Nintendo sacrifices Wii U profitability to entice consumers at launch

After dodging the issue of profitability for months, Nintendo confirms that its new Wii U console will be sold below manufacturing cost at launch. How will it avoid the same financial troubles that have plagued the Nintendo 3DS?

Nintendo’s earnings report for the July to September quarter delivered good news and bad news. The good news was that Nintendo had staunched some of the bleeding that’s plagued the company since the beginning of 2011 when Wii sales began bottoming out. The bad news was that it was forced to cut its earnings projections for the full fiscal year by 70 percent. Where Nintendo was expecting to make a profit of $251 million for the year ending March 2013, now it’s only expecting around $75 million. While there are many factors contributing to Nintendo’s diminished earnings projections, it’s hard to ignore the specter of the Wii U. Nintendo’s new console, expensive in the market at a base price of $300, will be sold at a loss according to the company.

Nintendo president Satoru Iwata confirmed during the company’s quarterly report that the Wii U, unlike previous consoles like the Wii, would not be sold above the manufacturing cost, earning the company profit on each machine sold from day one.

“[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 reasonable,” said Iwata, “In the 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.”

“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.”

Nintendo was evasive when Digital Trends asked about the Wii U’s profitability at its event in New York last September. “I can’t speak to profitability with either SKU,” said Nintendo director of corporate communications Charlie Scibetta, “It’s razors and razor blades. I’m not prepared to talk about whether we’re going to try and turn a profit on the console or a profit on the games to make up for a loss on the other.”

Now it’s clear why Scibetta avoided the question. Nintendo’s inability to coax customers into paying more than a gaming machine’s cost is a significant change to its past business. In 2006, Nintendo was making $100 on every $250 Wii sold. It was turning a similar profit on each Nintendo 3DS sold at the system’s launch in early 2011, but consumers were so reticent to pay $250 for a devoted gaming handheld that Nintendo was forced to cut the price to $170 just months after its release, selling it below cost.