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Digital won't save Nintendo
by Matt Matthews on 05/07/14 09:26:00 pm   Expert Blogs   Featured Blogs

The following blog post, unless otherwise noted, was written by a member of Gamasutra’s community.
The thoughts and opinions expressed are those of the writer and not Gamasutra or its parent company.

 

Digital sales are increasingly important for pure software and service companies like Electronic Arts and Activision Blizzard, but platform holders like Nintendo have long had a broader revenue base. Nintendo, for example, has historically drawn revenue from its own software sales, software licensing to third parties, hardware sales, and accessory sales and licenses.

But Nintendo is now caught in a negative feedback loop that has hurt all of these areas.

We are well past the point of wringing our hands over the Wii U's fate. It is a failed console, and will remain so. Wii U hardware shipments in the past 12 months were just over 2.7 million systems, a figure well under what Nintendo shipped in the two months after the system launched.

The 3DS is past its prime, with its peak worldwide shipments coming 1.5 years ago, around September 2012. At that point, Nintendo was shipping 15.5 million 3DS systems per year, and that rate has been on the decline in each of the subsequent six quarters. It now stands at 12.2 million systems per year.

Will the 2DS save the 3DS? No, it won't. Nintendo only shipped 90,000 2DS systems in the last quarter.

With hardware sales declining rapidly, it is merely a matter of time before software sales begin to contract, and quickly. And with fewer people actively buying the systems, the accessory makers will also see lighter sales.

Along with all these other areas, it now appears that Nintendo digital software sales are also stalling. When I first wrote about Nintendo's digital sales, the company was showing double digit growth in TTM (trailing twelve-month) sales in that segment. However, sales have leveled off in the last three quarters, as the graph below shows.

Yes, the company's digital business jumped 46 percent from March 2013 to March 2014. But look at those figures for the last three quarters (September 2013, December 2013, and march 2014). During these last nine months, the company has seen only marginal year-over-year increases in the quarterly revenue figures.

The total for the last 12 months now stands at ¥24 billion, or right aroud $239 million.

Digital has also stopped its growth as a segment of Nintendo's total software revenue. The figure below demonstrates this phenomenon.

Whereas software and service companies like EA and Activison Blizzard are well on their way to getting half of their annual revenue from digital sources, Nintendo has hit a ceiling at 10 percent.

It seems quite likely that the revenue they are getting from digital has a rich margin attached to it, and that should be softening some of the losses they've been incurring. However, with the hardware bases levelling off, there is only so much that can be squeezed from this audience.

At the moment when Nintendo most needs rich sources of revenue (and more importantly profit), it has run out of steam on practically every front. Nintendo needs a plan to right its ship, but I regret to say that its digital software sales simply won't be much help.


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Comments


Alan Barton
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Nintendo are having problems, but I wouldn't dismiss them so easily.

For a start they have been here before with the GameCube. That didn't do well in its entire lifetime, then they followed that with the Wii which sold over 5 times as many consoles in its lifetime.

Plus the 3DS has over 42M users, so its not exactly a small market.

Also here's another example of the potential of Nintendo ... combine these links...
http://www.gamasutra.com/view/news/217276/Nintendos_next_step_Its
_own_take_on_Skylanders.php
http://en.wikipedia.org/wiki/Pokemon
http://en.wikipedia.org/wiki/Mario_%28franchise%29

And its easy to see the huge potential they have.

(By the way, just the Mario franchise was valued at over $10 billion (in 2012)).

Also they have their new (potentially very mobile like) hardware...
http://www.gamasutra.com/view/news/217294/Nintendo_will_launch_ne
w_hardware_in_emerging_markets_next_year.php

Also they have multiple billion dollar franchises. For example, Mario, Pokémon, Donkey Kong, Zelda, Metroid.

Any games company in the world would love to have even just one of these!

Nintendo are a lot stronger company than some people would like to portray them.

Matt Matthews
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Nintendo had all of those opportunities two years ago too. And, yet, these are the results. What evidence do we have that Nintendo is doing anything any better to execute on all these strengths?

