JIN-246 -- A Newly Troubled Nintendo

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Issue No. 246
Friday, October 10, 2003

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>> Viewpoint:
-- A Newly Troubled Nintendo

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>> Viewpoint: A Newly Troubled Nintendo

Video games maker Nintendo, the company behind Mario, Pokemon and
Donkey Kong, has forecast a six-month loss for the first time in the
iconic firm's 41-year listed history.

In an announcement that stunned investors, Nintendo revealed a sudden
and dramatic reversal of fortunes. As recently as May, the maker of
GameBoy and GameCube consoles was talking bullishly of a first half
profit outlook of 15 billion yen.

Last Friday, that became a prediction of a 3 billion yen loss.

Nintendo blamed the recent extreme volatility in yen/dollar trading:
earlier in the week, the dollar crashed to a 34-month low against
the Japanese currency, badly denting the break-even calculations made
at the group's head office in Kyoto. Nintendo based its predictions for
fiscal 2003 on an average rate of 117 yen to the dollar. But on
Tuesday, the greenback plunged to the 110 yen mark.

The company said that the drop would contribute to 40 billion yen
of foreign exchange losses in the first half of fiscal 2003 and that
the full year net profit outlook would have to be cut from 65 billion
yen to 60 billion yen.

Last fiscal year, Nintendo posted a group net profit of 67.27 billion
yen, with sales of 504.14 billion yen.

Nintendo's grim news was no surprise to most Tokyo analysts, who
have long warned that the group has left itself dangerously exposed
to precisely this sort of disaster. Nintendo's own forecast downgrade
brought it in line with consensus analyst estimates. Although
Nintendo is not having an easy time in the hotly competitive global
video games market, the currency issue is not a particular headache
when it comes to the value of exports.

Currency volatility does present a problem, however, to Nintendo's
risky practice of keeping the lion's share of its foreign earnings
in the markets where it earns them, in the hope of making some money
from the interest -- which is always going to be higher than Japan's
near zero rates. Nintendo's US deposits amount to just over $5
billion, and though the strategy has reaped rewards in the past,
it has become a focal point for investor criticism in recent months.

The large cash pile has also become symbolic of Nindendo's dwindling
stock of decent ideas, say analysts. Many have strongly condemned
the company's inability to come up with any effective uses for the
$7.5 billion cash pile Nintendo is sitting on. It is widely thought
that Nintendo may hestitate before launching a new console again.
Although the GameCube is popular among a certain cross-section of
gamers, its appeal is weakened by the smaller range of games on
offer from Nintendo -- especially when compared with Sony's

Meanwhile, Nintendo continues its titanic battle to remain a
serious force in a global console market dominated by
PlayStation2, the emerging threat of Microsoft's Xbox
and a rapidly growing taste for online games.

Despite its many years of success and a rich history of
blockbuster machines and games, industry observers at last
week's influential Tokyo Game Show agreed: Nintendo
is beginning to look like a company in trouble.

The firm has already cut the price of its flagship GameCube
console to below $100 in a bid to keep sales vibrant. Similar
cuts are expected in Japan, Europe and the UK later this month.

-- The Editors


"Game Over? The state of Nintendo's future," from
J@pan Inc magazine, June 2003:

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Written and edited by Roland Kelts and
Leo Lewis (editors@japaninc.com)


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