Analyst Questions Third Party Wii Support

Kaufman Bros. equity research analyst Todd Mitchell has described current interest in the Wii by third party publishers and the mass media as “irrational exuberance”, in a new note to investors following a rise in Electronic Arts stock. Mitchell’s comments follow widespread reports of Electronic Arts’ initial success with Wii specific titles, and the company’s announcement that it would further increase support for the format. This has coincided with continued commercial success for the format, which remains sold out across the world. While praising Electronic Arts’ investment in Asia, online, massively multiplayer online games and mobile titles, Mitchell comments: “We are getting tired of what we believe is irrational exuberance about the Wii. Yes, it is popular, and yes, it is taking share, but one investor recently told us how he thought it would revolutionize the way Americans exercise...”. Mitchell goes on to argue that third party publishers may not benefit greatly from the Wii’s success, questioning whether it has really enlarged the market or instead “further segment[ed] it to Nintendo’s advantage”. While admitting that the truth may lay somewhere between these two extremes, Mitchell goes on to ask the question: “Did it [the Wii] enlarge the market by more than the amount of share Nintendo was able to take from the other publishers by dominating sales on the popular platform?” The unusually negative comments appear largely aimed at the profitability of the format for third parties, with Mitchell indicating that Nintendo’s own software share gains are likely to be sustainable. Positing that the Wii’s life cycle may be shorter than the PlayStation 3 and Xbox 360, he suggests that this may also make third parties more reluctant to support the format, while allowing Nintendo to widen the gap in perceived quality between its own titles and those from external publishers. “Yes, the Wii has caused the overall pie to get bigger”, says Mitchell, “but the independent publishers may be getting a proportionately smaller slice.”