Battered Shareholders Await Nintendo Forecast

Nintendo shareholders are skittishly awaiting tomorrow’s scheduled earnings forecast. On August 29th the company raised its forecast fiscal 2009 sales by 11.1% and its net income by 26.2%. A large part of the forecast growth in net income occurred because Nintendo management revised expected exchange rates to 105 yen per U.S. dollar from 100 and to 160 yen per euro from 155. As of today the actual rates are 97 yen per dollar and 125 yen per euro.

The surging value of the yen and the rapidly deteriorating economic conditions spell trouble for Nintendo. Shareholders now need to hope that Nintendo has not lost money by investing its cash hoard in financial instruments that have collapsed in value.

The recent precipitious decline in the price of Nintendo stock to 22,000 yen on October 28th strongly suggests that shareholders need to brace themselves. The stock reached a high of 73,200 yen on November 1, 2007; therefore, it has fallen 70%.

Nintendo has no debt and had $12.5 billion in cash as of March 31, 2008, so it is well positioned to survive this worldwide economic collapse. In fact, there is probably not a company in the world with as strong a balance sheet as Nintendo.

NINTENDO NEGLECTING SHAREHOLDER INTERESTS

It is time for Nintendo of Japan to address the weakening price of its shares by taking meaningful action. Its stock price closed at 48,700 yen on August 19, 2008, representing a decline of 33.5% from its November 1, 2007 peak of 73,200 yen and just slightly above its 2008 low of 45,600 yen. While some of the decline in its stock price is attributable to general market weakness, fear of recession, a strong yen, Wii supply shortages, topping out of sales of the DS, and game console price cuts by Microsoft and Sony, the fact is that Nintendo management has done nothing to curb the decline in its stock price.

The market value of Nintendo has fallen from a peak of about $85 billion to about $56.6 billion, a decline of $28.4 billion. It is now trading at a PE multiple of 19.2, a PEG ratio of 0.57, and a dividend yield of 2.6% based on its forecasted net income per share for its fiscal year ending March 31, 2008.

What Needs Done

Nintendo’s annual general meeting of shareholders was held on June 27, 2008 and no meaningful action was taken either prior to or at that meeting to maximize shareholder value. Among other things, Nintendo management continued to ignore the crying need to split its stock.

At present, a 20 to 1 split seems to be appropriate. Such a split would, other things being equal, cause Nintendo’s share price to drop to about 2,435 yen or about $22.13 per share versus the current $442 per share price.

Stockowners who currently own 100 shares would end up owning 2,000 shares if Nintendo did a 20 to 1 split.

Remove 100 Share Minimum

Nintendo also needs to drop the current 100 minimum share purchase and allow people to buy a single share. These two actions alone would bring share ownership within the reach of a significant number of new shareholders who have been prevented from buying Nintendo shares by the exhorbitant cost. Given its current share price and 100 share minimum, purchasers are now required to shell-out about 4.87 million yen or $44,273 to own a piece of Nintendo and that is simply unreasonable.

Microsoft has about 150,000 shareholders and Sony has about 630,000. Nintendo should be embarrassed by the fact that it has only 34,315 shareholders as of March 31, 2008. After all, in early 2007, Nintendo supported the secondary offering by Banks Shareholding Service Corporation of 1.987 million shares of Nintendo and company officials stated they were supporting the offering because it would help widen its shareholder base and encourage shareholding by individual investors. Nintendo stated that it had experienced a growing interest by individuals in owning Nintendo stock, which it attributed to the growing popularity of its DS handheld player and Wii console.
Given these expressions of individual interest in owning Nintendo stock and the company’s desire to broaden ownership, it is disconcerting that Nintendo maintains its 100 share minimum purchase size on the Tokyo Stock Exchange (TSE) and/or fails to split its stock.

Following the Nintendo 2007 annual meeting, company officials acknowledged they were aware of the need to make share ownership more affordable. At the same time, they mentioned that the Tokyo Stock Exchange was requiring all its listed companies to convert to book-entry securities by June 2009. Nintendo officials then went on to say that a stock split would be too expensive, therefore, they had decided to do nothing until January 2009.

The explanation offered by company officials as to why they had decided to not split the stock is absurd given that Nintendo has less than 35,000 shareowners and there is nothing to prevent them from moving to a book-entry system before 2009. Furthermore, their inaction reveals a cheapness that is unacceptable, inappropriate, and unnecessary for a Topix 30 corporation with more than $10 billion in cash. Nintendo shareholders know that the benefits of a stock split and an increase in the number of shareholders far outweigh any short-term costs. This is not the time for shareholders to allow Nintendo to revert to its legendary penurious ways.

Increase Dividend Payout Percentages and Frequency

A third step that Nintendo needs to take is to increase the size and frequency of its dividend. At present, Nintendo pays out the greater of 33 1/3% of its operating income or 50% of its net income. Its dividend is comprised of a paltry interim dividend of 140 yen paid to shareholders of record as of September 30th and a year-end dividend paid to shareholders of record as of March 31st. In recent years the year-end dividend has dwarfed the interim amount. Given Nintendo’s abundant cash position, it needs to adjust its payout to the greater of 50% of its operating income or 75% of its net income.

The unusual nature of the small interim and large year-end dividends causes confusion and inaccurate reporting. For example, E*Trade Financial shows that Nintendo’s dividend yield is 0.14%, which is totally wrong. The actual yield on Nintendo for the past 12 months, at its recent price of 48,700 yen, is 2.6% since an interim dividend of 140 yen was paid to stockholders of record as of September 30, 2007 along with a 2008 fiscal year-end dividend of 1,120 yen that was paid to stockholders of record as of March 31, 2008.

It could be argued that the current dividend yield on Nintendo is really 2.8%, which is the interim dividend of 140 yen already paid plus the company forecasted 1,230 yen year-end 2009 dividend divided by the current price of 48,700 yen. Nintendo’s dividend yield is 5 times larger than the yield on one-year Japanese government securities and three times the yield on 5-year Japanese government bonds. Individual Japanese investors would relish the opportunity to own such a secure high yielding investment.

Nintendo should begin to pay regular quarterly dividends like most other publicly-held corporations. This simple change would help financial reporting accuracy and be well received by shareholders who value Nintendo as a source of income.

Complete Existing Stock Buy Back Program and Institute A New One

The fourth important step that Nintendo needs to take is to complete its current stock buy back program and to announce a new one. At its annual meeting on June 27, 2002 the board of Nintendo authorized the company to buy back as many as 14 million shares at a maximum price of 250 billion yen.

During the first fiscal year of that program the company had bought back 7,334,448 shares at a cost of 81.521 billion yen. During the following 12 months, Nintendo acquired an additional 650,107 shares at a cost of 5.378 billion yen. In its 2005 fiscal year it acquired an additional 3,607,056 shares at a cost of 41.998 billion yen. In 2006 it purchased 1,002,389 more shares at a cost of 25.216 billion yen. Nintendo bought an additional 1,171,987 shares during its fiscal 2007 year. In fiscal 2008 it acquired an additional 13,366 shares.