Alan Barton
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@"What evidence do we have that Nintendo is doing anything any better to execute on all these strengths"

Also here's another example of the potential of Nintendo ... combine these links...
http://www.gamasutra.com/view/news/217276/Nintendos_next_step_Its
_own_take_on_Skylanders.php
http://en.wikipedia.org/wiki/Pokemon
http://en.wikipedia.org/wiki/Mario_%28franchise%29

And its easy to see the huge potential they have.

(By the way, just the Mario franchise was valued at over $10 billion (in 2012)).

Also they have their new (potentially very mobile like) hardware...
http://www.gamasutra.com/view/news/217294/Nintendo_will_launch_ne
w_hardware_in_emerging_markets_next_year.php

Sounds like you are smarting over their *current* 3rd party potential. Don't confuse that with Nintendo being weak.

Matt Matthews
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Perhaps you are confusing potential with performance. I'll just leave it at that.

Alan Barton
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Franchises like Nintendo have don't stop earning just because there's no recent games. Franchise branded products (like lunchboxes etc..) bring in many hundreds of millions every year because Nintendo's brands are so strong. I would say Nintendo's brands are easily in the top 10 of world class character IP's. Only companies like Disney and Marvel can beat it.

You are just focusing on the aspects of performance which impact 3rd party developers. Nintendo have other big ways to earn money you are overlooking, but none of that helps 3rd party developers.

Jamie Mann
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"For a start they have been here before with the GameCube. That didn't do well in its entire lifetime, then they followed that with the Wii which sold over 5 times as many consoles in its lifetime."
There are parallels: in the GameCube era, Nintendo was buoyed up by the Pokemon cash-cow and had the opportunity to tap into a previously untapped market (i.e. casual gaming).
This time, they've got a large cash reserve and have the opportunity to break into the Chinese market.

However, it remains to be seen how the Chinese will take to Nintendo's IP, especially given the traditional friction between the two countries. It also remains to be seen how Nintendo will adapt their IP to the Chinese market, with it's high piracy rates which has driven most companies towards F2P or subscription-based pricing; models which Nintendo has never been comfortable with.

(there's also the question about this new hardware being proposed for China. It seems doubtful that this is a cost-cutting exercise - the 2DS is already about as cheap as you can make a competitive handheld gaming system, and similar applies to the Wii/Wii U. Instead, it seems most likely that Nintendo are going to try and build some form of heavy-duty anti-piracy mechanism; i.e. they'll try and take the Chinese market head-on, rather than working with it)

Skylanders/Disney Infinity: these are cash-cows right now, but this doesn't mean there's room for a third variation on this theme. Then too, we've seen previous gaming cash-cows crash and burn in a very short space of time - Rock Band/Guitar Hero being the most obvious one; with the Wii itself arguably being a good example as well.

On the other hand, I wouldn't count Nintendo out yet: they do have a large cash reserve and China does offer a huge potential market. But I do wonder if Nintendo has the ability to adapt quickly enough to take advantage of it...

Alan Barton
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@"Skylanders/Disney Infinity: these are cash-cows right now, but this doesn't mean there's room for a third variation on this theme."

If it was a company trying to invent new characters, then I would totally agree with you. Even EA would struggle to make that work. But as this is Nintendo using *existing* extremely strong brands we are talking about (and by brands I mean Mario, Pokémon, Donkey Kong and Zelda, then these brands make it a totally different proposition. Companies will pay Nintendo many millions to use Mario on each of their small products, like lunch boxes, tooth paste etc... and for very good reason, because Nintendo has established extremely strong brands. Yet Nintendo get to use these characters for free on each of their new products, which adds considerable value to each of their products. (Plus that is money that Nintendo is still earning).

Nintendo may not succeed with doing their own Skylanders, but given how strong even just Pokémon is, I very much doubt it'll fail. (The Pokemon Franchise alone has generated $30 Billion in the past decade!. Its therefore an exceptionally strong brand and like I said, Mario is worth Billions as well).

