009, and hardware competitors Microsoft (Xbox 360) and Sony (PS3) have cut prices on their consoles. Another question raised is whether the Wii has reached saturation, and outlived its product lifecycle.

My reaction to the article was why just cite Nintendo?

The current problem of declining volumes is not just a Nintendo problem.

Product lifecycle planning for the consumer electronics industry, while always a challenge, does follow some predictable patterns.  Products when first introduced are at the peak of profitability potential, as consumers go to extraordinary efforts to be the first to experience the new features of the product.  This product hype cycle is the “sweet spot” for any consumer electronics producer, and the best example of a company who takes maximum advantage of this strategy is Apple. As the product matures, sales growth is driven by either price or new and different features.  Apple hardly ever approaches the peak of a holiday buying season without some new hardware model introduced, or associated hot new service or music offering primed for introduction.

Gaming consoles, along with video software games, follow pretty much the same patterns.  Game consoles, like MP3 music players, are not just about the sales of hardware, but more importantly, sales of linked products like games, which have far higher profit margins.  Nintendo was the first to recognize this, and launched a strategy to also develop and market its own video games, like the popular Wii Sports series, in order to leverage both strategies. Microsoft and Sony have however, not previously chosen to develop their own video game applications.

The industry however may be approaching structural change.  Another key evidence point came from the announcement this week from Electronic Arts, the second largest video game producer.  This company announced a $391 million loss and an upcoming cutback of 1500 jobs. The primary reason cited was a market shift noting that consumers are shifting their preferences to playing casual games on web sites such as Facebook or MySpace vs. owned gaming consoles.

As the industry approaches the new holiday season, Nintendo’s competitors Microsoft and Sony have already cut prices on their consoles.  In my view, Nintendo’s problem, as the market leader, is to match price reduction in the concept of value. In other words, it’s time for Nintendo to decide whether it wants to remain the predominate console provider, or video games developer.  The open question is whether it can do both.

In either case, Nintendo’s supply chain and product marketing teams must continue to play a key role in supporting the overall execution of the product strategy.  If consumers continue to cut-back, demand and inventory planning skills will prove critical.  If Nintendo shifts product strategy, supporting teams must be ready to execute in a timely manner.

The new industry winners will be those that anticipate consumer’s changing preferences and needs in gaming. Citing just Nintendo as a potential loser for the upcoming holiday season is not appropriate.  The problem is much broader, and lies among all the industry players, not just Nintendo.

What’s your view?  Have gaming consoles reached the decline point in product lifecycle?

Bob Ferrari