Should Nintendo Build New Consoles For Emerging Markets?

Nintendo NTDOY announced this week that the company will design new hardware specifically for emerging markets.

Company President Satoru Iwata told Bloomberg that Nintendo wants to "make new things, with new thinking rather than a cheaper version of what we currently have."

"The product and price balance must be made from scratch," he added.

This announcement came after Nintendo said that Wii U, the company's latest game console, sold a total of 6.17 million units during its first 18 months at retail. By comparison, Sony sold more than seven million PlayStation 4 units in six months.

More than five million consumers have purchased an Xbox One since November 2013, similarly dwarfing Nintendo's Wii U.

Related: More Than 240 Million Consumers Could Buy PlayStation 4, Xbox One, Wii U

Emerging Potential

Emerging markets could be worth billions of dollars to video game developers. China recently lifted a 13-year ban on the sale of game consoles, allowing Japanese, European and American companies to finally sell their hardware and console software to Chinese consumers.

Microsoft capitalized on this policy adjustment by signing an agreement with BesTV New Media, a Chinese-based online TV company. The Windows maker will utilize that partnership when it launches Xbox One in China this September.

Sony is expected to follow suit and bring PlayStation 4 to China as well.

This would make Nintendo the odd man out in deciding to build specific hardware for emerging markets. But could the effort pay off?

"Their hardware margins have historically been 35 percent, and the Wii U doesn't make any money at all because the bill of materials is too high," Wedbush analyst Michael Pachter told Benzinga.

"I don't understand why they wouldn't just keep making the Wii and DS and export those to emerging markets, since the BOM is so low for those already and they have manufactured 100 million of each. I think building a ground up new console is likely to cost more, but what the heck do I know?"

Pachter said that Nintendo is correct in thinking that emerging markets will be later to adopt smartphone and tablet technology.

"But that is because they are generally lower income than first world markets," Pachter explained. "It makes more sense to me to sell a $79 DS or a $99 Wii there, since there is already so much software."

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.