Nintendo
Essay Preview: Nintendo
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Even before last weeks announcement from Sony (SNE), it seemed nearly certain that companys dominance in the PlayStation 2 generation of video game consoles would give way to a much more level playing field for the PS3 generation. This time around, Sony faces much stiffer competition from both Microsoft (MSFT) and Nintendo (NTDOY).
While the Nintendo name is most closely associated with a video game platform (the NES), the companys real focus has always been the games rather than the platform. Herein lies the true distinction between Nintendo and its two larger rivals. Nintendo seeks to make good games. Microsoft and Sony seek to control a distribution channel.
Nintendo is the only company among the three console makers that began life as an entertainment company – and it shows. Microsoft is known for software; Sony is known for hardware; and Nintendo is known for games.
American gamers are well acquainted with the Nintendo brand; but, American investors generally know very little about the company. Thats unfortunate, because despite all the attention given to Sony and Microsofts video game operations, Nintendo is the ultimate pure play video game company.
Nintendo is big. The company surpasses U.S. video game publishing giant Electronic Arts (ERTS) in sales, earnings, and market cap. On the last count, some may argue that Nintendo only has a larger market cap than EA, because its stock price has risen sharply over the past year, while EAs share price has actually declined. However, theres a much simpler explanation.
Nintendo has a larger market cap than Electronic Arts, because Nintendo (the business) is worth more than EA (the business). The run-up in Nintendos stock price may be entirely due to improved investor perceptions of the companys future prospects as a result of the good press surrounding Nintendos soon to be launched console, the Nintendo Wii.
Regardless, such an increase in the price of Nintendos shares was justified by the rather low value the market had previously placed on Nintendos business. The same cant be said of Electronic Arts. Even after underperforming the S&P 500 over the last three years, EAs stock price remains at levels that are nearly impossible to justify using any form of rational thought. So, Nintendo really is the worlds largest pure play video game company.
Nintendo is an interesting business to write about from an investors perspective for several reasons. The company operates in an exciting industry with excellent long-term prospects. Its more reasonably priced than many public companies in that industry (although thats not saying much). Its a truly unique business (with a unique past), and it has a clear vision of what it is and what it isnt. Obviously, Nintendos tremendous intellectual properties add to its appeal both as a subject of an article and as the object of an investors interest.
Nintendo has been a good steward of its intellectual properties. Its been very careful to protect the image of its most beloved characters. In fact, some would say the company has occasionally been too protective of its strongest franchises.
For instance, between 1994 and 2002 there were no new Metroid games, despite the popularity of that franchise. The benefit of such a strategy is that when Metroid Prime was released in 2002, it received extraordinary reviews and sold over a million units. The downside to this approach is obvious. Nintendo effectively surrendered