During the six years ended March 31, 2008 Nintendo repurchased 13,779,353 shares of its own stock or 9.7% of its outstanding shares. The amount spent to buy those shares was 156.184 billion yen. The average price Nintendo paid for its treasury stock was 11,335 yen per share. During the first three months of its 2009 fiscal year it acquired an additional 1,530 shares. These share purchases since 2002 have left Nintendo with the ability to buy an additional 219,117 shares under the June 2002 authorization.

Given the facts that Nintendo stock is under downward price pressure and it has a war chest of more than $10.7 billion in cash and securities, it is time for Nintendo to complete its 2002 buyback authorization. Increasing the size of its treasury stock holdings to the 14 million share limit authorized in 2002 would only cost about $97 million at the current stock price. It is intuitively obvious that such share purchases would represent a far better use of Nintendo cash than investing it in Japanese securities at rates of less than 1% as is currently being done.

Nintendo needs to also announce that it is instituting a new stock buy back program to show the investing public that it believes its shares are undervalued. To be meaningful, the new buy back program should authorize the purchase of an additional 10 million shares. These shares would represent slightly less than 8% of the outstanding shares owned by shareholders after completition of the 2002 program.

At the current stock price, such a share buy back would cost about $4.4 billion. This amount is less than twice the positive cash flow resulting from Nintendo’s operating activities in Fiscal 2008 and less than 50% of its enormous cash position.

Create Nintendo Sponsored ADRs

The fifth step that Nintendo needs to take is to introduce Nintendo sponsored ADRs and have them listed on the NYSE. Presently, unsponsored Nintendo ADRs trade on the over-the-counter market (pink sheets) under the symbol NTDOY and do not get the respect or coverage they deserve from the financial community. In fact, numerous investors avoid investments in pink sheet listed stocks like a plague because of a lack of transparency. A listing of sponsored ADRs would give Nintendo management an opportunity to tell its story to the largest possible audience of potential investors.

Eight shares of NTDOY currently equate to one share of Nintendo of Japan and these ADRs would have to be incorporated into the newly sponsored shares to avoid confusion. The listing of Nintendo sponsored ADRs would simply recognize the fact that almost 50% of Nintendo’s stock is owned by stockholders outside of Japan, and it would significantly lower the transaction costs associated with purchasing shares of Nintendo.

Summary

The aforementioned recommended actions need to take center stage and be acted on swiftly. President Satoru Iwata left the door open to these changes in October 2007 when he was asked the following question: “Now that DS and Wii are in a constant sales stream, huge amounts of cash flow that you can not use for ordinary business is expected for several years to come. Are you going to pile up your cash reserves, or will you use them for some reasons, or will you make a return to shareholders?” Iwata responded, “If our cash deposits simply keep increasing at the current pace, it is possible that we may be required to take a new step that we have never done nor announced before.”

Turmoil in the world markets caused by toxic financial instuments has caused a number financial institutions to fail and more are expected. The ricochetting bullets from these failures are hitting corporate balance sheets, since surplus corporate funds are invested in these exploding financial instruments and held by these failing institutions. At times like this, Nintendo’s cash hoard of more than $10 billion becomes a significant liability and a cause for shareholder concern. It is simply impossible for Nintendo to invest those funds risk-free while earning a favorable return. Numerous other corporations have already had to take charge-offs due to bad investment of their surplus funds and Nintendo cannot escape that fate.

Nintendo’s problem is exacerbated by the fact that its earnings have become increasingly impacted by volatile exchange rates. For example, its report for the quarter ended June 30, 2008 showed it enjoyed a foreign exchange gain of 29 billion yen and that represented 22.1% of its before tax income.

Without question, Nintendo’s earnings have become heavily dependent on exchange rates. Any attempt to hedge would worsen its predicament and most likely put them in the hands of investmant banking wizards who have proven they are adept at destroying things they touch

Market conditions require Nintendo to take the actions presented in this article. It would be foolish to ignore the timely importance of these recommendations.

Nintendo Stockowners Anxiously Await Announcement

In October of 2005, 2006, and 2007 Nintendo announced upward revisions of their forecasted respective fiscal year ending March 2006, 2007, and 2008 earnings and dividends. Its October 2006 modification was followed by further upward revisions issued on January 10, 2007. No such upward modification announcement was made in January of 2006.

Investors looking for a revised forecast of earnings and dividends by Nintendo need to focus their attention on a possible announcement by the company around January 10, 2008. A failure to announce upward modifications would likely cause a cool response and disappointment from Nintendo stockowners who have grown accustomed to seeing long lines of Wii buyers being unable to buy the console.

For the past month, as Christmas shopping accelerated, the Wii console has generally garnered eBay bids of $100 and more above the retail price. At such prices, eBay resellers are surely making more than either Nintendo or its licensed retailers.

Nintendo’s stock price action indicates that stockowners remain relatively confident that the public’s appetite for the Wii will not wane. Knowledgeable observers believe that sales of the Wii in 2008 and future years will now be driven by an abundance of video games likely to be introduced by Nintendo itself and other game developers.

Nintendo’s Income Growth Limited by Wii Production

Nintendo’s failure to anticipate the demand for the Wii and its inability to ramp-up production are seriously restraining its growth. Furthermore, Wii console shortages have encouraged Microsoft and Sony to slash Xbox and PS3 prices and capture many would be Wii buyers.

Unit sales for the Wii revealed in the October 25, 2007, Nintendo earnings release show Wii sales of 1.143 million per month for the quarter ended April 30th, 1.3 million per month for the quarter ended September 30th, and expected sales of 1.695 million per month for the six months ending March 31, 2008. While these numbers show increased production, they fall far short of meeting actual demand.

Nintendo itself has acknowledged that there will be a significant shortfall of Wii consoles for the second consecutive Holiday season. Company officials, however, have continually refused to provide future Wii production numbers creating the impression they do not have a good handle on the situation.

In fiscal 2007 Nintendo’s net income increased by 77.2%. Its net income growth rate is now forecast to decline to 57.8% in fiscal 2008. While such income growth is admirable, the actual rate would be much greater if Wii supply was more closely aligned with demand. It remains to be seen how shareholders will react to a declining growth rate in net income.

The Wii shortage is best evidenced by the continuous sales of vast numbers of Wii consoles on eBay at substantial premiums above MSRP. Meg Whitman, the CEO of eBay, needs to send a special Christmas present to Satoru Iwata, Nintendo’s CEO, thanking him for all the business the Wii shortage has brought to eBay. She might even suggest that Iwata invest some of Nintendo’s abundant cash, which totals about $8 billion, in eBay stock while the Wii console shortage persists.

It is understandable when a manufacturer misses one Holiday selling season because of insufficient product. It is unacceptable to miss two in a row!

