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Originally published January 21, 2014 at 5:39 PM | Page modified January 21, 2014 at 6:49 PM

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Wii U flop puts Nintendo chief on hot seat

Analysts and investors are putting pressure on the president of Nintendo after projections for Wii U sales were slashed. “His direction is not where it should be,” one investor says.

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Nintendo President Satoru Iwata, who tripled revenue by introducing hits like the Wii console, is coming under fire from some investors and analysts after the company’s latest game machine flopped.

Though Iwata had vowed to deliver 100 billion yen ($960 million) in operating profit this fiscal year, the world’s largest maker of video-game machines instead forecast a surprise 35 billion-yen loss, blaming poor sales by the Wii U. The company last week cut projections for Wii U unit sales by 69 percent and game sales by 50 percent.

Iwata, 54, has stuck to family-focused games, which are losing favor as casual players use smartphones and tablets while hard-core gamers opt for more advanced machines from Sony and Microsoft.

Nintendo, which has zero debt and about $8.6 billion of cash and equivalents, is studying new business models to revive sales after previously ruling out licensing its Mario and Zelda franchises to rivals.

“Iwata misunderstood the market,” said Yasuaki Kogure, chief investment officer at Tokyo-based SBI Asset Management, which holds Nintendo shares. “His direction is not what it should be.”

Nintendo said Iwata explained his responsibility to ensure a recovery, and it declined to comment further, according to an emailed statement.

Nintendo shares fell 2.4 percent to 13,415 yen Tuesday at the close of trade in Tokyo after dropping 6.2 percent Monday. The stock has lost more than 80 percent of its value since its peak in 2007, the same year Apple unveiled the iPhone.

Iwata started programming games during high school and studied at the Tokyo Institute of Technology, one of Japan’s top universities. When appointed in 2002, he became the first president of Nintendo from outside the founding Yamauchi family since it started selling cards in the late 19th century.

At that time, Nintendo had annual sales of 555 billion yen.

Iwata subsequently oversaw a winning streak that included the Game Boy Advance SP, the Nintendo DS handheld player, the Nintendo DS Lite, the Wii, the DSi, the DSi XL and the 3DS. The company also opened its first retail store in New York’s Rockefeller Center, selling machines, games and merchandise featuring its Pokémon collection and Donkey Kong.

In 2009, Nintendo posted 555 billion yen in operating profit as revenue more than tripled to 1.8 trillion yen on demand for the original Wii console and software. The Wii sold more than 100 million units and became the world’s best-selling console.

Iwata followed in November 2012 with the Wii U, which failed to match its predecessor’s success. In the period between the Wii and Wii U releases, Apple unveiled its iPhone and iPad; Samsung Electronics its Galaxy line of smartphones and tablets; and Google its Android operating system used by most mobile-phone makers.

Those were body blows to Nintendo, and revenue in the 12 months ending March 31 is forecast to drop to 590 billion yen. The company projects it will sell 2.8 million Wii U units instead of the 9 million originally forecast, and 19 million Wii U games instead of 38 million.

“Iwata, who is very much a video-game man, must leave,” Amir Anvarzadeh, a manager of Japanese equity sales at BGC Partners in Singapore, said in an email.

The increasing criticism comes after Iwata benefactor Hiroshi Yamauchi, who ran Nintendo for 53 years, died in September and left his 11 percent stake to his four children. Iwata said Jan. 17 the company is considering buying back those shares.

As the Wii U flounders, both Sony and Microsoft are ramping up the pressure with new consoles. Sony this month said it sold 4.2 million units of its PlayStation 4 since it went on sale Nov. 15, and Microsoft has shipped more than 3 million Xbox One machines.

Both totals exceed the Wii U forecast for the entire year.

“Wii U hasn’t sold well because of Iwata’s misjudgment,” said Yoshihiro Okumura, a general manager at Chiba-Gin Asset Management in Tokyo. “He needs to show a new strategy.”

Nintendo has kept its games off the world’s 1.5 billion smartphones to protect sales of its own software and hardware.

Nintendo should scrap production of its own consoles, instead delivering games to mobile devices and the PlayStation and Xbox consoles, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles.

Both the Wii U and 3DS handheld take advantage of touch-screen controls to play many Nintendo games, which would make it easier for the company to deliver versions for smartphones and tablets, he said.

“He will be under pressure to make dramatic changes,” Pachter said in a Jan. 17 email. “If he can’t make change happen, the company should find someone who can.”

The company could release 10 games a year from its library of 1,500 titles, charge $5 to $10 per mobile game, and sell at least 50 million copies of each to a core Nintendo audience, Pachter said.

Those alone would generate $2.5 billion to $5 billion a year in high-margin sales without the costs of making hardware while keeping the release of more expensive titles for consoles, Pachter said.

Iwata said Jan. 17 the company is considering a new business model, especially using mobile devices to boost its hardware business.

Iwata’s experience in game development and his success with previous hardware releases may make him the best candidate to lead a revival even after the Wii U misstep, said Hideki Yasuda, an analyst at Ace Research Institute in Tokyo.

During his 12 years in charge, Iwata has been the public face of Nintendo, a role that has left the company with few prominent alternative leaders. That may make it harder for the company to make a change at the top.

“No one else knows the hardware and software-game business better than Iwata, inside and outside of Nintendo,” Yasuda said.

Cliff Edwards in San Francisco and Jason Clenfield and Aaron Clark in Tokyo contributed to this report.

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