Today Nintendo announced that it is to cut the price of the Wii in the US and Japan by 20 per cent, to $199 and 20,000 yen respectively.

In response to the move Jesse Divnich, director of analyst services at EEDAR, discussed the reasoning behind the cut and how it will impact Wii sales and Nintendo’s profit line. In addition, he looked at the console’s strengths and weaknesses compared to its rivals, and the possibility of Nintendo releasing an upgraded Wii in order to combat increased competition for market share from Microsoft’s Xbox 360 and Sony’s PS3 in the long-term.

Divnich said that North American sales of current generation consoles have been sliding since peaking in February of 2009. Despite remaining dominant, the Wii has seen the sharpest decline in sales.

He noted that Nintendo’s move “should not be looked as a reactive strategy towards the recent Xbox 360 and PlayStation 3 price cuts, but rather a pre-emptive strategic decision… to capture as much of the mainstream and casual market as possible before Microsoft and Sony can release their mainstream targeted motion capture devices”.

Divnich expects the Wii to “continue to maintain its position as the leading hardware platform in monthly sales over the short to medium term”, with sales up 40 per cent in October 2009 compared to September 2009. However, he noted that gauging the sales impact of the price cut for November through December is challenging due to the nature of the holiday shopping period when sales tend to rise anyway.

Even at the $199 price point, Divnich believes Nintendo will make a profit on each Wii sold. However, he said that the company will face other challenges in the long-term.

“Whilst its lower price point and revolutionary motion based gaming experience allowed Nintendo to penetrate mainstream American and European households quickly and early in the cycle, it does have drawbacks in the long‐term. The Nintendo Wii is less powerful than its competitors.

“There have been long standing rumours that Nintendo might introduce a Wii hardware upgrade in 2010 to further address the aforementioned issue. The most commonly rumoured upgrade would be to deliver a new hardware device that supports high definition video. While EEDAR believes this remains a possibility, we are sceptical on how an upgrade for the Wii focused on visual aesthetics can effectively compete with the significantly more comprehensive hardware offerings from the PlayStation 3 and Xbox 360 when their motion devices are launched in 2010.

“Hardware upgrades mid cycle are very challenging in the videogame industry. Backwards capability is a serious issue for publishers trying to appease the lowest common denominator and maximise their target market. With the Nintendo Wii’s global install base above 50 million, it will be incredibly difficult for Nintendo to release any significant hardware upgrade without alienating current consumers or third party publishers.

“Nintendo has already penetrated more than five million households worldwide with the new Wii Motion Plus device; predominantly through software bundling with titles such as Wii Sports Resort, Tiger Woods 2010 and Grand Slam Tennis. In order for the Wii Motion Plus to be fully embraced by publishers and further enhance Nintendo’s appeal to mainstream consumers, at least 20 million households worldwide will need to have adopted the hardware. EEDAR speculates that Nintendo will likely implement the Wii Motion Plus as the standard controller for new Wii retail units in late 2010 as other motion based device offerings from competitors appear at retail.”