Enough with the rumors of constrained supply of the Wii during this holiday season! Many otherwise rational people believe that Nintendo is purposely causing a shortage of its still highly-demanded home console. Hopefully I can help you understand not just why that's economically preposterous and bad business, but also patently false.
Before we dive into the real reason for the continued shortage of Wii consoles on the open market, let's first entertain the idea that Nintendo is, indeed, scheming to somehow ruin Christmas by holding back on a horde of Wiis that K. Rool would envy (if you don't get that reference already, then you need to travel over to the Virtual Console shop). Nintendo does not stand to make any more money by sitting on a massive inventory of Wii units. Perhaps you think it has done this so as to raise the average price of its system on eBay. This makes no sense, as Nintendo still only receives the portion of the $250 price tag that it was already owed when the console was first sold. If Nintendo were truly savvy in this sense, it would itself put a large number of Wiis up for auction, so that it could reap all of the extra profit that the market is willing to bear.
If you don't think it's doing it to jack up the price, then perhaps you believe this is a controlled shortage meant to build hype. I find this theory highly suspect as well. The Wii has now been on the market for more than a year. Most hardcore gamers planning to acquire the system have found a way to do so, so this only leaves the mainstream crowd. For 99% of the mainstream audience, its value proposition for the Wii is built solely on some awareness of Wii Sports. Add to that the fact that the Wii is now racing tightly with the Xbox 360 for first place in this generation. Had a shortage been created purposely, Nintendo would be using a must-have title– namely Super Mario Galaxy– as the internal catalyst. The situation would be akin to that following the launch of Halo 3 for the Xbox 360, where the legendary hype surrounding the game resulted in a spike in demand for the system. Yet for a controlled shortage to make sense, Nintendo would have to be in a situation where it needed a new flagship title to rally around. It doesn't need any such thing. Wii Sports remains a good enough reason for most consumers to purchase the system if they find one available. An example of where a controlled shortage might work, for instance, would be of the PlayStation 3 near the release of Metal Gear Solid 4. This is because it would help to accentuate just how well the game was received when it launches, and send a message to gamers that they need to get on board. To wager on a dangerous controlled shortage technique like this, Nintendo would need to be struggling with its existing strategy, which it is not.
Hopefully you're now convinced that Nintendo has no reason to create a virtual shortage. But why, you may ask, does supply remain so limited? Why can't it simply make more Wii units more quickly? The answer lies not in any production facility, but within Nintendo's boardroom. Nintendo, as always, remains a cautious operation, like many Japanese companies. Obviously Satoru Iwata and Nintendo's board of directors must be greatly pleased by the Wii's success, yet they all know failure all too well. They experienced disappointment with the Nintendo 64 and even more so with the GameCube. During these trying times, their number one goal was to remain consistently profitable, even with a smaller share of the market. This is why Nintendo has never sold a console at a significant loss, as Sony and Microsoft do, and never will. Unlike its competitors, Nintendo is not diversified in non-gaming industries. It retains the ability to remain profitable above all else in order to cope with the fact that gaming is all it has.
"To increase supply Nintendo would need to invest in a whole new facility, something it is unwilling to do. "
Obviously Nintendo is making money on every Wii sold now, but the company has now bumped against an economic break point, where the marginal cost for each Wii beyond what it is making now increases significantly. Nintendo already has several contracted production facilities working at full capacity manufacturing Wiis. To increase supply, it can't simply pay the workers to stay longer or leave the machines on for more hours of the day, because frankly the facilities are already pushed to their absolute limits. Indeed, to increase supply Nintendo would need to invest in a whole new facility, something it is unwilling to do.
Nintendo will not expand into another production facility until the company is confident that the current level of demand can be carried forward for several years. The initial start-up costs of building a new facility, with all of the necessary equipment, would be enormous. This would hurt the company's profitability in the short term. That is acceptable to most investors if they can be assured that the investment will pay off in time. However, Nintendo has no such assurance regarding the Wii. It's entirely possible that demand tapers off following this holiday season. By the time Nintendo brought a new facility on line, it could no longer be in need of the increased supply and find themselves with a number of facilities operating at 70-80% capacity instead of 100% like now.
This is the same conundrum that faces oil companies when trying to decide whether to drill new wells. Sometimes, oil wells can be very expensive to set up, especially if they are beneath the ocean or particularly rough patches of earth. To be profitable, oil companies need oil prices to stay at a certain level. Would it make sense for oil companies to drill wells right now that require a price per barrel of $100? I think not; there is no assurance that oil prices will remain so high for years to come. On the other hand, does it make sense to drill somewhere where the cost would be $60 per barrel? Probably so, as prices are not likely to dip below that level.
Hence the supply shortage. It is the safer route for Nintendo to simply make as many Wiis as it can with what it already has. This obviously frustrates some Nintendo executives, including American President Reggie Fils-Aime, who sees this excess holiday demand as a "missed opportunity". Perhaps so, but the more calculating minds in Tokyo have this one right: success today is no guarantee of future returns. Just as swiftly as Nintendo was swept back into power, it may again lose its seat to Sony or Microsoft. Nintendo is simply protecting its business from unnecessary risk by not getting overly excited by the Wii's success, and that is something Nintendo fans should be thankful for: the best thing to ensure Nintendo's continued importance in the gaming industry is to make sure that the company remains financially healthy for decades to come. Of course, if that's too hard for the kids to understand this Christmas, there's always eBay.