No one can say as fact, if almost any new business idea will or won't work for certain until after its tried, but Nintendo are not going to run out of money any time soon. It would take years of failure to sink them. Plus their Franchises are still earning a lot of money and even if the worst happened and they had to sell just one Franchise, it would earn them billions. They are not going to run out of money soon.

Eric Harris
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Good point. Matt doesn't account for IPs in his article. In addition, Nintendo has always appeared weaker than the competition, but some how manages to pull through. I think Matt's perspective is from what he sees EA doing. Truth is that if EA did not have as much investment as they have (Over 2.5 billion in stockholder equity), they would have been out of business long time ago. Nintendo is the real leader in video games.

Marvin Papin
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But people buy Nitendo games and hardware because you can offer them, it's physic...
I don't think that would be good for them. And children have pocket money, not a credit card.

Alan Barton
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Yeah exactly, they have a strong reason to sell more physical games and merchandising than digital downloads and with the franchises they have, even just the merchandising is worth billions.

But again, thats great for them, but not so great for 3rd party sales, which is where I think a lot of the negativity about Nintendo is coming from.

That doesn't mean Nintendo are weak or need "saving", it just means they are not so good for 3rd party companies to earn a living from supporting Nintendo consoles.

Eric Harris
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IDK. Capcom doesn't seem to be complaining.

Andrew Haining
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When Nintendo isn't doing nothing it's actively damaging itself but it'd have to keep doing these abysmal things for a decade for it to become an issue.

It's important to bear in mind that while the Wii U isn't selling very well it's still selling and so far has managed to stay ahead of the crossbone and probably will continue to for another quarter, yet no one is spelling doom for Microsoft.

On the other hand I keep expecting Nintendo to reveal what the hell they've been doing to fix this and so far they're 6 months too late with decent game announcements and it's approaching the time where they should consider abandoning the Wii U in favour of "updated hardware" that takes the shape of an entirely new console.

Jim Burns
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I really feel like Nintendo does not need saving. 3DS is right in the middle of it's prime. It is a money maker, Software is selling at #1 industry levels.


"At the moment when Nintendo most needs rich sources of revenue (and more importantly profit), it has run out of steam on practically every front."

Nintendo is predicting profit because of strong software, that never runs out of steam.

John Flush
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Nintendo doesn't put enough memory in their stuff to support digital.

A W
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That's why there is a external HDD market.

John Flush
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Yep. And I bought a card for my 3DS to support my switch to digital as well... however, I'm not a typical user thus the reason for my statement. Great you can expand it, but it doesn't work out of the box. 2 games and your little card it out of space... it is unfriendly and looks like it caps out.

I also liked the comment that the people buying Nintendo don't have cards, thus they have to get prepaid cards or not buy. And really Nintendo doesn't give any advantage in their digital market. Nothing ever goes on sale and it is usually the same price as physical which you could trade... again value reduced digital.

They do give work-arounds via memory expansions. and I do like not swapping cards (in the handheld space) but I again, I think of myself as an outlier though.

Leon T
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Why would digital ever save Nintendo when they make much more on hardware sales? Digital sales alone were never going to turn Nintendo's fortunes around. I'll even label the argument that digital sales won't save Nintendo as a strawman. Didn't they say the Wii U was making a profit now at their last meeting? If so they will slowly stop bleeding since that was the cause of a lot their loses.

The 3DS is experiencing a normal life cycle for a game device. Trying to paint its current sales as a negative is bit dishonest. It doesn't need saving at all. The 2DS is an attempt to stretch out the life span and pad the installbase.

Touching on digital sales again their revenue could be going back up due to GBA VC games and the amount of indie titles launching on the eshop. Not to mention the drop in digital prices that's been happening recently.

John Gordon
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Title: "Digital won't save Nintendo"

My question is, "will digital actually save anyone"? Going digital destroyed the music industry. Wonder what it will do for the video game industry?


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