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Digi-Capital believes the next Nintendo console could focus on VR and AR gaming. Courtesy of Nintendo

Nintendo’s new president faces challenging new world

Sep 16, 2015

There's a new boss at Nintendo (ntdoy). And, as he takes his seat, one thing seems clear: fixing the company will be no easy task.

Tatsumi Kimishima was named Nintendo's new president on Monday, replacing Satoru Iwata, a beloved figure at the company who tragically died in July while serving as the company's chief. During Iwata's reign, Nintendo had its fair share of ups and downs, watching the business grow to great heights on the back of the Wii game console, and subsequently plummet at the hands of iPhones and Android.

Indeed, the place Kimishima finds Nintendo in now is not a good one. The Wii U is in a distant third behind Sony's (sne) PlayStation 4 and Microsoft's (msft) Xbox One, and portable gamers who were previously willing to buy company devices, like the Game Boy or the Nintendo DS, have turned to smartphones and tablets.

The company's issues were made clear during its last fiscal year when Nintendo's revenue slipped 3.8% year-over-year to approximately 549.8 billion yen (about $4.6 billion). Although Nintendo was able to turn a 23 billion yen loss in 2014 into a 41.8 billion yen profit in its last fiscal year, it did little to reassure analysts and investors who were more concerned with its performance in hardware and software—the lifeblood of its business. Nintendo sold just 3.4 million Wii U units during a period in which its competitors each neared 20 million unit sales. On the portable side, sales tumbled from 12.2 million 3DS units in the prior year to 8.7 million in 2015.

Meanwhile, the company continues to face other challenges in the market. Sony announced in March that it had sold 20 million PlayStation 4 units since the console's launch in Nov. 2013. Despite launching its console a year earlier, Nintendo said in June that in nearly three years, it's sold 10 million Wii U units to date. Nintendo, once a dominant force in the portable-gaming market, is also forced to watch most of its revenue get gobbled up by Android and iOS.

"Nintendo faces major market challenges," David Cole, an analyst at DFC Intelligence told Fortune . "In the portable market, they have been hurt by the emergence of smartphones and tablet devices that have many games, which are free. On the console side, Nintendo has lost almost all of its momentum and really needs a new product to reinvent itself. The biggest issue is that Nintendo was noted as a premium game developer with exclusive hardware devices and there are now many top notch game developers and many different hardware devices that can play games."

Nintendo hasn't ignored its issues. Earlier this year, Iwata announced that Nintendo would bring some of its top software franchises to Android and iOS in a bid to attract mobile gamers. To address its hardware troubles, Nintendo is working on a new device, code named NX. Still, Nintendo is keeping all information on NX close to the vest and its mobile titles have yet to launch. For now, Nintendo is in a rough spot.

"Nintendo's current place in the market has been minimized," Christine Arrington, senior analyst for Games at IHS Technology told Fortune. "While it still holds the interest of its core young gamer demographic, the Wii U was not a big enough change to create upgrade demand from the Wii to the Wii U, and many of its handheld customers have moved on to smartphones and tablets. So, the market just has not moved on and embraced Nintendo's new offerings."

But not all is lost.

At a press conference in Japan on Monday, Kimishima said he has no immediate plans to change his company's strategy, indicating that NX and mobile-gaming development is still in the works. His comments reassured investors who believe Iwata's plan is the right path for Nintendo. And while other names had been floated to replace Iwata, Kimishima's history—past work in banking, experience running Nintendo's U.S. operations, and heading up the company's Pokemon giant—suggest he may just have all of the tools to fix Nintendo's ailing business.

"The potential for the new CEO to turn Nintendo around is high," said Arrington. "The benefit the new CEO has is the history of strength at the company. Despite seeming inflexible regarding the mobile market, overall the company has a long history of moving to where the entertainment market is going. Even this late to the mobile market the company has incredibly powerful franchises that still have huge potential."

It's those franchises and market knowledge that have saved Nintendo in the past. When the GameCube was on store shelves and being outsold by the PlayStation 2, Nintendo was quickly counted out. However, the company then turned things around and sold over 100 million Wii units. Regardless of its hardware issues, gamers young and old continue to buy its games in droves. It's that combination of strong game design and perhaps an acumen for what gamers ultimately want that could help Nintendo and Kimishima succeed.

"You simply cannot count Nintendo out," Cole said. "They have a great deal of resources and there is still great demand for a device that plays games on television sets. As was shown with the success of the DS in 2004 and the Wii which launched in 2006, all it takes is a hit product to turn things around."

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