When Nintendo’s top brass gathered in Tokyo to speak to analysts Friday, they admitted they had been caught off-guard by the slowdown in Wii demand.

To the dismay of analysts and fans, they did not announce a new Wii console, as some had hoped, or a revolutionary new game.

But they dropped a few hints about where they might be heading.

Nintendo’s legendary game designer, Shigeru Miyamoto, who helped to create Super Mario Bros., Zelda and a host of other hit games, said a new Zelda game for the Wii will take advantage of the console’s Wii Motion Plus controllers to allow for better swordplay. It is being targeted for a 2010 release.

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Activision Blizzard (ATVI) CEO Bobby Kotick the London-based Times that the video game company might stop making games for the Sony (SNE) Playstation.

“I’m getting concerned about Sony; the PlayStation 3 is losing a bit of momentum and they don’t make it easy for me to support the platform,” he told the Times. “It’s expensive to develop for the console, and the Wii and the Xbox are just selling better. Games generate a better return on invested capital on the Xbox than on the PlayStation.”

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U.S. sales of video game hardware, software and accessories were down 23 percent in May to $863.3 million, according to market research firm NPD. It was the first month with sales under $1 billion since August 2007.

Hardware sales were hit the worse, down 30 percent. Software sales were off 17 percent, while accessories were down 25 percent. For the year to date, sales overall are down 7 percent, with hardware off 6 percent, software 8 percent and accessories 5 percent.

Among the consoles, the Nintendo Wii sold 289,500 units, down from 340,000 in April and 601,000 in March. That was followed by the Microsoft (MSFT) Xbox 360 at 175,000, flat with April.

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Let’s just admit it: the Nintendo people are total geniuses. I was one of the first journalists to see the Wii, in Kyoto in the spring of 2006.

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Netbooks are hot. Intel (INTC) estimates that the laptops–which can cost less than $300–sold faster in their first 12 months on the market than Apple’s (AAPL) iPhone or Nintendo’s Wii game console did. Could a similar low-end niche emerge in server systems?

It’s too early to tell, but there are some tantalizing signs–and some big ramifications if the trend takes hold.

First, some background: Hardware companies have long tried to convince customers to buy new machines that do computing work faster. Many customers in recent years have moved an increasing percentage of jobs away from “big iron”–mainframes and other servers that use proprietary circuitry–in favor of inexpensive servers based on the same x86 chip design used in PCs.

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Here’s a puzzle: Why does Nintendo expect dramatically fewer software titles to sell for its Wii and DS game machines this year?

This morning, Tokyo time, the company announced results for its fiscal year ended in March that were a little bit better than expected thanks to the strength of the Japanese Yen, turning in 1.8 trillion Yen in revenue ($18 billion, roughly) and 555 billion in operating profit. But for the current year, the company forecast sales to be flat, at 1.8 trillion, which is in line with estimates, but profit of 490 billion Yen, which is short of Street estimates for about 517 billion.

Nintendo says that’s because it will see a sharp decline in software titles for the DS, and software, of course, carries higher profit margins.

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While much of the tech sector has fallen on hard times during the recession, the videogame industry has thrived, as penny-pinching consumers look for lower-cost entertainment. Why go out when a family of four can buy a videogame and get 50 hours of entertainment out of it?

And so the industry gathered in San Francisco for the annual Game Developers Conference to rally its troops. While the PC industry is expecting its second consecutive year of negative unit sales growth, much of the talk at the conference was of 5 to 10 percent annual industry growth, and of the prospects for another record-setter in 2010.

Nintendo was particularly buoyant at the show, where it introduced an Internet-enabled version of its portable DS player that will sell for $169, and announced its 50 millionth Wii shipment.

How’s this for confidence? Nintendo Of America President Reggie Fils-Aimé in an interview ruled out any potential for Nintendo to lower the price of its motion-controlled Wii game console this year. “Why would we?” he said.

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Has Nintendo run out of new levels to play?

Deutsche Bank analyst Satoru Kikuchi this morning launched coverage of the videogame company with a Sell rating, asserting that profits are likely to “peak and decline after growing on the success of the Wii and the DS.” He asserts that earnings could “return to past levels if the company fails to come up with new blockbuster platforms.”

Kikuchi expects Nintendo’s profits in the March 2009 fiscal year to “slightly” excess guidance, but then sees profits sliding 18 percent in FY 2010, due at least in part to unfavorable exchange rates, with another 19 percent fall in FY 2011 “as sales slow.”

