What a blow for Mario.

Nintendo (NTDOY), the biggest video game company in the world, is set to post its first annual loss ever. The company had previously expected to make a profit of about 20 billion yen, or $264 million, for the year ending next March.

But on Thursday, Nintendo delivered the crushing news: Instead of a profit, the company could see a net loss of about 20 billion yen. That was a surprise to analysts, who had expected to see a profit of about 12.2 billion yen, Bloomberg reports.

It's the second time in six months that Nintendo has cut its outlook.

How could this happen? Blame the surging yen -- disastrous for a company like Nintendo, which gets nearly 80% of its sales from overseas. In just the six months ended Sept. 30, Nintendo's losses from the exchange rate alone totaled nearly $700 million.

A downturn in Nintendo's business is also a factor. The company made a killing by appealing to non-gamer types. The Wii was a smash with younger children, parents and even grandparents, and children also adored the portable DS handheld.

But in the past few years, games have flourished on smartphones like the iPhone. Farmville and Angry Birds are all the rage. People are playing on Facebook and other online sites.

The very crowd that Nintendo built a fortune on suddenly has dozens of other options.

"Nintendo faces a very harsh time now," one Japanese portfolio manager told Bloomberg. "Competition in the video game industry is getting severe, and Nintendo must fight for customers who are using smartphones and tablets."

On top of that, Nintendo is in that squishy period between major console releases. The Wii is 5 years old -- a lifetime in video game years. Last holiday season, the Wii's share of the console market fell to 42% from 55% the year before. Nintendo is putting the finishing touches on the Wii U, due out next year.

But can the Wii U achieve the same success? Nintendo had high hopes for the 3DS handheld it launched earlier this year, but that device hasn't seemed to excite consumers. In response, Nintendo cut the price of the 3DS by 40% in August. The company cut its full-year sales forecast to 790 billion yen from 900 billion.

The company heads into the crucial holiday period, then, with no new console and a handheld that isn't a knockout. Now is the time when video game sales should kick in, but Nintendo said its games haven't been selling as well as it expected. The company is counting on the next game in its popular Zelda franchise and some new Mario titles to increase sales.

Nintendo is now six months into its current fiscal year, and those six months have been worrisome. The company's net loss grew to $925 million for the first half of the year. Sales fell more than 40% to $2.8 billion.

"They're still in the transition phase," a JP Morgan analyst told The Wall Street Journal. "I can't find much salvation in the numbers."