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Summary

  • Despite my bullishness on AMD regarding next generation consoles, I have seen next generation console efforts in China as dubious.
  • Nintendo announced the company is planning to address this market with specifically targeted hardware.
  • Cheap consoles and cheap games made by a company with its DNA in gaming could help Nintendo succeed in China.

Author's Note: This article is in no way intended to start any rumor that AMD (NYSE:AMD) is powering Nintendo's (OTCPK:NTDOY) recently announced efforts. Although I think it would be a great match, as I will outline below, there is no information available on hardware specifics at this point.

I have been extremely bullish on next generation consoles since they were announced. While Microsoft's (NASDAQ:MSFT) Xbox One is off to a slower start, Sony's (NYSE:SNE) Playstation 4 has been a smash hit so far.

Despite my bullishness on consoles, I have been very leery of next generation consoles in China. In this article I will take a look at statements from Nintendo to explain why I think the company has the best shot of the three (Nintendo, Microsoft, and Sony) at cracking the Chinese console market.

Rather than rehashing an entire article, readers should read this article to grasp what I feel are barriers to entry into the Chinese market.

Nintendo Has Announced Plans For A Console Targeted Specifically at China

My initial thoughts on the Xbox release in China is that the console would simply be too expensive and the traditional business model of the console doesn't work in China. China's market is dominated by cheap games and cheap hardware. The Xbox One and PS4 rely on powerful hardware and expensive games.

However, Nintendo's recently announced efforts sound like they fit the bill nicely. According to an article on Bloomberg:

Nintendo has resisted making its games available on smartphones because it doesn't see a sustainable way to make money in a business with such boom-and-bust cycles, said Iwata, who has been president since 2002. Making products specifically for emerging markets is a change for the company, which until now has sold the same products globally.

"We want to make new things, with new thinking rather than a cheaper version of what we currently have," Iwata said in Tokyo today. "The product and price balance must be made from scratch."

A from-scratch product with its design centered around being a cheap gaming console could be a gangbuster in the Chinese market. Nintendo has rarely provided the most powerful hardware, but has had some pretty big success as a hardware vendor until recently. The Wii was nowhere near as powerful as the PS3 or Xbox 360, yet was a smash hit despite the weaker hardware specs.

Creating A Low Cost Console

Nintendo has used AMD/ATi products for several generations of game consoles, so the companies should be accustomed to working together and would be able to address this market in relatively short order.

Source: The GameCube I keep forgetting to take to Goodwill

Nintendo has also typically been the cheapest of the consoles despite the fact the company has typically broke even or made a slight profit on hardware sales. The appeal of the Wii was the novel control concept and not expensive hardware.

(click to enlarge)

Chipworks grabbed a die shot of the PS4 APU when the site did the teardown of a PS4. The die size of the PS4 APU is ~350 mm^2, and based on comments from AMD's CFO Mr. Devinder Kumar, we know that the console APUs pull in between $60 and $100.

Large dies have worse yields, and the PS4 APU is absolutely huge. Contrast this with AMD's Jaguar APU, which measures in at ~107 mm^2 (source: AnandTech).

It's my guess that if Nintendo were to hire AMD, AMD could field a product with a quad core CPU either based on the PUMA architecture or ARM Holdings (NASDAQ:ARMH) A57 cores, 4 to 6 GCN graphics units, and a memory controller to utilize either GDDR5 or DDR3 in less than 150 mm^2 on a mature 28nm process node. The heart of the console would likely cost Nintendo around $40 or so, and the company could likely get this console in the hands of consumers at a slight profit for less than $200.

Granted AMD is not the only choice, and this article is in no way meant to fuel any speculation. However, if Nintendo were to choose AMD's scalable architectures, performance targets would be very easy to calculate, and Nintendo could very quickly supply developer kits based on off-the-shelf hardware to get started on content development.

Conclusion

Regardless of hardware choice, it seems Nintendo is the first major gaming company to acknowledge the differences in the Chinese market. This is a market that could be quickly addressed, and it represents a multi-billion-dollar opportunity.

Although the margins on the consoles would be tight, this opportunity represents a massive volume. By using AMD's standard library of IP with very little third party IP, the only NRE (non-recurring engineering) expense Nintendo would incur would be the cost of AMD scaling out existing IP to hit performance targets. This would keep the overhead for Nintendo low.

Both ARM and x86 are dominate CPU architectures, so by utilizing either of these along with a non-proprietary graphics solution, Nintendo could likely address this market inside 18 to 24 months. Since the architectures utilized could very easily consist of off the shelf IP, developers could begin creating content as soon as console specs are decided, and content creation could happen in parallel with hardware development. Going with AMD isn't an absolute must for Nintendo, but AMD now has the proven track record of two simultaneous console ramps and the experience of developing tailored solutions. AMD would be able to help Nintendo quickly attack this market.

Of all the console makers, Nintendo appears to be the one not trying to put an overpowered and expensive square peg into a round hole, and has experience in creating unique gaming experiences profitably at low price points.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Nintendo Should Partner With AMD To Dominate The Chinese Console Market

Additional disclosure: I own both shares and options in AMD, and actively trade my AMD position. I may add or liquidate shares or options at anytime. I may also trade short term options, both calls and puts, in AMD.I may initiate a small long position in Nintendo within the next 72 hours.