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Will Nintendo's Wii Strategy Score?

If the Japanese company attracts new gamers with its innovative but not quite cutting-edge console, it could alter the industry

Killer processing power, high-definition graphics, WiFi connectivity, massive storage capacity�when it comes to game consoles, the presumption has always been the more functionality and speed, the better. Well, Nintendo (NTDOY) will launch its next-gen game machine called the Wii in the U.S. on Nov. 19, followed by Japan and Europe in early December. And the Kyoto-based company is making a huge strategic bet that "less is more" in the global game-console market.

Compared with the Sony (SNE) PlayStation3 and the Xbox 360 by Microsoft (MSFT), the Wii doesn't boast blistering chip speeds or cutting-edge graphics. Still, it's a cool game console and boasts some unique features, such as a wireless controller that can send a signal up to 30 feet away. It will retail for about $250 in the U.S. and include one wireless controller, one "Nunchuk" controller, and five different sports games.

It will also cost less than half what Sony hopes to fetch for its PS3, due out in November in the U.S. and Japan (Europe will have to wait until March, 2007). The PS3 features a super-fast Cell processor, which was co-developed with IBM (IBM) and Toshiba (TOSBF), and a Blu-ray DVD player that promises to deliver high-definition video. The standard Xbox, already on the market for about $400, is powered by IBM chips that also pack plenty of processing oomph, scads of memory, and quality graphics.

ALTERNATIVE APPEAL. Nintendo is clearly trying to position the Wii as a low-budget alternative. Although it also features an IBM chip, Nintendo's development team concluded that "while we needed adequate processing power, there was a threshold beyond which customers didn't really need more," said Nintendo of America President Reggie Fils-Aime. By not investing heavily in a technology like Blu-ray, the "Wii will be profitable from day one," he adds (see BusinessWeek.com, 9/14/06, "Hot Chips and Cool Consoles").

Nintendo thinks its game consoles�the Wii and the Nintendo DS handheld�will appeal to a mass market of first-time game players, women, and older consumers not typically drawn to this form of interactive entertainment. The Wii "has been designed to appeal even to people who aren't interested in games," Nintendo President Satoru Iwata told reporters near Tokyo last week.

Investors like Nintendo's chances. The company's stock is up 74% since April, and its quarterly results released in July were robust thanks to the DS. For the three months through June, Nintendo's sales rocketed 85%, to $1.1 billion, while operating profit increased almost eightfold, to $248 million. A weak yen helped, but a tripling of DS sales to 4.54 million units was the biggest factor behind the better-than-expected results (see BusinessWeek.com, 7/25/06, "DS Pays Off for Nintendo").

ADVANTAGE SONY? Though the Wii doesn't boast all the features and processing firepower of its rivals, Nintendo believes its easy-to-use controller will give it an edge. The Wii's wireless controllers can be moved through the air like a virtual sword, tennis racket, or weapon to pinpoint targets in a game or rifle through the Wii channel menu. About 30 new game titles will be available by yearend, the company says. Nintendo expects to ship 4 million boxes, primarily to the U.S., this year, and another 2 million through March, 2007.

Few expect truly dedicated gamers to choose the Wii over the PS3 or Xbox. And ultimately, the advantage may go to Sony. Yuta Sakurai, an analyst at Nomura Securities in Tokyo, expects the PS3 to sell 71 million units by 2011, compared with 40 million units for the Wii. Microsoft, meanwhile, is planning a stripped-down version of the Xbox without a hard-disk drive and other accessories that will cost about $250 in Japan, where the U.S. software maker has endured disappointing results. There's also a danger that the Wii could cannibalize sales of the DS, which has been a smash hit with casual gamers thanks to its user-friendly design and titles such as New Super Mario Bros., Nintendogs, and the Brain Training for Adults series.

It's definitely going to be a World of Warcraft moment in the game-console market when the Wii, PS3, and Xbox are all competing for consumers' hearts and dollars, euros, or yen. A particularly strong showing by Nintendo may signal that reaching new gamers is more about ease of use than processor muscle and high-end graphics. If so, the Wii could be a game changer.

Posted by Ed on September 21.

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