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Nintendo announced its first-ever annual net loss for the year this week, reporting net losses of 70.3 billion yen ($926 million). The Kyoto-based company’s revenue fell 41 percent to 215.7 billion yen ($2.84 billion). Nintendo also slashed its full-year operating profit forecast from 35 billion yen to just 1 billion yen.

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Nintendo owes its struggles to weak software sales and the growing strength of the yen. Nintendo generates about 80 percent of its sales overseas, but the yen’s strength against the euro is badly hurting profits returning from abroad. In fact, Nintendo was forced to take a $52.4 billion yen ($690.5 million) hit due to the poor foreign exchange rate between the dollar and the euro.

For decades, Nintendo was the clear leader in gaming. Its most popular franchises, such as Mario, Donkey Kong, Zelda and Pokemon have endured countless generations of gamers and consoles, becoming cultural icons. Nintendo fell behind Microsoft and Sony in the last decade, when the GameCube couldn’t keep up with the Xbox’s online capabilities and the Playstation 2’s backwards compatibility, but experienced a second wind in 2006 with the introduction of the Wii, which completely revolutionized video games with motion-controlled features and a quirky-looking controller.

In recent years, the company’s grip on the games market has been slipping. Nintendo only sold 3.3 million Wii units worldwide in 2011, down from the nearly 5 million Wiis sold in 2010. The Wii is still outselling the Xbox 360 and Playstation 3, but when it comes to software, Nintendo is paying the price for being unique. Software sales for the Wii plummeted from 65 million units in 2010 to 36 million in 2011.

Nintendo has also been struggling in the portable space. Sales of the Nintendo 3DS, which projects stereoscopic 3D images without the use of 3D glasses, were hurt badly by reports of the device’s short battery life, as well as consumer complaints of eye strain, dizziness and headaches.

Nintendo sold 3.6 million 3DS units during its U.S. release in March, but after that first month of success, demand for the system dropped off precipitously: only 710,000 units were sold in the three months post-launch. Poor sales led the company to slash the price of the handheld in July from $250 to $170, which caused the company’s share prices to drop nearly 45 percent since the start of 2011.

Nintendo hopes to make a comeback with its successor to the Wii, the Wii U. While the console will finally support 1080p HD graphics, Nintendo’s system is highly complex. The Wii U uses the same motion sensing peripherals as the Wii, including the Wii Remote and Wii Balance Board, but the new tablet controller is a handheld unto itself, complete with a 6.2-inch touchscreen so the user can choose to play the game on the TV screen or directly on the controller.

The uniqueness of Nintendo’s products makes it difficult for third-party developers to build games. Compared to the Xbox 360 and Playstation 3, which have similar control sets and graphics engines, developers are often forced to build entirely new games if they want to be featured on Nintendo’s systems.

Despite Nintendo’s standalone nature, the company is still beating its competitors in hardware sales. As of June 30, Microsoft had sold 55.3 million Xbox 360 units, and Sony had sold 51.8 million Playstation 3 units, but Nintendo had sold 86.6 million units worldwide. However, it’s not Sony and Microsoft Nintendo needs to worry about. It’s Apple and Google.

The release of the iPhone in 2007, and the subsequent release of the App Store in 2008, completely changed the gaming landscape. More than 500,000 apps have been downloaded 18 billion times from the App Store’s to date, with games making up the vast majority of user downloads. A Nielsen report also reveals that 93 percent of mobile users are willing to pay for a game, while 64 percent of users who downloaded an app over the last 30 days have downloaded at least one game.

Given that roughly 77 percent of the world’s population now owns a cell phone, mobile games have begun to explode in popularity and profitability; in fact, the mobile gaming industry is expected to report revenue of $8 billion this year. A prime example of mobile gaming potential is Angry Birds, Rovio’s breakaway mobile game, which has already surpassed 250 million downloads to become one of the most popular games of all-time, not just in the mobile category.

Nintendo’s loss signifies a sea change in the gaming industry, as the world becomes increasingly mobile and less tied to TV. Unfortunately, Nintendo has repeatedly said that it will not venture into mobile gaming.

“This is absolutely not under consideration,” said Satoru Iwata, president of Nintendo. “If we did this, Nintendo would cease to be Nintendo. [Making mobile games is] probably the correct decision in the sense that the moment we started to release games on smartphones we’d make profits. However, I believe my responsibility is not to short-term profits, but to Nintendo’s mid- and long-term competitive strength.”

The Wii U isn’t expected until 2012, but in the meantime Nintendo plans to offer a new feature for the 3DS that lets users take 10 minutes of 3D video, as well as an on-demand movies and TV service for the 3DS and Wii. But even if Nintendo refuses to enter the mobile gaming realm, it must find a way to address the cheap, accessible aspects of mobile gaming, lest it report its second annual loss next October.