The general feeling among fans and industry-watchers alike is that the Nintendo Switch, the $299 console launching on March 3rd, is a make-or-break moment for the 127-year-old company.
Success would validate Nintendo’s strategy of building unique, sometimes gimmicky consoles that are like nothing else on the market.
But delivering another flop, following its previous new product disappointments, would heighten investor pressure on Nintendo to get out of hardware entirely.
And yet, the bar for the Switch’s success is shockingly low. The Nintendo Wii U, the immediate predecessor to the Switch, sold a mere 13 million units in its four-year lifespan. Anything that tops that fiasco would be a marked improvement for Nintendo.
Still, expectations for the Nintendo Switch are high, with at least one market research firm predicting 40 million sales within its first three years on the market — an optimistic forecast that would put the Switch not too far behind the 50 million PlayStation 4 consoles that Sony moved during its first three years to become the current market leader.
Meanwhile, as VentureBeat reports, analysts are lukewarm on the Switch. While the console’s $299 price tag and Nintendo’s deep bench of blockbuster franchises (like “Super Mario” and “The Legend of Zelda”) are reasons to be optimistic, the limited number of game titles expected to be made for the Switch and the unproven, TV-mobile hybrid form factor of the console are potential minuses.
Here’s the thing, though. There’s a growing sentiment among the investor community that the success or failure of the Switch is almost irrelevant to the huge, bright, shiny future they see for Nintendo. The problem is that gamers might not like what those investors are seeing in their crystal ball.
Take a licking and keep on ticking
The markets haven’t been very kind to Nintendo in the last 12 months or so, beyond just the ongoing drag from the Wii U business. Here’s a brief list of all the times Nintendo stock took a big hit in the last few quarters:
- When investors realised Nintendo had very little to do with the “Pokémon Go” phenomenon.
- When the Nintendo Switch was first announced.
- When investors realised that “Super Mario Run,” the franchise’s smartphone debut, wouldn’t generate the ongoing revenue they were looking for. (Though the announcement that the game existed sent it rocketing up.)
- When Nintendo announced Switch pricing, availability, and launch games.
Nintendo’s stock, which trades on the Tokyo Stock Exchange, has rebounded from its low point but remains roughly 28% below its 52-week high.
And yet, in general, analysts seem pretty positive on Nintendo: According to the Wall Street Journal, Nintendo stock is overwhelmingly rated a “Buy” by 13 firms.
So what’s making financial analysts so bullish, even as the stock suffers?
What the future holds
It all comes back to the smartphone.
Back in October, after “Super Mario Run” was announced but before the debut of the Nintendo Switch, Nomura upgraded its rating on Nintendo’s stock to a “Buy.” The firm said that the company’s willingness to dabble in smartphones “heralds a change in earnings structure at Nintendo.” By Nomura’s reckoning, the profitable smartphone games will “provide support” to the console business, meaning that Nintendo can have its console cake and eat it too.
This plays straight into Nintendo’s stated strategy for getting into smartphones games in the first place. As Nintendo tells it, games like “Pokémon Go” and “Super Mario Run” have the very pleasant side-effect of building interest in the company’s console games. That theory seems to have been borne out, as “Pokémon Sun and Moon,” the first games in the franchise released since the “Pokémon Go” craze hit, set sales records.
But some, like Jefferies Equity Analyst Atul Goyal, go a step further: “Nintendo’s long-term outlook is driven by the [intellectual property],” Goyal tells Business Insider. In other words, he says, the future of Nintendo rests on its ability to monetise its most popular franchises, starting from “Super Mario Run” and “Pokémon Go,” and going well beyond.
The way Goyal sees it, it’s simple maths. As an example, the Pokémon series on Nintendo consoles has sold an estimated 280 million games over the last 20 years; “Pokémon Go” had been downloaded 500 million times as of September 2016.
It’s a much bigger audience, and Nintendo has a huge leg up, because so many millions of people already love the company and its cast of instantly-recognisable characters. By the same token, and for the same reasons, Nintendo recently licensed its characters to Universal Studios for theme park attractions.
So yes, if the Switch is a massive flop, you might see Nintendo make a huge and dramatic shift towards smartphone games. But even if the Switch is a huge success, there’s a healthy chance that smartphone games will still prove to be more lucrative, and so Nintendo will focus more of its efforts there regardless.
And while Nintendo’s first “Super Mario” smartphone game didn’t generate the kinds of profits that Wall Street was looking for, the company has committed to trying and trying again, with the free-to-play “Fire Emblem Heroes” dropping for Android on February 2nd and iPhone later.
The good news for die-hard Nintendo console gamers is that the likely long-term success of Nintendo’s smartphone efforts will actually reduce investor pressure on the company to move away from its hardware business. The potential downside is that if Nintendo’s iPhone and Android games business really picks up, the company’s hardware business will naturally become a smaller area of focus, which could result in a diminished number of console games.
Either way, the Nintendo Switch is shaping up to be at least a moderate success. But taking the long view, this console may turn out to be a small piece of a much different strategy for Nintendo.