Nintendo disappointed investors over the weekend by warning that it is now likely to sell just 2.8 million Wii U systems for its fiscal year ending in March. It had earlier projected to clear 9 million units. That's pretty bad. Keep in mind that Microsoft (MSFT) and Sony (SNE) each sold more Xbox One and PS4 systems than that last year ... and those platforms weren't even out until mid-November.
Nintendo also warned that it will post another operating loss for the year. This is the company's third year in a row where it winds up in the red. It was previously forecast to post a profit.
Wii Will Rock U
Nintendo seemed to be in the driver's seat when it introduced the Wii U 14 months ago. Getting a year's head start on the competition should've been huge, but Nintendo had a soft 2012 holiday shopping season -- and things only got worse after that.
Its lack of compelling games and stiff selling price seemed to be the two biggest knocks on the system that tried to raise the bar with a touchscreen controller that doubles as a second screen to enhance gameplay. Nintendo addressed both issues. It slashed the price of its Wii U just weeks before the more expensive Xbox One and PS4 consoles hit the market. It put out new games in 2013 featuring its more popular proprietary characters.
It wasn't enough.
The Wii U is less powerful than the Xbox One and PS4, but that wasn't a problem before. The original Wii wasn't much of a match for the Xbox 360 or PS3 based solely on the tech specs, but that didn't matter after consumers flocked to the Wii's revolutionary motion-based controller. It didn't matter that the Wii's graphics weren't as mind blowing as the stuff being blown up on rival systems. It was fun for the whole family to get up off the sofa and engage in virtual bowling.
Hardware Goes Soft
It's not just the Wii U that's in a bit of a funk. Nintendo's handheld 3DS line is holding up better, but it too has been a disappointment this fiscal year. After originally predicting that it would move 19 million 3DS systems, Nintendo is now only banking on selling 13.5 million units.
In this business, if you're not selling hardware, you're not going to be selling software, and that's why Nintendo's also scaling back its targets for Wii U and 3DS games.
Nintendo isn't going to go away, but it can't ignore the fact that it's now a laggard in hardware. Xbox and Sony own this generation on the console front, and there are too many portable gadgets competing against Nintendo's 3DS on the go.
Unplugging the Wii
It wouldn't be a surprise if Nintendo eventually pulls the plug on at least the Wii U. This wouldn't be the end of the world.
Other companies including Sega and Atari that have bowed out of the console markets have continued to live on as software companies, and Nintendo certainly has a deep bench of original content. The realms of Super Mario, Samus, Link, Donkey Kong, and Pokemon could be brisk sellers on rival systems.
Playing Super Mario on an Xbox One or PS4 system may seem blasphemous, but there's money to be made in the high-margin universe of third-party software releases. It would also mean healthier finances without the losses being incurred by the fading Wii U. If Sega was able to push Sonic across competitor consoles, why not Nintendo with its even deeper catalog?
Nintendo may not have a choice if sales continue to dwindle for its hardware since it narrows the market for its software. Letting the Wii U go would be the first step in clawing its way back to relevance as a gaming software giant.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our newsletter services free for 30 days.