Nintendo’s Near Term Outlook Gets Clouded

Nintendo’s rumored problem ramping-up production of the Wii console and the company’s failure to comment casts a cloud over the near term outlook for its common stock. That outlook is further clouded by the weakness of the dollar.

In its last forecast dated July 25, 2007, Nintendo modified its projected fiscal 2008 earnings to reflect sales of 16.5 million Wii units, which was up from the 14 million units forecast in its April 26, 2007 release. At the same time, it revised its earnings to reflect an exchange rate of 118 yen per U.S. dollar versus its previous forecast of 115.

Since the last Nintendo investor release, the dollar has collapsed to 113 yen on September 10, 2007. If that exchange rate persists, it will cause a downward revision in earnings of approximately 30 billion yen ($266 million) in fiscal 2008.

Nintendo is not expected to release the results of its second quarter until the latter part of October, 2007. An upward revision in earnings in October similar to what it did last year seems unlikely.

Who Is Buying Nintendo Stock?

Given the price rise of Nintendo stock, it seems appropriate to find out who owns its shares. It is especially important to discover whether the number of shareowners is expanding and if they are adding to or liquidating their holdings.

Treasury Stock

Nintendo has authorization to issue 400 million shares. Of those shares, 127,903,013 were outstanding on March 31, 2007.

At its annual meeting on June 27, 2002 the board of Nintendo authorized the company to buy back as many as 14 million shares at a maximum price of 250 billion yen. By March 31, 2003 the company had bought back 7,334,448 shares at a cost of 81.521 billion yen. During the following 12 months, Nintendo acquired an additional 650,107 shares at a cost of 5.378 billion yen. In its 2005 fiscal year it acquired an additional 3,607,056 shares at a cost of 41.998 billion yen. It purchased 1,002,389 more shares at a cost of 25.216 billion yen in 2006.

Nintendo bought an additional 1,171,987 shares during its fiscal 2007 year bringing its treasury stock holdings to 13,765,987 shares. During the five years ending March 31, 2007 Nintendo repurchased 9.7% of its outstanding shares. The amount spent to buy those shares was 155.396 billion yen ($1.26 billion). The average price Nintendo paid for its treasury stock was 11,288 yen ($917.7 million).

It is important to understand that the Nikkei stock average declined 28% in the 12 months ending March 31, 2003, which was during the time the board authorized Nintendo to buy back shares. The board’s action should provide a source of comfort to Nintendo shareholders. After all, Nintendo was willing and able to step-up to support its stock through share repurchases when those shares were under significant downward pressure. Nintendo’s president recently reaffirmed that the company remains willing to provide support for its shares in the event that is needed in the future. Furthermore, Nintendo is able to buy back shares because it had $8.15 billion in cash at the end of its 2007 fiscal year and that cash hoard grew by $1.27 billion in 2007 alone.

The Owners of Nintendo

There were 32,371 Nintendo shareholders as of March 31, 2007. By comparison, Sony has 630,554 shareholders and Microsoft has about 150,000.

The largest single Nintendo shareholder is Hiroshi Yamauchi who owns 141,650,000 or 11.07% of the company. His shares have a market value of about $6.4 billion, and he reportedly is now the third wealthiest man in Japan. He was Chairman, President and undisputed leader of Nintendo for 53 years from 1949 until he retired in 2002 at the age of 75.

Among other things, Yamauchi is credited with keeping the Seattle Mariners in Seattle. He achieved that distinction by buying the biggest piece of ownership in The Baseball Club of Seattle, which was organized to buy out the Mariners owner, who had run into financial problems in his other ventures. The group formed to rescue the Mariners originally approached Bill Gates of Microsoft, but he chose not to participate.

After being rebuffed by Gates, the group decided to approach Microsoft’s Redmond, Washington neighbor, Nintendo of America (NOA). Hiroshi Yamauchi’s son-in-law, Minoru Arakawa was President of NOA and had established himself as a leading member of the Seattle business community, so Yamauchi decided to fund a majority of the $125 million purchase price. In 1992 he paid $67 million for his 54% ownership stake in the Seattle Mariners. Interestingly, in the summer of 2004 he sold his entire stake in the Mariners to Nintendo of America for the same amount he paid even though Forbes estimated that the Seattle Mariners franchise was worth more than $400 million.

Yamauchi, apparently, had no interest in baseball and purchased his share as a goodwill gesture to help local leaders keep the team in Seattle. In 13 seasons as an owner, Yamauchi never visited Seattle or witnessed a game.

Banks and Trust Companies

The second through tenth largest shareowners are all banks or trust companies. The 2nd largest owner is the Bank of Kyoto, Ltd. with 6,387,300 shares and the 10th largest is Mellon Bank Treaty Clients Omnibus with 3,084,500. Most of these shares are probably held in custodial accounts for the benefit of their customers.

Directors

Unlike their counterparts in publicly-traded corporations in the United States, the officers and directors of Nintendo are not flush with stock. As a group, the 13 members of Nintendo’s board own only 14,315 shares. The value of those shares is about 701 million yen ($5.7) million. Satoru Iwata, Nintendo’s President, is the largest stockowner among directors with 4,300 shares. The second largest stock position is held by Takao Ota, General Manager of Manufacturing, who owns 2,079 shares.

Foreigners

As of March 31, 2006 foreigners owned 41% of the outstanding shares of Nintendo of Japan. This was a higher percentage than observed in 2005 (38%), 2004 (39%), 2003 (30%), and 2002 (37%). The noticeably lower percentage in 2003 is worth noting because that was when the stock market in Japan was in a sharp decline. During that stock market decline, Nintendo’s foreign owners showed a greater propensity to liquidate their holdings. This trait did not endear foreign shareowners to Nintendo officials.

Institutional Owners of Nintendo of Japan

Various investors, including mutual funds, are required to disclose their portfolio holdings quarterly to the U.S. Securities Exchange Commission (SEC). A comparison of those quarterly reports reveals if a fund is accumulating or liquidating a stock. Investors like to know if and when professional money managers are accumulating or liquidating a position, since it could influence a stock’s price.

Exhibit 1 shows a listing of 41 current shareowners of Nintendo of Japan. It also shows whether an owner increased or reduced their position since their last quarterly report. These owners hold 5,162,763 shares or 4.0% of all the shares outstanding. During their most recent quarter they were net buyers of 668,988 shares, a 14.9% increase in their holdings.

