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MG Siegler, reacting to news that Nintendo’s Wii U isn’t selling well:

I just don’t see how Nintendo stays in the hardware business. … I just wonder how long it will take the very proud Nintendo to license out their games.

I hear this a lot, but it’s not that easy for Nintendo. They’ve been spoiled by the massive success of the first Wii.

The Wii was much more profitable than most game systems. Not only was the system itself sold at a profit from day one, which is very unusual in this business, but Wii owners also bought unusually high numbers of add-ons — additional controllers, nunchucks, steering wheels, tennis rackets, exercise scales… — with very high profit margins.

And this wildly profitable system also sold more than anyone expected, including probably Nintendo.

The Gamecube sold poorly, sustained mostly only by enthusiasts of Nintendo’s long-standing game franchises (Mario, Zelda, etc.). The Wii sold well because it had a much more broad appeal — people would buy it even if they didn’t care about Nintendo’s long-running franchises.

But the Wii was a fad, in retrospect. The Wii U looks like it’s going to have more Gamecube-like appeal: long-time Nintendo fans will like it, but it won’t do well in the rest of the market.

The solution most people suggest is for Nintendo to exit the cut-throat, usually-low-margin hardware business and just make their well-known games for other platforms. But Nintendo’s hardware business isn’t low-margin at all. Suggesting Nintendo leave it would be like suggesting that Apple leave the hardware business.

Unlike Apple, Nintendo’s just not selling a lot of hardware anymore. That’s a big problem. But becoming a software-only business would almost certainly bring in far less revenue, especially if they wanted to sell their games on iOS, where nobody can sell games for $50.

And their franchises might not matter to the general gaming public as much as we think. What percentage of gamers are even old enough to have played more than one or two Mario, Zelda, or Metroid games?

Neither option looks good for Nintendo.

The market has moved on from what they do best. There’s not a lot of room left for game systems that aren’t also media centers and social gaming hubs, both of which Nintendo is still terrible at. And even those systems aren’t very profitable or compelling anymore.

The software side of gaming has also lost most of its middle class. At the high end, there’s room for a small number of huge-budget blockbuster titles that usually involve realistic sports simulations or killing people, none of which Nintendo does well. They compete by pushing the boundaries of cutting-edge graphics hardware, which Nintendo doesn’t produce anymore, and licensing real-life sports teams, which Nintendo doesn’t do. Or, more often on the PC side, they operate massively multiplayer online social fantasy worlds, which Nintendo also doesn’t do well. These successful blockbusters can charge $50.

At the low end is casual gaming, including the entire iOS gaming market, which is rapidly eroding demand for high-end gaming. Modern casual gaming almost always happens on computers or computer-like platforms, not traditional game systems connected to TVs. It relies much more on social features, which Nintendo doesn’t do well. Many of the big hits succeed by taking advantage of psychological tricks or gambling mentalities, which Nintendo is probably too proud to do. Casual games are usually free or nearly free up front, and they get money from frequent in-app purchases or advertising, which Nintendo would probably also hesitate to do.

Nintendo needs the profits of the high end, but they can’t compete there anymore. All of the growth is happening at the low end, which is mostly games that they can’t or won’t make. And even if they succeeded in casual gaming, it probably wouldn’t bring the kind of profit that they need.

I don’t think Nintendo has a bright future. I see them staying in the shrinking hardware business until the bitter end, and then becoming roughly like Sega today: a shell of the former company, probably acquired for relatively little by someone big, endlessly whoring out their old franchises in mostly mediocre games that will leave their old fans longing for the good old days.