By DAISUKE WAKABAYASHI and IAN SHERR
Like its famous character Super Mario in his latest game, Nintendo Co. is trying to outrun its enemies.
The Japanese videogame pioneer, coming off of its first annual loss in more than three decades, will start selling the Wii U in U.S. stores Sundayâ€"its first home console in six years.
With the new machine, Nintendo is betting it can continue to push pricey hardware in a videogame market where most of the growth has been in software for smartphones and other mobile gadgets.
"The changes that have taken place over the last few years are massive," said Nintendo President Satoru Iwata in a recent interview. "If we don't do anything to keep pushing forward, we may see demand shrink as those devices encroach on our space."
Nintendo
Starting at $299, the Wii U packs high-definition graphics with a 6.2-inch, tabletlike controller that offers a second screen in addition to the television displayâ€"a big change from the current generation's more simple motion-sensing wand.
In packing more technological muscle, Nintendo aims to win over the core gamers who never fully embraced the motion-sensing games of the original Wii.
It is a pricey gamble: The cost of manufacturing the touch-screen controller, known as the Wii U GamePad, forces Nintendo to sell the machine at a loss, a trade-off to draw in a large base of consumers who will eventually buy the high-margin Wii U software. It is a common strategy in the industry, but one that Nintendo has tried to avoid in the past.
The price of the Wii U makes it competitive with current discounts offered on Microsoft Corp.'s Xbox 360 and Sony Corp.'s PlayStation 3. Both companies are expected to launch new game machines next year, likely at close or slightly higher prices.
Three years ago, Nintendo was king of the $78 billion videogame industry. The Wii was a smash hit and Nintendo's DS hand-held was the best-selling portable gaming device.
But a series of stumblesâ€"a lukewarm debut for Nintendo's 3DS hand-held game player and a sharp decline in Wii salesâ€"raised questions about whether the company is on the wrong side of a generational divide.
Nintendo has refused to veer from its tried-and-tested formula of creating dedicated videogame machines, passing up a potentially lucrative opportunity to apply its game-making prowess to billions of smartphone and tablet users.
By 2016, the number of mobile phones sold world-wide is expected to reach 2.24 billion units while the tablet market is expected to top 364 million units, according to research firm Gartner Inc. The number of videogame consoles is expected to total 48.8 million units.
"If Nintendo were to put their games on mobile they would probably sell millions of copies," said Michael Pachter, a Los Angeles-based analyst at Wedbush Securities.
Even its console rivals Sony and Microsoft are hedging their bets. Sony created a specialized app store, called "PlayStation Mobile," offering about 30 new games that work with some phones and tablets powered by Google Inc.'s Android operating system. Microsoft has integrated Xbox features into computers, tablets and smartphones running its latest software.
Speaking together at Nintendo's corporate headquarters in Kyoto, Japan, Mr. Iwata and Shigeru Miyamoto, Nintendo's top game creator who is credited with many best-selling titles including "Super Mario Bros." and "Legend of Zelda," said that only by creating its own unique hardware can Nintendo offer games that can't be replicated on other devices.
"We think it's the least cool thing to start doing something just because other people are making money doing it," said Mr. Iwata. "We always want to do something that forces people to slap their knee and say 'we didn't think of that.'"
Messrs. Iwata and Miyamoto said they are worried about "devaluing" Wii U's software by making the games available on phones and other devices overrun by games that are either free or sell for a fraction of the price of traditional console software. A game for the Wii U game console about $60, while most smartphone and tablet games cost less than $10 and many sell for as little as 99 cents.
Traditional console games tend to be more sophisticated, but players with limited time and money may find the free and low-priced games good enough.
Zynga Inc. made its name offering games like "Zynga Poker" and "FarmVille" on Facebook, while Tokyo-based Nexon Corp. provides free multiplayer online games popular in Asia. Japanese firms Gree Inc. and DeNA Co. also have grown quickly offering free-to-play games on mobile phones.
"You get a lot of entertainment for less money than you used to," said Nexon Chief Financial Officer Owen Mahoney.
Mr. Mahoney said Nexon strives to offer the type of creative, entertaining games that Nintendo is known for but does so with a different business model. Free games allow users to try new titles that they may be reluctant to pay for, and developers can monitor which games gain momentum and devote resources to the most popular.
But Mr. Iwata, who started programming videogames on his calculator as a teenager during the 1970s, holds philosophical reservations with the free-to-play model that entices users to make in-game purchases to gain a leg-up during gameplay. He said he wonders if this is a good way to develop a long-term relationship with customers.
"History will decide whether we're right," said Mr. Iwata. "Or whether the people who say we're old fashioned are correct."
Nintendo started dabbling with the concept of a game machine with a second-screen controller in 2009. At the time, the Wii was still selling well, but Nintendo executives saw its broader reach as a living room hub limited because it required the Wii to monopolize the family's TV when it was in use.
"We wanted to become independent from the TV," said Mr. Miyamoto.
The wireless controller can function separately from the television, so a person can continue playing a game on the GamePad when someone else is using the TV. It only works within close proximity to the console, so the controller isn't meant to be a portable device outside the home.
To push the idea of making the controller a key device in the living room, Nintendo built in a Web browser and video chat capability. The company also added a remote control function that works with video recorders, set-top boxes from cable and satellite providers, and online video services such as those from Hulu LLC and Netflix Inc.
The tablet-style controller can also allow for games where one player has different information than the rest of the players (known as asynchronous gameplay). One of the early games Nintendo created that uses this function is "Nintendo Land: Mario Chase"â€"a videogame version of hide-and-seek.
In the game, the player controlling Mario holds the Wii U GamePad and enters the maze with a 10 second head start. With the GamePad controller, that player can see where all the other players are in the maze. Up to four other players try to catch Mario, but the chasers, looking at the TV, can only see the view straight ahead.
"This is a totally new structure that allows a new way of play," said Mr. Iwata.
Mr. Iwata said shoppers snapped up the entire allotment of Wii U preorders at U.S. videogame retailer GameStop Corp. in less than two days in September, with more than 250,000 people on a waiting list. It remains to be seen whether Nintendo can sustain demand after the holiday surge.
After its North American debut, the Wii U will roll out in Europe on Nov. 30 and on Dec. 8 in Japan. Nintendo said it aims to sell 5.5 million units by the end of March, and hopes to sell 24 million units of software for the new console during the same period. The company plans to offer the basic Wii U model for $299 in the U.S., while a version with additional memory and a copy of the game "Nintendo Land" which contains a dozen mini-games including "Mario Chase," will sell for $349.
Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com and Ian Sherr at ian.sherr@dowjones.com"
A version of this article appeared November 17, 2012, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Nintendo Sticks to Its Guns.
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