The Wii price cut won't improve sales, system dead in 2013

The Wii's price cut to $130 will push a few more units, but looking back through history, Gamasutra analyst Matt Mathews predicts that U.S. sales won't improve. Rest in peace, Nintendo Wii. When Nintendo announced that its Wii console would drop to $130 with a new bundle in about two weeks, I believe it was setting the stage for one last round of rich profit taking before ending the system's run sometime in 2013. To be perfectly clear, the transition from the Wii to the upcoming Wii U will be far different than some of the major generational transitions we've seen in this last generation. When Sony launched the PlayStation 3 in November 2006, for example, the PlayStation 2 business was still humming along nicely. The older console, in fact, outsold its successor by nearly 2.5 million units in that first year alone. It was only in March 2008 that the PlayStation 3 became Sony's top-selling console in the U.S. Or take the situation of Nintendo's own 3DS handheld, which launched while the Nintendo DS was declining but still a very strong seller. Both systems sold equally well during the first nine months that the 3DS was on the market, and only then because Nintendo was pressured into dropping the price of the new system only five months after it launched. In both cases, killing the older system immediately would have been counterproductive, since its continued sales provided a transition period for the newer one to find its footing. The Nintendo Wii, however, is in no position to prop up the sales of much of anything. Its monthly U.S. hardware sales rates are currently hovering below 80,000 units and its software sales have plummeted. According to official software tie ratio data provided to me by the NPD Group, it appears that software unit sales for the Wii are down by over 25 percent so far this year compared to the first nine months of 2011, as shown in the figure below. For context, both the PS3 and Xbox 360 are individually several million units of software ahead of the Wii at this point in the year, a reversal from previous years. And when even Nintendo can't be bothered to provide new software, third parties certainly won't step into the breach on a moribund system. The NPD Group has provided me with monthly average selling price (ASP) data in several months this year and in each instance the price has been in the $147-$149 range, just a few dollars below the suggested retail price of $150 for the Wii itself. With the price now dropping to $130, I expect that that will become the new average price for the system, since it isn't clear that stock of the $150 bundle will be replenished once it is exhausted. So it's worth looking at how the cut to $150, which happened about 18 months ago, affected sales of the Wii. To try to minimize the tremendous difference in scale between non-holiday and holiday months, I've put the Wii hardware sales data together here as trailing-twelve-month (TTM) results. That means that for each month on the graph below, the height of the curve represents total Wii hardware sales from that month and the previous eleven months. If there had been a dramatic shift in hardware sales after May 2011, that TTM sales curve would have bent upward to show that sales had increased over the same period a year before. If sales had simply remained flat year-over-year, then the curve would have been flat for a period. Instead, what we see here is that sales continued to erode even immediately after the price dropped from $200 to $150. A 25 percent cut in price, to a level $50 below the nearest competitor (the Xbox 360 4GB at $200), was at best a slight brake on the descent of Wii hardware sales. I believe we'll see even less of a positive effect from the current price cut. Instead of sales going up, as one might imagine happens after a price cut, we will instead see sales decline dramatically year-over-year. Given the focus on the Wii U this holiday, I don't see how the Wii could break a million units in this last quarter of the year. Of course, the Nintendo Wii has had a tremendous run. It will likely finally hit 40 million units in November of this year in the U.S., having averaged well over 6.5 million units per year since it launched in 2006. And given the technology inside, practically every one of those Wii units was sold at a profit. That has to be Nintendo's focus going forward with the new console, and I suspect we'll see Nintendo try to hold onto the Wii U's launch price as long as possible. To put this in context, I've put together a history of price drops for the big three consoles in each of the last two generations. The graph below runs from the launch of the PlayStation 2 in October 2000 through the present day. This figure gives you a good taste of how easy it was for Nintendo to rake in record profits during this generation. The Wii launched at a price that was lower than even the launch price of the original Xbox and the PlayStation 2 and then maintained that price for nearly three full years. During part of that period, even the Xbox 360's entry-level machine was priced below the Wii, but still could not match the sales of Nintendo's console. Those white hot sales and fat margins made for some of the best years Nintendo has ever seen as a business. Meanwhile, Sony has battled to bring the staggering $500 price tag of the original PlayStation 3 down to the same level that Nintendo started with. Having reached that level and still aching to make as much profit as it can from its console, Sony is now faced with Nintendo launching a new machine. As I've said before, the real insurgent in the next generation could be Microsoft. The company appears to be aligning itself with cable companies and content providers, and moving to a model in which it sells hardware bundled with a long-term service contract. If that model proves successful (and I'm not sure yet that it is, based on Xbox 360 ASP data), Nintendo and Sony could find themselves in a position where the traditional price cut simply can't go low enough, fast enough to compete.