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Nintendo's Revenue Gap Will Soon Be Wide Open With Only One Hybrid Console

|Includes: Nintendo Co., Ltd. (NTDOY)

This is sort of an overflow commentary for my recent article on Nintendo's strategic challenges (worth reading for people anticipating a successful Switch launch, even if it's only about hearing a different perspective):

Nintendo's 'Switch' - It's No Magical Switch - More Likely A Switch To A Software-Only Future

That article was getting too long already, so I couldn't include a fairly obvious point that's still worth discussing in more detail:

Nintendo players will soon have three options to play games outside of their home / living room - but only one option really contributes to the bottom line in my opinion once the 3DS is gone.

The three options of course are:

  • Switch (brand-new HW as of 2017, high-end experience)
  • 3DS (aging as of 2017, low-end experience)
  • Third-party platforms (annual HW, simple experience, mostly programmed by external partners for Android/iOS)

So far so good, more options than ever from a user's perspective.

Many optimistic Nintendo investors seem to think that third-party mobile platforms can conveniently fill (or even surpass) the revenue gap once the aging dedicated 3DS hardware is retired.

I don't think so. See my article linked above and this article covering another Nintendo IP's performance (Fire Emblem) for further details and numbers.

The TAM on Android/iOS is obviously much larger, but so is the competition - while the in-app revenue numbers or conversion rates are very low most of the time (except for outliers like Pokemon Go - on the other hand Mario Run has shown already that mobile isn't a simple home run even with famous Nintendo IP - and Mario is arguably Nintendo's most famous and longest-running IP).

In addition to the novelty factor wearing off (everyone wanted to see what Nintendo had in store for these first games on other platforms with differing control schemes etc.) Nintendo has already launched its two biggest IPs (namely Pokemon Go and Mario Run) early on.

There are only so many games they can/want to publish each year on third-party systems - and only so many ways to re-use the same IP within a certain period of time. (Some quotes from Nintendo execs say 2-3 games per year, earlier quotes said 3-5 games per year for other mobile platforms).

That's not all:

From a valuation and revenue perspective, Nintendo's hybrid Switch game console soon (2018+) has to "carry on" the sales numbers of both the 3DS and the Wii U going forward (as the 3DS slowly fades out, my prediction for that date is the end of 2018 - or early 2019 at the latest *).

The current installed base amounts to (rounded numbers):

  • 75-80 million 3DS sales (I'm adding another quite generous 10-15 million units until the EOL status)
  • 15 million Wii U sales

That's close to 100 million consoles for the status quo (Nintendo's current-gen consoles before the Switch launch) - that's even with total Wii U sales coming in far below Nintendo's original expectations back in 2012.

I only expect the Switch to sell close to half that number (up to 45 million units, more details are available in my linked SA article for anyone interested).

It's easy to see that Nintendo will have to generate A LOT of new revenue outside their dedicated hardware base (mainly the mobile games on Android/iOS mentioned above, some other IP licensing...) to just keep up with current revenue numbers.

Let's also keep in mind Nintendo's revenue has already been falling a lot since the Wii / DS glory days last decade:

Is this all worth it? Nintendo basically had no choice but to go down this hybrid route given the increasing pressure from modern smartphones and tablets.

A hybrid console is unproven. The main question from my linked article remains unanswered until we see a few quarters of Switch sale numbers:

"Do [many] people REALLY want to enjoy COMPLEX entertainment software on the go by carrying around ANOTHER [in addition to their smartphone that can do MANY things, including casual games and that is in their pocket already] device with rather poor battery life?"

Otherwise, the various trade-offs (weaker system, higher manufacturing costs etc. to make the Switch portable and run on batteries) didn't pay off for Nintendo.

We wil know within 1-2 years*.

On the plus side, Nintendo obviously no longer has to maintain separate development teams (home and mobile), they can cut costs and/or increase game output for just one main system (the Switch) going forward - especially since mobile development for third-party hardware is often out-sourced to development partners like DeNa or Niantic (but then, all profits also have to split...).


* There's a small chance that Nintendo might introduce a separate 3DS successor after all in 1-2 years, but I don't think that's likely given the strong sales and rapid annual hardware cycles of modern smartphones (also thanks to subsidies by carriers...) and tablets.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.