This is a story about Nintendo’s resurgence on its wildly popular Wii console and how that is a bad thing.

Yes, beleaguered Nintendo did turn it around. Its GameCube was in years-long spankings at the hand of consoles from Sony and Microsoft. PlayStation 2 and Xbox had it in a beat-down. Tired of No. 3, Nintendo gambled: People didn’t need to blow each other to bits to have fun. In fact, many didn’t care about having the best graphics, opting instead for a more social, but casual, gaming environment. Nintendo eschewed controller button overload to instead capture motion so that users of its Wii remote would stand up and swing the wand like a golf club.  The move would lift it from industry laggard to leader.

Now all that could be a bad thing. In the meantime it’s lost focus on hardcore gamers and let Microsoft and Sony take that more lucrative audience.

“Both Microsoft and Sony have a pretty strong claim on the hardcore gamers in this generation,” said Rob Helm, director of research at Directions on Microsoft. “It raises the question: ‘How is Nintendo ever going to get them back?’”

Nintendo bet the house on casual games. Yet while the Wii captures new gamers to drive high growth, the shift alienates a larger, more established hardcore crowd in exchange for a short-term spike in popularity with more fickle newbie gamers.

That hasn’t stopped Nintendo from selling 12 million Wii consoles and 22 million Nintendo DS systems in the U.S. The strategy has also helped Nintendo usher in hordes of nontraditional gamers and change the face of video gaming. It also gets soccer moms to plunkdown $250 for its family-oriented games console or $130 for its easy-to-pick-up handheld.

DOWN-MARKET MOVE OR GENIUS?

How did it do it? Nintendo and its legendary designer, Shigeru Miyamoto, creator of Donkey Kong and Super Mario, went to the drawing board. The company, ever more challenged by powerful graphics-intensive consoles from Sony and Microsoft, changed the game. Yet it’s been a move into a smaller segment than bloody shooter games and blockbuster franchises. Casual games held only a $2.25 billion slice of the market in 2007, according to a Casual Gaming Association report, a figure expected to see year-on-year growth of 20 percent. That compares with the $20 billion market for hardcore games in 2007. For Nintendo, the casual segment has given them a fighting chance.

“Targeting a larger [casual] market actually pays off” for Nintendo, said Brian Shiau, founder of the simExchange, a site for gamers to trade virtual stocks in gametitles. "Casual gamers do not necessarily spend less per game than hardcore gamers.”

Still, boosting the casual market makes it harder for games targeting the traditional core gamer to sell well for a company like Nintendo, according to industry tracker VG Chartz. For now—in the short term, it’s given Nintendo a new life.

Nintendo’s twisted history is all about reinvention. The company that began as a playing card company also dabbled in “love hotels,” taxi cabs, and toys before it eventually morphed into a video game company in the 1970s. Now Wall Street sings praise for the company’s reinvention. Boutique strategy consulting firms study its innovation. And console unit sales are off the charts. Investors have responded. Kyoto, Japan, Nintendo’s stock has doubled to $49.25 from $24.65 since the company announced the Wii in September 2006.  That should come as little surprise given some of the fist fights at retail stores over last Wiis.

Nintendo’s Wii has catapulted it from a mere 14 percent sliver of the market to industry king. Industry tracker NPD reported that Nintendo in August sold 453,000 Wii consoles in the U.S. compared with Microsoft’s 195,000 Xbox 360 consoles and Sony’s 185,000 PS3s. Nintendo’s Wii has edged into first on total console sales of 11.9 million, besting Microsoft’s 10.9 million in Xbox 360 sales, according to NPD.

NEGLECTING CORE FANS?

But Nintendo’s success comes at a price. For certain, the Wii has won it time in the media spotlight for casual games. But that’s changed the company’s identity for its early fan base. The move may irk some of its most loyal hardcore base who’ve identified with its earlier games lineup, much in the way fans of metal band Metallica were upset when members had shorn their head-banging locks. 

That feeling of being lost without a cause to follow reached new levels when the company’s E3 conference came around earlier in the year. The annual confab left many hardcore gamers feeling abandoned by the company they’ve supported for many years.

Clearly, beyond being good to the gamers who have been lifelong Nintendo fans, there’s a lot of money at stake on the direction Nintendo takes.

“That’s a big issue with Nintendo,” said Brian Crecente, managing editor of gaming blog Kotaku. “They seem totally focused right now on getting those new gamers. The risk there is that in not focusing on current gamers they could lose them for this generation and perhaps even future consoles.”

The game console giant on Thursday held a conference in San Francisco, where company watchers looked for signs of strategy changes. Instead the company mostly stayed the course, announcing plans to crank up Wii shipments by 50 percent to head off holiday shortages. Nintendo did throw its hardcore gamers a bone: It announced two upcoming traditional titles, Sin & Punishment 2 and Punch-Out, to feed the core gamers.   

Nintendo stock on Thursday skidded $2.99, or 6 percent, to $46.26 by close of trading. Sony fell $2.58, or 8.5 percent, at $27.92; Microsoft fell $0.23, or nearly 1 percent, at $26.25.

Wii’s dominance is expected to grow. The hot-selling console is forecast to sell four times as many as Microsoft’s Xbox 360 and twice that of Sony’s PlayStation 3 in 2008, according to a report from Daiwa Institute of Research on Wednesday. That should fortify the company as king of casual. 

MICROSOFT, SONY KEEP IT CORE

But Nintendo games targeting traditional gamers have lagged.  That hasn’t been the case for Microsoft and Sony. Hardcore titles such as Metal Gear Solid 4 for the PlayStation 3 and Halo 3 for the Xbox 360 sold more than 3.2 million and 8 million units, respectively, according to industry tracker VG Chartz. GrandTheft Auto IV sold over 10 million units across both systems.

Sony and Microsoft can’t help but test the casual market though. Microsoft is using its online connected Xbox Live Arcade, a new Avatar system, and a  Netflix deal to test the waters for interest in casual games. Meanwhile, Sony is working on its PlayStation Home, an online virtual world for people to pick avatars and interact with other PlayStation 3 users.

But industry watchers expect that the high-growth casual segment will become too tempting for hardcore-oriented Microsoft and Sony to resist a full attack.

What remains to be seen is whether Nintendo can go the other direction—converting soccer moms into metal heads.