Exhibit 1

Institutional/Mutual Fund Owners of Nintendo of Japan 2007

Owner	Shares	Change
Fidelity Diversified International Fund	1,850,000	150,000
William Blair & Company	865,700	865,700
Fidelity Overseas Fund	602,500	-84,700
Fidelity International Discovery Fund	340,100	36,600
Vanguard Pacific Index Fund	316,915	10,140
Fidelity Advisor Diversified International Fund	225,200	14,300
Fidelity Japan Fund	222,000	-211,600
Fidelity Select Software and Computer Services	137,800	-9,300
The Japan Fund	83,600	-74,600
Fidelity International Small Cap Opportunity	79,600	1,500
Fidelity Select Technology Portfolio	76,900	-3,100
Fidelity Advisor Overseas Fund	53,400	-10,900
Fidelity Worldwide Fund	41,400	-1,700
Fidelity Pacific Basin Fund	33,500	1,500
Matthews Asia Pacific Fund	30,400	-5,800
Matthews Japan Fund	29,315	-17,900
Matthews Asian technology Fund	16,585	1,000
iShares S&P/Topix 150 Index Fund	16,400	16,400
Excelsior Pacific/Asia Fund	16,000	-24,000
Morgan Stanley Institutional Active International	10,900	NC
Templeton Transamerica Global	10,700	NC
SPDR Russell/Nomura Prime Japan ETF	9,248	9,248
MFS International Equity	8,900	-1,200
Fidelity Advisor Japan Fund	8,500	600
iShares S&P Global Technology Sector Index Fund	8,100	8,100
Fidelity Strategic Income and Dividend Fund	7,800	-1,100
Gartmore Worldwide Leaders Fund	7,100	NC
ICON Asia-Pacific Region Fund	7,000	7,000
ICON International Equity Fund	6,900	6,900
Gartmore International Growth Fund	6,700	900
Pacific Capital International Stock Fund	6,700	-1,200
Fidelity Global Balanced Fund	6,000	3,600
IXIS Hansberger International Fund	4,400	NC
Henderson Global Technology Fund	3,500	NC
Capital Guardian Global	2,700	NC
Van Kampen Active International Allocation	2,600	NC
Fidelity Select Multimedia Portfolio	2,200	-700
Morgan Stanley Institutional International Magnum	2,100	NC
Matthews Asia Pacific Equity Income	2,000	NC
Commonwealth Japan Fund	1,000	NC
Gartmore International Index Fund	400	-16,700
Total	5,162,763	668,988

Sixteen of the owners in Exhibit 1 are recent net buyers, 15 are net sellers, and 10 did not change (NC) their holdings. The largest net buyer is William Blair & Company, which acquired all of its 866,700 shares between December 31, 2006 and March 31, 2007. The second largest buyer is Fidelity Diversified International Fund, which acquired an additional 150,000 shares.

In addition to William Blair & Company, five others established new positions in Nintendo. Those five are Ishares S&P/Topix 130 Index Fund (16,400), SPDR Russell/Nomura Prime Japan ETF (9,248), iShares S&P Global Technology Sector Index Fund (8,100), ICON Asia-Pacific Region Fund (7,000), and ICON International Equity Fund (6,900).

Fidelity Mutual Funds

By far the largest owner of Nintendo is the Fidelity Diversified International Fund, which holds 1,850,000 shares. William Blair & Company is the second largest Nintendo of Japan shareowner with 865,700. Fidelity’s Overseas Fund is the third largest holder with 602,500 shares, but it reduced its holdings by 84,700 from the preceding quarter. The owner with the fourth largest Nintendo position is also a Fidelity fund; the Fidelity International Discovery Fund, which owns 340,100 shares adding 36,600 during its last quarter.

Of the 41 funds that owned Nintendo shares, 15 of them were Fidelity mutual funds. Those 15 held a combined 3,686,900 shares and accounted for 85.8% of all Nintendo of Japan shares owned. Fidelity, therefore, controlled 2.88% of all outstanding shares of Nintendo of Japan.

Nintendo Portion of Owner Portfolios

Among the owners with more than 100,000 share positions, Nintendo accounted for 3.94% of the net assets of the Fidelity Select Software and Computer Services portfolio and that was the largest percentage among those owners with more than 100,000 shares. The Fidelity Japan Fund is a close second with 3.87% of its assets in Nintendo shares followed by Fidelity Overseas Fund (2.22%), Fidelity Diversified International Fund (1.11%), and Fidelity International Discovery Fund (0.93%).

American Depositary Receipts (ADR)

American Depositary Receipts (ADRs) were created to aid US investors who wished to purchase shares of non-US corporations. An ADR is a negotiable certificate evidencing ownership of shares in a foreign corporation from a country outside the market in which the ADR is traded. Each ADR denotes depositary shares, which represent a specific number of the underlying shares on deposit in the issuer's home market.

ADRs are quoted in dollars and are governed by the trading and settlement procedures of the exchange on which they trade. Each ADR can represent one, more than one, or a fraction of underlying shares. The relationship between the ADR and the ordinary share is referred to as the ratio. While many ADR programs are established with a 1:1 ratio (one underlying share equals one depositary share), current ADR programs have ratios ranging from 100,000:1 to 1:100. The ease of trading and settling ADRs makes them an attractive investment option for investors wishing to purchase shares in foreign companies.

The Nintendo ADR ratio is 8:1; therefore, eight ADR shares equal one share of Nintendo of Japan. These ADRs trade on the over-the-counter (OTC) market under the symbol NTDOY. The average daily trading volume is about 150,000 shares.

Anyone can create Nintendo ADRs by pre-arrangement with one of the depositary banks. In order to create such ADRs, shares of Nintendo of Japan would be purchased on the Tokyo Stock Exchange and placed in a custodial account in Japan designated by the U.S. depositary. Once the New York depositary was notified by the custodian that they had possession of the purchased shares then the New York depositary would issue eight NTDOY shares for every one deposited in Japan. Japanese banks that serve as custodians for Nintendo of Japan shares include The Bank of Tokyo – Mitsubishi, Sumitomo Mitsui Banking Corporation,Sumitomo Trust and Banking Company, and Deutsche Bank - UK.

An owner of NTDOY shares could also turn their ADR shares into the depositary bank and have their shares turned back into Nintendo of Japan shares through a process called cancellation. The ability of holders to redeem shares in the U.S. for shares in Japan and vice versa insures that the shares will trade close to their intrinsic values. The conversion of shares also creates arbitrage opportunities during periods of stock market and foreign exchange instability.

Intrinsic Value of NTDOY

Buyers and sellers of NTDOY shares need to recognize that they are quoted and trade in U.S. dollars, while Nintendo of Japan shares are quoted and trade in Japanese yen. The intrinsic or underlying value of a NTDOY share is calculated by dividing the price of a share of Nintendo of Japan by the number of yen in a U.S dollar and then dividing that quotient by eight.

Because of time differences, the Japanese market is a day ahead of the U.S. stock market and the intrinsic value of NTDOY is known before the U.S. markets open. The correlation between the price of a share of NTDOY and the price of a share of Nintendo of Japan is not perfect. Fluctuations in the yen dollar exchange rate and market volatility influence the price of NTDOY, but it has always traded within a 95-105% band of its intrinsic value.

