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LOS ANGELES, Jun (Reuters) - The launch of Nintendo Co Ltd's next-generation Wii console failed to address investor concerns the firm is missing the gaming market's shift to social networking, sending its shares tumbling to a five-year low.
The Wii U, complete with a new touchscreen controller, is aimed at winning back hardcore gamers from rivals such as Microsoft Corp's Xbox and won early praise from industry critics at its launch at the E3 videogame expo on Tuesday.
But Nintendo shares closed down 5.7 percent in Japan on Wednesday, hitting levels not seen since before the original Wii was launched to rave reviews in late 2006.
Investors said they were worried Nintendo remained too centered on hardware as the market increasingly shifts to a battleground over software, with games played over Internet networks linking millions of players.
"Although some experts seem to like the new device, I expected Nintendo to move more into the social networking business," said Mitsuo Shimizu, deputy general manager at Cosmo Securities in Tokyo.
"It's a warning from investors that the company should reconsider its business strategy and move more aggressively into social gaming operations."
Nintendo's president Satoru Iwata dismissed questions about the new console's lack of emphasis on network capabilities and said the company's hit games had always been social.
"It's not that we're negative about the network, but if we ignore those customers who don't link their game consoles up to the Internet, that goes against our strategy of expanding the games market," he told reporters in a roundtable. "We are just trying not to shrink our own market."
Industry critics in early reviews praised the innovation embodied by the separate device, larger than Apple Inc's iPhone, but smaller than the iPad.
The new controller has camera and video-call capability, plus an array of buttons and functions that might entice gamers who play longer and more intensely.
"Nintendo is ahead of the curve for once," said Wedbush analyst Michael Pachter. "It can do anything a tablet can do and people might be asking, why can't my iPad 2 do this kind of gaming too?"
Nintendo retains the lead in gaming hardware, but is struggling to win users from Microsoft and Sony Corp after the disappointing introduction of its 3DS handheld device.
Gaming executives hope the new Wii can jumpstart a $65 billion video games industry -- surpassing Hollywood in size -- still struggling to rebound from the recession.
The entire console is still under development, but is expected to go on sale between April and December 2012.
Investors are awaiting details on specifications and pricing, but some speculate it could move for $299, or about the same as an Xbox twinned with a Kinect motion-sensing system.
"The controller is a breakthrough," said Sterne Agee analyst Arvind Bhatia. "Overall, Wii U looks good, but I have to say I wasn't blown away."
That is a far cry from how the Wii took the industry by storm, bringing motion control to gamers accustomed to joysticks and mice. Whether its latest gadget can win over a notoriously fickle market remains to be seen.
Though it may not repeat the first Wii bonanza, the new Nintendo device, nonetheless, will exert some pressure on traditional console rivals such as Microsoft and Sony to come up with new systems.
"It's smart for a number of reasons. There are two levels of interface, the touchscreen for casual gamers and the buttons for more core types," said Ricardo Torres, editor-in-chief for popular games site gamespot.com. "They have a lot of games core gamers care about.
"It's like a sandbox for developers. It's up to them to decide the experience that works best."
But all game console makers risk drowning in a deluge of game-capable phones. In 2010, shipments of such smart phones were more than 1 billion units compared with only around 50 million home game consoles and around 40 million handheld devices, according to research firm iSuppli.
"Their near universal presence gives them the potential to become a viable competitive threat," iSuppli said.
The new console is the first Nintendo device to support high-definition graphics and will sport a microprocessor or brain from International Business Machines Corp and graphics processors from Advanced Micro Devices Inc.
But it was the controller that stole the limelight on Tuesday.
Its 6.2-inch touchscreen works like a second display and can show the same images that are on the TV screen or provide gamers with additional information, giving them an edge over competitors.
The Wii U's controller can also be used to make voice calls and run old Nintendo games. It has motion-sensor capabilities and works in conjunction with existing Wii controllers.
The device also acts as a stand-alone gaming gadget. It can, for instance, continue running a game on the touchscreen while someone else watches TV. But it functions only in wireless connection with a Wii U console.
The initial game line-up suggests Nintendo is trying to woo hardcore gamers back to the fold, with popular first-person shooters such as Ubisoft Entertainment SA's Ghost Recon, Sega's Aliens and Electronic Arts Inc's Battlefield 3 on the slate.
"There are so many developers already responding to creating new games for the videogame system we are proposing with Wii U," said Iwata. "It can satisfy all tastes with deeper gameplay actions."
With at least nine months to market, Nintendo could still make modifications and the game slate might change.
This week, Sony announced plans to begin selling a handheld, 3D-enabled games device for $299 -- which critics immediately deemed too pricey.
Additional reporting by Tim Kelly and Antoni Slodkowski in Tokyo; Editing by Edwin Chan, Joseph Radford and Lincoln Feast