Why Wii Dominates

Better, brighter, faster games--and perhaps more profits--are in Nintendo's future
Hardcore gamers may still scoff at Nintendo's Wii for catering to casual gamers. But hidden behind its Clark Kent facade are some impressive financial muscles.

Nintendo rocked the gaming world when it brought out the Wii gaming console three years ago by turning an entirely new demographic of users on to gaming. Middle-aged and senior citizens stood in line to buy Wiis on the strength of games like Wii Fit, which audiences found more fun than workout DVDs.

To date, Nintendo has sold nearly 35 million Wiis, including 12.6 million in the U.S., Nintendo's biggest market. That's lower than Sony's PlayStation 2, which has sold 43 million units since 2000. But it's still pretty high for a console that, at launch, was technologically a generation behind its chief competitors, Sony's PlayStation 3, with 13 million units in users' living rooms, and Microsoft's Xbox 360, with 23 million units. This year, the Wii is expected to sell more than the best-selling PS2 sold in its best year, 2003.

Just as interesting as how Nintendo has changed the gaming world, however, has been its business approach. Nintendo sells games along the time-honored razor-razor blade model, namely pushing out the console and then enticing users to buy more games.

"More casual players aren't as likely to be attracted by hardware features, so it's all about delivering a fun, easy-to-use and addicting game experience," says Anita Frazier, toy and video game analyst at NPD Group.

Another factor in enticing those casual users is keeping its console cheap. "The key thing about Nintendo is they want their things to be at price points that anyone can respond to," says Hiroshi Kamide, director of research at KBC Securities Japan. Nintendo's strategy is to buy inexpensive components instead of making them in-house, allowing the Wii to sell for $260 while the PS3 costs $300.

But here's the winning point: Unlike its competitors, Nintendo has figured out how to make money from its console sales. Sony loses money on each Playstation sold. Microsoft might just break even. But every Wii brings in $6 of operating profit for Nintendo, says David Gibson, an analyst at Macquarie Securities.

Nintendo also sells 60% of Wii games itself, compared with 30% for Microsoft and 15% for Sony. Wii users are expected to buy the most games this year, 220 million, compared with 120 million PS3 games and 125 million for the Xbox 360.

The top three Wii games--"Wii Play," "Super Smash Brothers Brawl" and "Super Mario Galaxy"--are all Nintendo's own titles, but the top three for PS3--"Grand Theft Auto IV," "Call of Duty 4: Modern Warfare" and "Assassin's Creed"--are all from outside developers, not from Sony.

By making most of its games itself, Nintendo risks sacrificing the chance to earn licensing fees from as many third-party developers as its competitors. It also prices games cheaper--at $50 versus $60 for the other two consoles. But so far the gambit has paid off: Wii locks in fans because many of its most popular games appear exclusively on the Wii. And Nintendo has a higher gross margin on game software than the others at 65%, compared with between 50% and 60%.

Those only-available-here games sell better than games that have been ported to other consoles because the Wii's unique features--the motion-sensor remote, for instance--make it hard to translate into other systems. PS3 and Xbox 360 games can be ported between those two systems fairly easily, but developers that want to make a game for all three consoles need a dedicated Wii team to write the Nintendo version.

Ubisoft's new "Shaun White Snowboarding" game, which shipped in late November, uses the Wii Fit motion board to simulate full-motion snowboarding; its Xbox and PS versions push online virtual snowboarding with friends.