Wii U will be sold at a loss in order to return to Nintendo-like profits

In the wake of yesterday’s news that Nintendo has slashed its profit predictions (opens in new tab), it’s quite surprising to hear from the company’s president, Satoru Iwata, that Wii U will be sold at a loss.

Many companies in the games hardware race have utilised this tactic in the past, which involves taking a hit on every unit you sell, in order to give customers a cheap entry point and then make money back on the games they buy. But Nintendo has traditionally made a profit on every console it’s ever sold, except for early versions of the 3DS after that massive early price cut.

Iwata’s statement in full reads:

During the second quarter of this fiscal term, we have successfully eliminated the situation that we sell the Nintendo 3DS hardware below cost, which was the main reason our corporate profits fell in the last term. However, as we are in the phase of concentrating our development resources on software for the Nintendo 3DS system, which is still in an earlier stage of penetration than that of Nintendo DS, and as we have not yet launched the Wii U system, it is difficult to increase the total sales of software, which is generally profitable.

In addition to the yen’s continuous appreciation, the Wii U hardware will have a negative impact on Nintendo’s profits early after the launch because rather than determining a price based on its manufacturing cost, we selected one that consumers would consider to be reasonable. In this first half of the term before the launch of the Wii U, we were not able to make a profit on software for the system while we had to book a loss on the hardware, which is currently in production and will be sold below cost.

Our loss has therefore widened during the second quarter in spite of bringing the Nintendo 3DS hardware back to profitability. Although we expect our financial performance to be revitalized, under these circumstances, unfortunately we cannot say that we will achieve ‘Nintendo-like’ profits within this fiscal year.

“We will make best efforts to retrieve “Nintendo-like” profits by:

  • Boosting sales of the Nintendo 3DS system as a sound successor to Nintendo DS both in Japan and overseas during the year-end sales season,
  • Launching the Wii U system successfully in each part of the world in the year-end and maintaining the sales momentum next year, and,
  • Transforming our business structure in line with the times, including the expansion of our digital business to increase our business efficiency and profitability.

We daren’t speculate on how much of a loss the Wii U will make if it does achieve the 5.5 million sales the company is predicting it will shift by April. A loss of £2 a console is £11 million, £10 a console would be £55 million… it’s scary stuff. And then there’s the old ‘attachment rate’ issue. Nintendo is expecting 24 million software units to be sold in 2013’s financial year, which is over 4 games per console, if they meet their targets.

We don’t normally report on industry analyst Michael Pachter’s ‘predictions’, but he’s got a point when he says the expected attachment rate is “highly unrealistic given the steep price of both console models (which will limit the applicable gamer’s ability to purchase additional games), 23 launch-day releases (with some likely to slip), a somewhat murky launch window that boasts many big names but lasts 4.5 months, and compelling competitive devices.” It’s hard to argue with that logic.

What do you think? Let us know in the comments.

Sources: Nintendo (opens in new tab), Wired (opens in new tab)

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