M2 Research: E3 2011 Has Come and Gone, But Where is the Market Headed? Nintendo analysis

Nintendo Fortifies 3DS With Top Shelf IP and Launches the Next Generation With Wii U

Nintendo’s press event listed showcased anticipated high value franchises for 3DS for 2011 to 2012 including Zelda remake Ocarina of Time, a new Mario Kart game, a new Super Mario 3D platformer, Luigi’s Mansion 2, Star Fox 64 3D (featuring video communications for multiplayer) and Kid Icarus (featuring unique local and network based multiplayer modes). We believe upcoming releases of these games will drive increased momentum for 3DS hardware well into 2012.

Nintendo’s E3 presentation also revealed Wii U, positioned as a high definition technologically advanced console targeting hardcore gamers as well as mass market consumers. With Wii U, Nintendo means to catch up to the performance capabilities of Microsoft Xbox 360 and Sony PlayStation 3 and dig in to a new installed base in advance of competitors’ next generation hardware. Nintendo exhibited simulated high definition game style experiences to demonstrate Wii U’s graphics capabilities and the alternative gameplay mechanics made possible by use of the new controller incorporating a 6.2″ touch screen and gyroscopic and accelerometer sensors for motion control.

Nintendo did not announce pricing or release dates for Wii U, nor did the company share detailed processing specifications beyond the integration of “Watson” class IBM silicon for CPU and AMD design for GPU. Until these details are available, projecting Wii U performance remains a speculative exercise. Still, Wii U should play out well for Nintendo at launch in a window between April and December of 2012 (a Q4 2012 release is likely). Until Wii U is available, the new console’s short term impact will be negative on the market, particularly on Nintendo’s share. Wii hardware uptake has been slowing in the U.S. for over a year, and sales will now drag even lower with the announcement of a new system. New high value Wii titles such as Legend of Zelda: Skyward Sword are likely to improve Wii software sales, but third party Wii title performance remains sluggish.

What it All Means and Why You Should Care

The takeaways from E3 2011 point toward year over year revenue growth in the traditional retail market despite significant slowdowns to date this calendar year. The catalyst for that growth would be stronger hardware sales driven by the availability of quality software for that hardware.

We believe upcoming releases of highly anticipated Nintendo franchises including Mario Kart and Super Mario, Legend of Zelda and Starfox for 3DS will spur aggressive hardware uptake. 3DS hardware and software growth alone would be positive but could lack sufficient impact to push 2011 U.S. revenue from loss to growth, but we also expect strong first and third party software will drive increased momentum for PS3 hardware and to a somewhat lesser extent Xbox 360 and Kinect, which may be slow but will be mitigated by replacements, upgrades and the laptop cross-promotion giveaways continuing through early August 2011. PS3 and Xbox 360 software should remain strong through the mid term. We expect Wii hardware performance to continue to slow due to Nintendo’s announcement of a successor system and to a shift in quality software to 3DS in the near term and to Wii U in the long term, although, again, Legend of Zelda: Skyward Sword will boost Wii software sales.

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