In Kikuchi’’s view, a key question going forward is well much Nintendo can boost sales for long-selling titles for the Wii and the DS. He notes that sales in Japan have “declined substantially” for both Wii and DS hardware and software.

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Last week, when the hardcore gamers of the world were supposed to be firing up The Lost and Damned, a new, downloadable episode of Grand Theft Auto IV, I instead decided to spend more than $400 for the privilege of playing a $10 game. I bought a PlayStation 3–a system I had consciously avoided to date in favor of the Xbox 360 and the Wii–so that I could download Flower, a little marvel of a game that casts the player as a series of petals floating in the wind.

What’s remarkable about Flower is the sensation it creates, from start to finish: simple, almost indescribable, joy. Kellee Santiago, the president and co-founder of thatgamecompany, the game’s publisher, says in an accompanying behind-the-scenes video that Flower is “the video game version of a poem” and that its purpose is to create “an emotion” in those who play it. Flower, which at least for now is exclusively for sale on the PlayStation Network of downloadable games, is not unique in that ability–other games successfully create fear, or nervousness, or exhilaration (or controller-hurtling anger)–but it is the only game I’ve played that made me feel relaxed, peaceful, and happy. What’s the point of it? Only that. Which is plenty.

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The National Bureau of Economic Research hardly stunned the nation this month when it announced that the United States had been in recession since December 2007. And, as it turns out, the buyers of consumer electronics could very well have been a leading economic indicator. Over the last year, they chose to buy two inexpensive and simple products, the Wii and the Flip, over competing gadgets bristling with more features.

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Nintendo seems to have bucked the recession. The Japanese videogame manufacturer has doubled November sales of the Wii in the U.S. from a year ago, according to NPD’s latest release on gaming sales.

The demand for the Wii remains strong since the game console’s debut two years ago. The company sold a record two million Wiis last month, higher than the previous 23 months. Nintendo has significantly increased shipments of the red-hot Wii for this holiday season after dealing with a shortage last year. Last November Nintendo sold 981,000 Wiis.

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Activision Blizzard (ATVI) shares are sliding following this weekend’s debut of Guitar Hero World Tour, the latest version of the company’s popular music game. UBS analyst Benjamin Schachter says his assessment of the first day of sales was mixed: near sellout sales of Wii and Xbox 360 versions of the game at many locations, with PS3 kids often in stock. He said the guitar-only and game-only versions of the games were shipped in larger quantities but did not seem to be selling as well as the full version of the game. He also says that a small minority of buyers is reporting issues with the drum kit that comes with the game.

On a broader subject, Schachter says the videogame industry is likely to be recession-resistant, but not necessarily recession-proof.

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With the influx of fresh new gamers, thanks in large part to the popularity of mass-market game machines, the DS and the Wii, more game companies than ever are jumping on the girl gamer bandwagon. Practically every booth at this year’s E3 Media and Business Summit this year had something to offer for female gamers of various demographics.

The breadth of games ranged from Nintendo DS titles like Namco Bandai’s “National Geographic Panda” and Legacy Interactive’s “Zoo Vet Endangered Animals” to Wii titles like Electronic Arts’ “Littlest Pet Shop” … and “Boogie: Superstar.”

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We’ve come a long way since Pong and Space Invaders. But video and computer games are still striving to be both interactive and realistic. Have you seen the “Saturday Night Live” skit of the interview with Grand Theft Auto IV’s main characters, Niko and Vlad? Their arms move imprecisely, as if they’re puppets underwater.

On Monday, chip maker Advanced Micro Devices, which already supplies the graphics power for the Nintendo Wii and the Xbox 360, showed the “SNL” skit at an event in San Francisco. Then AMD gave a taste of what it says a game maker can do with its new microprocessor: A 30-second clip of what appeared to be a real scorpion skittering around a terrarium, presumably hunted by another equally terrifying bug.

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The latest data on video game software sales from market research firm NPD shows continued robust demand.

In May, video game software sales rose 41% on a year-over-year basis. Pacific Crest’s Evan Wilson, in his review of the data, noted that console hardware sales saw little benefit from the launch of Take-Two’s (TTWO) Grand Theft Auto IV. He also noted that third-party titles continue to find it difficult to gain any traction on the Nintendo Wii. He notes that 10 of the top 15 tiles for the Wii are produced by Nintendo, accounting for 78% of unit sales on the Wii.

The top revenue generating games in the month were GTA IV, Wii Fit, Mario Kart Wii, Activision’s (ATVI) Guitar Hero III and Rock Band.

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