Nintendo knowingly passed up a rare opportunity to issue sponsored ADRs in 2007 when the Banks' Shareholdings Purchase Corp liquidated 1.987 million shares of Nintendo in a secondary offering in Japan. The company could have easily purchased all of those shares, filed a F-6 registration statement with the SEC, and then issued its own sponsored ADRs in a secondary offering to cover the purchase of the Banks’ shares. It seems reasonable to assume that they did not take that route, because they did not want to increase the foreign ownership of Nintendo.

At the time of the Banks’ secondary, Nintendo officials stated they were supporting the offering because it would help widen its shareholder base and encourage shareholding by individual investors. Nintendo stated that it had experienced a growing interest by individuals in owning Nintendo stock, which it attributed to the growing popularity of its DS handheld player and Wii console.

Given these expressions of individual interest in owning Nintendo stock and the company’s desire to broaden ownership, it is surprising that Nintendo maintains its 100 share minimum purchase size on the Tokyo Stock Exchange (TSE) and/or fails to split its stock. On July 6, 2007 Nintendo closed at 48,950 yen on the TSE; therefore, an individual would have to pay 4.9 million yen ( $39,796) to purchase the minimum amount of Nintendo.

Nintendo ADRs became available in 1993 when the Bank of New York and then Citibank were established as depositaries. They were followed in 1994 by Deutsche Bank and by JP Morgan Chase in 2006. Registration statements filed with the SEC in 1993 authorized the issuance of 50 million Nintendo ADRs with BNY as depositary and 50 million with Citi as the depositary. A 1994 registration statement authorized the issuance of an additional 100 million Nintendo ADRs with Deutsche Bank as depositary. A 2006 registration statement was filed authorizing the issuance of an additional 50 million Nintendo ADRs with JP Morgan Chase serving as depositary. These four registration statements, therefore, permit the issuance of up to 250 million Nintendo ADRs, which would be the equivalent of 31.25 million shares of Nintendo of Japan or 24.4% of its outstanding shares.

Institutional Owners of NTDOY Shares

Exhibit 2 identifies 45 owners of NTDOY shares who are required to notify the SEC about their portfolio holdings via quarterly filings. It shows these owners hold 6,345,370 shares of NTDOY and their combined ownership increased by 2,792,765 shares or 76.7% versus their prior reporting quarter.

Exhibit 2

Institutional/Mutual Fund Owners of NTDOY 2007

Owner	Shares	Change
Thornburg Asset management	941,809	941,809
William Blair & Company	738,135	738,135
Alger MidCap Growth Institutional Fund	735,330	-18,300
Fidelity Independence	590,000	520,000
Firsthand Value Technology Fund	413,407	413,407
Alger MidCap Growth Fund	321,640	-13,400
Alger American Growth Portfolio	279,225	-106,900
SunAmerica Series – Alliance Growth Portfolio	278,600	28,300
Parametric Portfolio Associates	224,169	-38,401
Zeke, LP	200,000	NC
Alger American MidCap Growth	177,950	-8,900
Par Capital Management	175,000	NC
Alger Large Cap Growth Fund	174,700	-33,400
Simms Capital Management	152,370	152,370
Fidelity VIP II Asset Manager Fund	126,200	NC
JNL/Alger Growth Fund	119,000	6,000
Alger American Balanced Fund	84,000	-26,400
Fidelity OTC Portfolio	73,200	73,200
Summit Investment Partners/Calvert Variable Series	68,600	-9,800
National Bank Canadian Opportunities	63,000	63,000
RS Information Age Fund	59,600	NC
Munder International Equity Fund	57,000	NC
Eagle Asset Management	53,505	53,505
RS Internet Age Fund	53,230	-1,770
BNY Hamilton International Equity	40,800	-8,000
Private Asset Management	37,406	25706
Alger Balanced Fund	36,345	36,345
Alger American Income and Growth Portfolio	31,600	-14,450
Alger Large Cap Growth Institutional Fund	23,800	-10,150
Navellier & Associates	17,925	17,925
Aperio Group	15,092	NC
Globalbridge	10,780	NC
Windward Capital Management	9,330	9,330
The Connable Office	9,310	9,310
JNL/FMR MidCap Equity Fund	9,000	NC
JNL/Select Global Growth Fund	8,000	-5,000
Janney Montgomery and Scott	6,390	6,390
JNL/Oppenheimer Global Growth Fund	6,000	-2,000
IXIS Moderate Diversified Portfolio	4,537	-3,697
JNL/Mellon Capital Management International Index	4,000	NC
IXIS Equity Diversified Portfolio	2,096	-2,952
JNL/FMR Balanced Fund	2,000	NC
SM&R Alger Growth Fund	1,775	-55
Navellier International Growth	984	984
Gilder, Gagnon and Scott	624	624
Total	6,344,459	2,713,554

Fourteen of the 45 owners shown in Exhibit 2 acquired all of their shares during the last quarter. Among those 13 are the top seven net buyers for the past quarter. These seven largest net buyers are Thornburg Asset Management (941,809), William Blair & Company (738,135), Firsthand Technology Value Fund (413,407), Simms Capital Management (152,370), Fidelity OTC Portfolio (73,200), NatCan Investment Management (63,000), and Eagle Asset Management (53,505).

Fred Alger Management is the largest owner of Nintendo ADRs with 2,529,622 shares in its mutual funds. In its prior reporting period it owned 2,946,094 shares; therefore, it was a net seller of 416,472 shares. Interestingly, on March 31, 2006 Fred Alger Management owned 4,447,380 NTDOY shares, a position it probably wishes it had kept given the uninterrupted rise in Nintendo’s stock price.

Nintendo ADRs account for 5.77% of assets managed by Zeke, LP and that was the highest percentage of assets observed. The RS Information Age Fund has the second highest percentage of assets, 3.41%, invested in NTDOY shares and is followed by the RS Internet Age Fund with 3.27%. Among other large fund holders, the JNL/Alger Growth Fund has 2.61% of its assets in Nintendo ADRs, Alger Mid Cap Growth Fund has 2.40%, and the Alger American Mid Cap growth Fund has 2.28%.

Thornburg Investment Management’s Nintendo ADRs accounts for only 0.14% of its assets under management. Similarly, William Blair and Company’s position only represents 0.08% of its managed assets. The market value of Fred Alger Management’s 2.5 million share position represents about 1% of the total assets it manages.

Nintendo and Shareowner Relations

Following Nintendo 2007 annual meeting, company officials acknowledged they were aware of the need to make share ownership more affordable. At the same time, they mentioned that the Tokyo Stock Exchange was requiring all its listed companies to convert to book-entry securities by June 2009. Nintendo officials then went on to say that a stock split now would be too expensive, therefore, they had decided to do nothing until January 2009.

The explanation offered by company officials is absurd given that Nintendo has less than 33,000 shareowners and there is nothing to prevent them from moving to a book-entry system before 2009. Furthermore, their inaction reveals a cheapness that is unacceptable, inappropriate, and unnecessary for a Topix 30 corporation with over $8 billion in cash.

