Struggling Nintendo wants to make sure that it doesn’t end up like one-time video game making rival Sega. And it’s pinning its hopes on Friday’s launch of Switch, a video game console that is intended to reverse a string of failed and mediocre releases that have raised serious questions about the iconic company.
Sega is a software developer today, but it’s best remembered as a once-prominent maker of video game consoles that later went into decline. It ultimately left the hardware business and focused on its popular software franchises.
Today, Sega’s story is more relevant to Nintendo than ever.
Nintendo, an early giant in video games, had a huge hit with the Wii console after its release in 2006. The company followed that in 2012 with the Wii U, a console that it hoped would keep the momentum going, but it failed to catch on amid stiff competition and a shortage of outside developers willing to create compatible games.
Now, with its business lagging, Nintendo hopes that the Switch, which costs $300, can help it regain its footing. A failure would be a huge setback for the company, as it battles Sony’s PlayStation 4 and Microsoft’s Xbox One.
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“If it doesn’t succeed, they’re going to have to rethink their strategy,” Michael Pachter, an analyst for Wedbush Securities, told Fortune about Nintendo. “A weak hardware launch impacts them across the board.”
Nintendo (NTDOY) knows duds and their consequences all too well. Because of underwhelming sales for its Wii U, Nintendo’s revenue has plummeted.
In its latest fiscal year ending March 2016, Nintendo had revenue of just over 500 billion yen (about $4.4 billion), about half as much as the nearly 1 trillion yen it generated in 2011.
In the first nine months of the current fiscal year, Nintendo’s revenue has slipped 27% from the same period a year earlier to 311.1 billion yen.
While the Wii U shouldn’t be blamed for the entire drop, it’s been a major contributor. Nintendo has sold 13.6 million Wii Us worldwide since the console’s release—a tiny number compared to the 101.6 million Wii units that Nintendo has sold over that console’s lifespan.
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In response to the decline in console sales, Nintendo has started to invest heavily in mobile gaming in hopes of attracting customers who prefer playing on smartphones. It’s also trying to jump-start its hardware business with the Switch.
Turning things around may be difficult, but Nintendo did it before with the Wii, IHS Markit analyst Piers Harding-Rolls told Fortune.
“The poor performance of the Wii U has dented its standing, but Nintendo has come back from similar poor sales in the TV console business before,” he says.
So far, everything is going right for Nintendo. The Switch has received good reviews, and early signs like preorders suggest Friday’s sales will be strong. But Pachter isn’t so sure any initial sales boom will translate into long-term success.
“Their problem is that they have generally failed on consoles for the last 20 years, with a huge exception being the Wii,” Pachter says of Nintendo. He noted that the two consoles that bookended the Wii—the GameCube and Wii U—were “abject failures” in stark contrast to the Wii’s success.
“They conduct themselves as if every new console will perform like the Wii, and that’s unlikely,” Pachter said.
As for the future, if the Switch is a long-term success, the result is clear: Nintendo’s hardware business will be revived, revenue and profits will surge, and talk of the company’s troubles will be forgotten. But if the Switch meets the same fate as other underperforming Nintendo consoles, or worse, the Sega Dreamcast, a last-ditch effort by Sega to rebuild its ailing business, what happens then?
Sega, in the early 1990s, was the first to truly give Nintendo a fight for console supremacy. But after its Genesis console became a hit in the early 1990s, Sega stumbled with a successors that failed to catch on, including Sega Saturn, one of the worst-selling consoles of all time. By the late-1990s, Sega’s hardware division was running on fumes, and it hoped that a single device, the Dreamcast, could save its ailing business.
Ultimately, the Dreamcast failed as newcomer Microsoft (MSFT) and popular competitor Sony (SNE) introduced new and better devices shortly after Dreamcast’s debut. Sega’s console, which received generally glowing reviews, was dead. And Sega’s hardware division died with it.
That all sounds familiar. But as the analysts note, Nintendo may have a secret weapon Sega didn’t have.
Despite its recent troubles, Nintendo operates a notably disciplined business. With billions of dollars in the bank, Nintendo could ultimately fall back on its cash hoard if things sour.
“It has a significant amount of leeway because of its large cash reserves,” Harding-Rolls says.
Pachter, who believes the Switch will only be successful if Nintendo is lucky, thinks the company may have one last opportunity if its new console fails.
“Because Nintendo has a huge amount of cash, I don’t think this is their last hurrah.”
So perhaps Nintendo won’t become the next Sega. But as history has shown, the game industry isn’t kind to repeated failures—even if they come from an icon.
