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Written By:
Jared Black

The mainstream press just doesn't get it, do they?  In one of the worst video game articles ever, Forbes spewed forth paragraph after paragraph of inaccuracies regarding Nintendo's holiday position this year.

And of course, I had to respond.  Below you'll find my letter to the writer of that article.  Oh well, at least it was fun to write.

Oh yeah, and if you haven't read the article click here to see why I had to reply.


I just had to comment on your article.  It has to be, without a doubt, the most inaccurate piece on the video game industry I've ever had the mispleasure of reading.  The mainstream press typically reports inaccurately on the industry, but that's just terrible.  Let's break down what's wrong with it:
The first two paragraphs are fine.  No problem there.  After that, it gets pretty bad:
"Nintendo's scramble to get the hardware out the door raises the question of why the company is in the business in the first place. Hardware is a tough business to make a buck in. Wall Street analysts estimate it costs Nintendo about $380 to manufacture each GameCube console, which will sell retail for about $200. That means the company will lose about $180 on each unit sold."
I don't know where you got your figures from, but Nintendo is not losing $180 on each console sold.  Analysts have placed their production costs at around $220 maximum (that will decrease as economies of scale kick in), and that number is quickly compensated by the sale of just one video game (retail at $50, cost around $12 - $15 to produce).  Microsoft, on the other hand, is losing roughly that much despite their $300 retail price.  And as I'm sure you know, they'll sell more than one game per console this holiday season.  Research is a GOOD thing.
"Unfortunately, Nintendo is counting on GameCube to revive its profits. In May 2001, the company reported a decline in fiscal-year operating profit of more than 40%, and a 13% decline in revenue (although the company reported an increase in net profits due to a weak yen). The decline in operating profit was largely attributed to slow sales of its game console, Nintendo 64."
What you didn't mention is that a large portion of Nintendo's profits still come from handheld sales, ie the Game Boy Color and Game Boy Advance.  They just launched their new handheld (the GBA) this June.  Additionally, these kinds of figures are always reported at the end of a system's life cycle.  People don't want to buy games for an "old" system when a "new" one is out (PS2) with the promise of more on the horizon (Xbox & GameCube) they need to save up for.  Even if the GameCube totally tanked, the GBA would more than keep Nintendo afloat.
"Hardware losses may be softened by lucrative software sales, including popular titles such as Donkey Kong 64, Pokemon Snap and Pokemon Stadium. If all the profits are made in software anyway, is there a reason Nintendo should continue pursuing console sales? It's not entirely certain the GameCube will sell like hotcakes anyway. It was one thing for consumers to throw about $200 on a videogame console when the economy was booming, but given the current climate, a $200 purchase is a serious investment--even if that's a discount to competitors like Microsoft (nasdaq: MSFT - news - people), which will sell its Xbox console for about $300."
Does it make sense for Nintendo to just forget about the billions it has invested in GameCube R&D, not to mention throw away all the work done on GameCube games to this point?  Even someone outside of the industry should understand that would simply be a stupid move.  It's better at this point to release the system and see what happens.  People all over are excited about it, so why not give it a shot?  Then again, your opinion on that might've changed had you known Nintendo's true manufacturing costs in the first place.
"Sega (otc: SEGNY - news - people) successfully pulled out of hardware, leaving the heavy lifting to those foolhardy enough to persist, and in May, the company said it expects to pull an operating profit by March 2002, after several years of losses. It was lauded as one of Sega's smartest moves."
Sega also had virtually no cash to market or promote the Dreamcast, whereas Nintendo has roughly $7 billion in the bank.  And like I said before, Nintendo's not losing a ton of money on each console sold as you stated.
Thanks for your time,
Jared Black

Posted: 9-27-01
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