The number of owners of Nintendo of Japan and NTDOY shares is bound to increase regardless of what Nintendo does to encourage ownership. With expanded ownership will come increased coverage of Nintendo by the financial press, which has much to learn about the video game industry.

The inevitable increase in the number of Nintendo shareholders will coincide with growing revenue and income from its hugely popular DS and Wii hardware consoles and its proprietary and licensed video games. These forces will drive the stock to significantly higher prices.

If Nintendo decides to truly cultivate share ownership then it should take five actions. First, it should reduce the minimum number of its shares that can be purchased on the Tokyo Stock Exchange from 100 down to 1. Second, it should declare a stock split sufficient enough to reduce Nintendo’s share price to about 3,075 yen ($25); as of mid-2007 a stock split of about 20 to 1 would be required. Third, Nintendo should reduce its burgeoning cash position by buying back more of its stock. Fourth, it should work with current depositary and custodian banks to convert the existing unsponsored NTDOY ADRs into Nintendo sponsored shares to be traded on the New York Stock Exchange (NYSE). Fifth, it should be among the first Japanese companies to become cross-listed on the Tokyo and NYSE when that program is initiated.

The aforementioned actions by Nintendo would benefit existing shareowners of Nintendo of Japan and as well as owners of NTDOY shares. Furthermore, these actions would encourage people to become shareholders.

The Video Game Industry: Nintendo Returns To Dominance

The video game industry spans the globe and has emerged as a significant segment of the economic landscape. An analysis of its size and growth rate, along with an identification of the major companies in the industry, sheds important light on the existence of investment opportunities.

Size

The following list shows the most recent three years of video game revenue for 25 leading, publicly-traded companies in the video game industry. These better-known companies, whose common stocks are listed on various stock exchanges throughout the world, probably account for at least 90% of the worldwide sales in the video game in industry. With the exception of Sony, Microsoft, Disney, and Logitech, most of the other companies listed derive almost 100% of their income from the video game business.

Video Game Industry Sales: 2005-2007

(in billions)

Company	StockSymbol*	2007	2006	2005	Growth
Sony	SNE ADR	$8.3	$7.8	$5.9	6.4
Nintendo	NTDOY	8.1	4.3	4.2	88.4
Microsoft	MSFT	5.0	4.3	3.1	16.3%
Sega Sammy	SGAMY ADR	4.5	4.7	4.4	4.3
ElectronicArts	ERTS	3.1	3.0	3.1	0.0
Gamestop	GME	2.1	1.3	0.8	71.0
Activision	ATVI	1.5	1.5	1.4	0.0%
Konami	KNMADR	1.4	1.4	1.3	0.0%%
Square Enix	3090 TSE	1.4	1.0	0.6	40.0%
Namco Bandai	1954 TSE	1.1	1.1	1.0	0.0%
Take-Two Interactive	TTWO	1.0	1.2	1.0	16.7%
THQ	THQI	1.0	0.8	0.8	25%%
Vivendi	VIVEF	0.8	0.7	0.6	14.3
Ubisoft	UBIPSE	0.7	0.5	0.5	40.0
Capcom	9697TSE	0.6	0.6	0.6	0.0
Disney	DIS	0.5	0.4	0.3	25.0
NCSoft	036570KRX	0.4	0.3	0.3	33.3%
Game Group PLC	GGOPF	0.4	0.3	0.3	33.3
SCI Entertainment	SEG LSE	0.3	0.2	0.1	50.0%
MidwayGames	MWY	0.2	0.2	0.2	0.0
Atari	ATAR	0.1	0.2	0.4	50.0%
Gameloft	GFT LSE	0.1	0.1	0.1	0.0
Logitech	LOGI	0.1	0.1	0.1	0.0%
Mad Catz Interactive	Mcz	0.1	0.1	0.1	0.0%
Majesco	COOL	0.1	0.1	0.1	0.0%
Total		42.9	36.2	31.4	18.5%

*Note: ADR=American Depositary Receipt, TSE=Tokyo Stock Exchange, PSE=Paris Stock Exchange, KRX=Korean Stock Exchange, and LSE=London Stock Exchange.

The largest of the pure video game companies is Nintendo, which accounted for 18.9% of the most recent combined sales presented. Sony, however, edged Nintendo as the company with the largest sales revenue in the video game industry. Its sales of $8.3 billion represented 19.4% of the sales of all 25 companies.

The 25 listed companies had total video game hardware and software sales of $42.9 billion for the year ending March 31, 2007. Comparable sales in 2006 were $36.2 billion and in 2005 they were $31.4 billion.

Growth

The combined video game sales at these companies, therefore, grew at a rate of 18.5% during the year ending March 2007 after growing at a rate of 15.3% rate during the prior year. These growth rates are well above comparable growth rates in most other industries and suggest that investors have the opportunity to earn above average returns by purchasing stock of companies operating in the video game industry.

An examination of the most recent sales data for each company shows that Nintendo experienced the greatest growth rate. Its sales grew at a rate of 88.4% for the year ending March 31, 2007. The second and third largest growth rates in sales were produced by Gamestop (61.5%) and SCI Entertainment (50%).

Gamestop is a retailer of new and used video game hardware and software, while SCI Entertainment is a game developer based in London. The sales figures shown for Gamestop were adjusted to avoid double counting. In particular, only the gross profit (sales minus cost of goods sold) on sales of new video game hardware, software and other products was included along with the gross sales of used video game products. Similarly, only the gross profit was included for Game Group PLC, the largest retailer in Europe.

Major Hardware Manufacturers

Video game revenue at Microsoft and Sony represents only about 10% of their total revenue. Most of that revenue came from sale of their new video game hardware systems at prices below their production costs. Reportedly, Sony is selling the PS3 at a loss of $250 per console.

The expertise of these two industrial giants obviously did not extend to their video game business. Microsoft had an operating loss of $1.3 billion in 2006, which followed losses in each of the preceding four years. Microsoft’s combined losses in video games for its five fiscal years ending 2006 were $4.9 billion on sales of $15.3 billion.

Similarly, Sony reported an operating loss on its video game business of $1.97 billion for its 2007 fiscal year. Sony’s combined profit since it entered the video game industry is $3.3 billion on combined sales of about $72 billion.

Sony’s most profitable video game years were 1998 and 1999 when it reported profits of $950 million and $1.1 billion, respectively. On a relative basis, the video game segment of Sony’s business reached its zenith in 1999 when it accounted for 40.3% of Sony’s profit.

For the past last eight fiscal years ending in March 2007, however, the income earned by Sony on its video game business has been less than stellar. In fact, from 2000 through 2007 Sony’s video game business combined profit was only $920 million on combined sales of $57.3 billion, a gross margin of only 1.6%.

