Nintendo of America president Reggie Fils-Aime isn't worried. Yes, sales of the Wii have tapered off. Yes, analysts doubt that its successor, the game machine/tablet Wii U, will sell as well as the original. Yes, Facebook, mobile, and Xbox Kinect have poached Nintendo's audience of fitness-minded moms and kids.
But Fils-Aime has faith. "To buy into a console, consumers need a very clear, understandable, and persuasive reason," he explains. "We believe that's games."
If he's wrong, Nintendo could be in trouble. If he's right, well, Nintendo may still be in trouble. Building a game console that only plays games is becoming a risky proposition. When the Wii U hits on November 18, it will include a controller with a touch-enabled screen, camera, and NFC. The controller is at the heart of the Wii's makeover, with its screen giving more game-play options (navigate a dungeon on TV while following a map on the controller) or allowing for a two-screen experience (stream Netflix on TV while playing a game on the controller).
In other words, the Wii U is still predominantly a game machine. That makes its competition everything from Xbox and PlayStation to upstarts like Ouya, an Android-based, Yves Behar-designed console that Kickstarted $8 million. There are app stores for every device you own and companies creating HTML5 games that use browsers as the platform. If people want to play games, there's no shortage of ways to do so. That's why, on the heels of Nintendo's first dip into the red in 21 years, the Wii U's release won't just determine the fate of one of the most successful gaming companies ever. It will also shed light on whether traditional consoles have a future in an era of multifunction devices.
From a cultural standpoint, games have never been bigger. Nielsen found that half of all American households have a console, and the amount of time spent playing games has increased 7% since last year (due mostly to mobile and tablet games). But the current crop of consoles is aging rapidly: Xbox 360 is seven years old; Wii and PlayStation 3 are six. As a result, hardware sales are down 15% over the past year, and software isn't faring much better. Even factoring in projected Wii U sales, NPD analyst Anita Frazier expects physical video-game-industry revenue to be around $14.5 billion for 2012. That would be 15% lower than 2011. Meanwhile, two of the biggest movements in games—the rise of social and mobile gaming—were pioneered not by the establishment but by outsiders like Apple, Facebook, and Zynga.
Nonetheless, Nintendo is pushing ahead with its usual MO: create a console with broad appeal, and then lean on franchises like Zelda and Mario. What gamers desire, according to Fils-Aime, is games, and games alone. "When you talk to players and understand what they want," he says, "it can only be delivered through a dedicated gaming device."
Sony and Microsoft aren't so sure. In June, Sony acquired cloud-based gaming company Gaikai for $380 million; three months prior, Microsoft revealed that Xbox Live Gold members use the service for an average of 84 hours per month, with entertainment-app usage more than doubling year-over-year.
The entertainment-device-that-plays-games idea also underpins the $99 Ouya. The so-called console killer is taking as much from the entertainment space as it is gaming, with apps for Vevo, iheartradio, and TuneIn. Ouya is hardly a sure thing—its target March release date is ambitious, and the existing Android library of games is underwhelming—but the approach points to what consoles are rapidly becoming: all-purpose living-room devices.
Which isn't to say Fils-Aime's faith in games is completely ill-founded. Blockbusters like Call of Duty still have billion-dollar releases. But games of that scale require years and cost millions to produce. Alex Seropian, a cofounder of Bungie, the studio that created the Xbox mega-franchise Halo, sold his company to Microsoft in 2000 before becoming video-games head at Disney Interactive Studios. In February, he left to found Industrial Toys, which focuses on mobile. "The $60 console game is going to disappear," he says. Poised to replace it is an ecosystem teeming with games of all sizes and prices, most available outside the gated confines of a console.
The future of gaming hardware may well come to look like the mobile phone industry: one or two market leaders (Sony and Microsoft as Apple and Samsung, for example) and a host of smaller competitors (such as Valve Software's rumored "Steam Box," an open-source device a la Ouya). Michael Pachter, an analyst for Wedbush Securities, cites Microsoft's new Xbox/Kinect bundle ($99 if you commit to a two-year Xbox Live subscription) as proof of a move toward the mobile model: subsidize feature-laden hardware in order to lock people into a service contract. And though Fils-Aime is touting TVii—a free streaming-video app for the Wii U—and other entertainment offerings, they seem like afterthoughts. What Nintendo does best is, in fact, games.
That's what makes the Wii U a good barometer of the future of the console. Despite its commitment to them, games have not always served Nintendo well. The company's last offering before the Wii was the GameCube, a failure, and the portable Nintendo 3DS has yet to reclaim the gamers that fled to iOS. The Wii was a hit when it landed in 2006, but that was because its motion controls were unlike anything else in gaming.
The Wii U, however, is entering an industry that has been blown open by external forces. And whether it happens in two months (the Wii sold more than 3 million units after just 60 days on the market) or six months (after the Ouya release), we're about to learn just how much pull Mario still has.
A version of this article appeared in the November 2012 issue of Fast Company magazine.