Nintendo Switch: the SuperData Take

Notes from Nintendo’s New York Switch event:
Arms is the most innovative title showcasing the Switch capabilities. Zelda was obviously a huge favorite and the cell-shading looks gorgeous. What surprised me was that Nintendo showcased only partially the available titles at its Tokyo event: it’s worth noting that Activision is also contributing with Skylanders and there was quite a bit of buzz around Street Fighter V. With several smaller dev studios like GameTrust (GameStop) there’s a broad offering.

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Access to Nintendo’s classic titles via the online service will prove to be a key differentiator. Even as Nintendo continues to innovate on its existing titles, for many consumers the classic titles remain an important selling point. Providing access to this library of games will help drive adoption to the paid online service for the Switch. By comparison, the combined earnings for the subscription service for Sony and Xbox–PlayStation Network and Xbox Live, respectively–generated around $3 billion in revenues last year, and has proven a key component in transitioning consumers to the higher-margin side of the business in digital distribution. Total earnings for digital downloads on console last year, including full game downloads and micro-transactions, was $7 billion, worldwide.

Nintendo is de-emphasizing physical cartridge sales. The cartridge system for the Switch is based on the 3DS more so than the Wii U, suggesting that digital distribution will play a bigger role for the upcoming platform. Consumer generally find it is easier to expand the memory and download titles directly to the device than having to carry all of their games separately. The challenge here for Nintendo centers on providing a seamless experience in its eShop. The emphasis on gaming consoles as a toy is a smart, and proven, strategic move. While we don’t anticipate games like 1-2-Switch to become breakout sellers in comparison to the announced Mario and Zelda titles, they do a great job differentiating the Nintendo device from other consoles. It continues the company’s legacy as a toy-maker and shows Nintendo’s strength in providing innovative game play that integrates both hardware and software.

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To many the Switch is Nintendo’s long-awaited answer to recent challenges. Especially the investment community has been highly critical of the performance of Nintendo’s last console, the Wii U, which sold around 15 million units. The device failed to replicate the blockbuster success of the Wii, which sold more than 100 million units. This, in combination with Nintendo’s late entry into the $40B mobile gaming market, has raise the level of criticism among investors and industry observers, even when consumers remained loyal.

One of Nintendo’s strengths is its brand portfolio. The release of Pokémon GO and Super Mario Run (an exclusive with Apple) has allowed the Japanese giant to quickly capitalize on consumer enthusiasm for mobile games. Super Mario Run, released almost a month ago, has been downloaded by an estimated 96 million people worldwide, earning $43M to date. And Pokémon GO (released in the summer of 2016) has so far earned $894M since launch (up to and including December, 2016). The two titles are largely regarded as evidence of Nintendo’s continued relevance and the strength of its brands.

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The worldwide market for video games is currently valued at $91B, with console sales representing $25B in 2016. Over the past few years, a growing percentage of console sales have moved away from retail-based physical sales to digital channels. The digital console market is on track to generate $7.8B in 2017E, up from $7B in 2016. The Nintendo Switch enters the console market at a time when Sony is dominating with an install base of almost 55 million, and 26 million for Microsoft’s Xbox One.

Switch is part of Nintendo’s response to the broadening of the interactive entertainment category. The prominent featuring of its multi-player game Splatoon in the context of competitive gaming suggests that Nintendo is looking to also capitalize on recently emerged categories like eSports. In 2016 eSports was valued at $892 million, with 135 million regularly watching competitive gaming tournaments. Splatoon has so far sold around 5 million units worldwide (both digital and physical sales).