Shareholders of Sony and Microsoft might have been better served if they had stayed out of the video game business. At best, their video game segments have been a needless distraction and represent failed attempts by these companies to jump-start slowing growth in their main line of business.

Sony

Sony officially entered the video game industry in November 1994 when it introduced its PlayStation (PS) home console in Japan. In September of the following year it began selling the PS in the U.S. and the rest of the world.

The PS was quickly adopted as the platform of choice by video game developers who were particularly attracted by the fact that the PS used CD Roms, which cost pennies. By contrast, Nintendo required third-party video game developers to purchase proprietary cartridges from them in bulk at price of $20-$30 per cartridge. Because of the differences in cost between cartridges and CDs, PS games sold for $45-$50, while Nintendo 64 games sold for $60-$70.

The arrival of Sony, with its much cheaper CD game delivery system, marked the end of Nintendo’s dominance of the video game industry. In an effort to recapture its former glory it introduced the CD based GameCube home console system in 2001. That system, however, failed to gain traction because developers chose to focus their attention on games for the PS, PS2 and Microsoft’s Xbox.

Sony went on to sell more than 100 million PS systems. An up-dated version of the PS, which was aptly named the PS2, was launched in March 2000 and it enjoyed even more success. Through May 2007 Sony had sold 118 million PS2 home consoles.

Sony effectively dominated the hardware end of the video game home console market for a decade beginning in 1995. Sales of its industry leading PS2 finally began to run out of steam in late 2005. For its fiscal year ending March 2006 Sony reported PS2 sales of 16.22 million, which was slightly above its prior year total of 16.17. In its 2007 fiscal year sales of the PS2 system fell to 14.2 million units.

The decline in PS2 sales reflected the tendency of console sales to reach market saturation at a level slightly above the 100 million mark. The decline also coincided with the introduction of Sony’s next generation home console the PS3 in November 2006. The PS3 sold 5.5 million units during its first five months.

Sony entered the hand-held video game market with the launch of its PlayStation Portable (PSP) in December 2004 in Japan and in March 2005 in the U.S. Unit sales were 2.84 million through March 31, 2005, 14.06 million for the 12 months ending March 2006. Sales of PSPs then declined sharply and fell to 8.36 million in fiscal 2007. While the PSP drew rave reviews regarding its technological advances, it lacked a supply of compelling games.

Sales data show that while the introduction of the PS3 and PSP were initially greeted warmly, potential buyers quickly lost interest because of a lack of games. The fact is that games drive sales of video game hardware. Sales of the PS3 have also been hampered by its price tag of $800, which is significantly above prices for the Xbox 360 ($400-$600) and the Wii ($250).

The apparent failures of the PS3 and PSP certainly contributed to the departure of Ken Kutaragi, 56, an icon among gamers, who stepped down as Sony Computer Entertainment Inc.'s chairman and group chief executive in June 2007. In late 2006 Kutaragi had been relieved of day-to-day responsibilities as president but stayed on as chief executive and chairman. The departure of Kutaragi, marked the end of an era at Sony that saw the company long dominate the video game industry with its flagship PlayStation consoles. It also highlights troubles at Sony amid a series of blunders over the rollout of its PlayStation 3 and intense competition from Nintendo's popular Wii console and Microsoft's Xbox 360. Sony is not expecting to post a profit in its game business until the fiscal year ending March 2009.

Microsoft

Microsoft has been actively trying to establish itself within the video game industry since November 2001 when it launched its Xbox console. From then through December 2005, Microsoft sold 24 million Xbox consoles of which 16 million were sold in the U.S., 6 million in Europe, and 2 million in Japan.

On November 22, 2005, Microsoft launched the Xbox 360 as a successor console. From that launch date until June 2007 Microsoft sold 12 million Xbox 360 units. Accordingly, Microsoft has sold 36 million consoles since it entered the video game industry and, as previously mentioned, has managed to lose money every year. Microsoft’s supporters view these losses as a small price to pay to establish a beachhead in living rooms with the Xbox 360, which is designed to serve as the gateway for the convergence of the internet, television, and games.

Microsoft does have a valuable, proprietary video game franchise in its Halo series. Halo was developed by Bungie Studios, which was a long-time Macintosh game developer that was acquired by Microsoft in 2000. Halo:Combat Evolved (Halo 1), a multiplayer game for the Xbox, was introduced on November 15, 2001 and received the "Game of the Year" and "Console Game of the Year" awards for 2002 from the Academy of Interactive Arts & Sciences. On Nobember 9, 2004 Halo 2 was introduced and sales on the release date exceeded $125 million. On May 9, 2006 Microsoft announced that it would introduce Halo 3 for the Xbox 360 in August 2007. It has been reported that pre-orders for Halo 3 exceed 4 million units. Through the first half of 2007 Halo 1 and Halo 2 had combined sales of more than 14 million units.

Nintendo

The nascent video game industry collapsed in 1983-1984 taking with it Atari, which was the leading hardware and software company. That collapse provided Nintendo an opportunity to become the industry leader, because it coincided with the introduction of its Family Computer System home console in Japan in 1983 and immediately preceded the introduction of the Nintendo Entertainment System (NES) in the U.S. in 1985.

Nintendo’s rise to the pre-eminent position in the industry was sealed when its proprietary Mario Brothers video game became a smash hit worldwide in 1985. Nintendo further solidified its dominating presence in home consoles with the introduction of Legend of Zelda in 1987 and the launch of its up-dated Super NES system along with Super Mario World in 1991.

In 1989 Nintendo decided to extend its reach to the hand-held video game market. In that year it launched GameBoy, which was the first successful hand-held video game system with interchangeable game paks. By 1992 Nintendo had established itself as a fully integrated video game company. Furthermore, it had a stranglehold on the video game industry with the leading home console system, the leading hand-held system, and the leading video games.

By the end of 1992 Nintendo’s estimated market share was 90-95% of the video game market in Japan and 70% of the U.S. market. Its market dominance was reported in depth in a 1993 book, Game Over: How Nintendo Zapped an American Industry, Captured Your Dollars, and Enslaved Your Children by David Sheff.

Despite its market dominance Nintendo continued to introduce new versions of its hand-held and home console systems. In the hand-held arena it launched Super GameBoy in 1994 followed by GameBoy Advance in 2001. In its home console systems it introduced Nintendo 64 in 1996 followed by GameCube in 2001.
The combined sales of Nintendo 64, Super NES, and NES hardware through March 2007 exceeded 140 million units, while related software sales exceeded 770 million units. GameBoy and GameBoy Advance hardware sales exceeded 198 million units and accompanying software sales 867 million units. These systems, along with Sony’s PS and PS2 series, are the biggest selling video game systems of all time. Their sales totals serve as a barometer to gauge the size of the market for a video game platform. Sales of these systems suggest that a successful new video game system should be expected to sell about 120 million hardware units and 600 million software units within five years of such introduction.

Nintendo’s dominance began to fade with the entry of Sony into the video game business in 1995. Until the introduction of the PlayStation, video game developers were forced to deal with Nintendo. In general, developers believed that Nintendo was difficult to deal with, arrogant, and cheap.

Game developers moved swiftly to the PS. In that process, Sony was able to provide a wealth of new and exciting games that could be played only on its PS.

Nintendo’s decline accelerated with the entry of Microsoft and its Xbox in 2001. Sony and Microsoft recognized that games drove their sales, therefore, they either acquired game developers or they entered into exclusive contracts such that certain games would run only on their console. Game developers were able to command millions in up-front payments in return for granting Sony or Microsoft exclusive rights. Nintendo did not enter into a such deals with game developers; therefore, their games became stale.

During its fall from the mountain top, Nintendo also suffered because its new systems did not replicate the success of the previous generation. The Nintendo 64 and, especially the GameCube, failed to generate the desired sales. Nintendo sold only 21.59 million GameCube systems from 2001 to 2007 and 206 million units of GameCube software. It sold 33 million Nintendo 64 systems and 225 million units of software. It seems more than fair to say that these two systems were failures and contributed to Nintendo’s loss of dominance.

Nintendo originally listed its common stock on the Osaka and Kyoto Stock Exchanges in 1962. In 1983 it listed its shares on the Tokyo Stock Exchange. The performance of its shares closely paralleled its rise and fall within the video game industry. From 1983 to August 1990 the price of its shares rose 800%. They then fell 65% to January 1995, and then the share price rose 345% into March 2000. Following that rise, Nintendo’s share price fell 76% into March 2004, at which time it retested the low price it reached a decade earlier in 1995. As of July 5, 2007, Nintendo’s share price was 631% above its March 2004 level, but only 72% above the previous peak established in March 2000.

DS

The retirement of Nintendo’s legendary chairman and president Hiroshi Yamauchi in 2002 at age 75 after a distinguished 53 year career coincided with an internal review of the video game industry. The result was that Nintendo decided to focus its attention on expanding the video game user population by designing delivery platforms and games that were fun. This approach was in marked contrast to the direction of the video game industry, which was toward developing more complex, highly sophisticated hardware and games.

The DS hand-held was the first product introduced that reflected the new direction taken by Nintendo. The DS has been an unrivaled success. From its introduction in 2004 through March 2007, Nintendo sold 40.3 million DS hand-held units and 184 million units of DS software. Notably, sales of the DS rose from 5.3 million in 2005 to 11.5 million in 2006 and to 23.6 million in 2007. Sales of the DS are, therefore, running 2.8 times the sales of Sony’s PSP.

The sales of DS software are equally impressive. More than 183 million units of DS software have been sold though March 2007 and that amounts to about 4.5 software units per hardware unit sold.

Wii

In November 2006 Nintendo continued its bold move to expand the gaming population by launching the Wii. This new home console was enthusiastically greeted with long lines of anxious customers. Nintendo’s Wii production has remained far below demand. Nine months after the Wii was introduced people were still paying a premium via eBay to get their hands on this revolutionary home console or standing in long lines at retailers.

Through March 2007 Nintendo sold 5.84 million Wii consoles and 28.84 million units of related software. At its current sales pace, Wii sales will exceed the records established by Nintendo’s NES family of home game consoles and Sony’s PS and PS2.

Historically, two home console manufacturers have always dominated the video game industry. One company invariably captures the lion’s share, about 70% of the market, while the other dominant manufacturer captures about 20%. Remaining hardware manufacturers are left to fight for the remaining 10% as they struggle for survival before exiting that segment of the business. Atari and Sega are prime examples of companies that dropped out of the video console business after being #1.

Early reports strongly suggest that Nintendo’s Wii will be the dominant home video game console followed by the PS3 and the Xbox 360. In June 2007, the Wii was outselling the PS3 at a rate of six-to-one in Japan following having outsold it by 4:1 in April and 5:1 in May. At the same time, the Wii was outselling the Xbox 360 in Japan 15:1. Nintendo is dominating the home console war even though it has been unable to satisfy all its orders because of insufficient production.
Available data also suggest that the Nintendo DS will be the dominant hand-held video game platform. In June it outsold the PSP 5:1 in Japan.

Nintendo is in the early stages of recapturing the dominant position it held in 1992 in home consoles, hand-helds, and video games. The likelihood of it reaching it former 70-90% market share, however, seems remote.

Forecast Sales for DS and Wii

At its current pace, Nintendo will sell 100 million DS hand-helds by June 30, 2009 along with 500 million units of DS software units. The 100 million unit sales mark for the Wii should be reached by mid-2011 at which time Wii software sales should reach 500 million. Such sales will drive a growing stream of revenue as production ramps up to meet the burgeoning demand. While Nintendo management has stated that its profit margin on the Wii console is not as great as on the DS hand-held, the profit margin on its proprietary software is enormous and can be expected to provide dramatic growth in revenue and net income.

Nintendo’s stable of proprietary games gives it a franchise of incredible value. It should be expected that Nintendo will capture a growing percentage of the video game industry’s total revenue as its growth rate continues to exceed the industry average.

Nintendo has firmly established itself as a renowned manufacturer of video game hardware and software. Since 1983, Nintendo has sold nearly 2.4 billion video games and more than 409 million hardware units globally, and has created industry icons like Mario, Donkey Kong, Metroid, Zelda and Pokémon. Recently, it made a conscious decision to distance itself from the eternal quest of avid gamers for more realistic and complex game graphics. Nintendo’s strategic decision to expand the population of video gamers by introducing lower cost hardware along with software that appeals to the masses instead of only hardcore gamers is proving to be farsighted.

In an unusual move for Nintendo, perhaps in recognition of past problems it and Sony has had with game developers, it has reached out to encourage smaller independent developers to create video games for the Wii. In June 2007 it announced that, beginning in 2008, it will allow individuals and outside game studios to create and sell downloadable Wii games with a tool called WiiWare. Gamers will then be able to purchase the created games through the console's Wii Shop channel once Nintendo has quality-checked it.

Buy Nintendo Stock

Investors looking to participate the growth of the video game industry need to focus their attention on the clear market leader, Nintendo. It offers the purest play in that industry and its stock offers the greatest value with a PEG ratio (price earnings ratio divided by the growth rate in earnings per share) of 36%.

An examination of its share price trend shows that shareholders reaped dramatic rewards the last time Nintendo gobbled up market share in the video game industry. Returns similar to those earned during the 1983-1990 period are not totally outside the realm of possibility.

Amazingly, some security analysts insist on comparing the stock prices of Nintendo and Sony as if they are in the same industry. At best, such comparisons are specious, since about 100% of Nintendo’s revenue comes from the video game sector, while only about 12% of Sony’s total revenue comes from its video game segment. Similarly, comparisons between Nintendo and Microsoft would be equally absurd, since only about 10% of the latter’s total revenue comes from its video game segment.