Nintendo ended 2017 in style as it posted record-breaking revenues of $9.2 billion for the full year, growing 172% year on year. This performance is enough to push Nintendo back into the top 10 gaming companies by software revenues for2017 after an absence of three years. The Switch was the main driver of this success, with 60% of Nintendo’s revenues in 2017 generated by hardware sales. This is drastically different from Sony and Microsoft, whose hardware sales accounted for an estimated 34% and 26% of their 2017 revenues, respectively.
Most remarkable is that Nintendo generated these revenues with hardware and full-game sales only. The contribution to its gaming revenues from its smart-device business (responsible for Nintendo’s mobile games) was negligible at 3%, while subscription revenues and revenues from in-game transactions were almost non-existent. In this sense, Nintendo remains a very traditional gaming company in an industry that is rapidly changing, and not in the least by adopting the games-as-a-service model. Subscription revenues have been very strong for Sony and Microsoft, while in-game transactions are the main growth driver for dominant Western publishers such as Activision-Blizzard, EA, Take-Two Interactive, and Ubisoft. In Japan, Konami, Bandai Namco, and Square Enix are shifting focus to mobile games, which are hugely popular (and profitable) in their domestic market.
The share of Nintendo’s revenues from digital products and channels was only 16%, far lower than most of its peers. The industry average share of digital revenues for console game software in 2017 was 66%, up from 58% in 2016. The future for Nintendo is surely also digital and there are three obvious areas on which to focus.
Subscriptions, in-game transactions on console, and mobile gaming are untapped revenue streams that represent an extraordinary opportunity for Nintendo. Now that the Switch has been successfully launched, 2018 could well be the year that Nintendo succeeds in making serious progress in all three areas. The upcoming Mario Kart Tour for mobile devices and the launch of Nintendo Switch Online announced for September 2018 make it clear that Nintendo is eager to capture this opportunity. Together with the organic growth of its console software revenues, this could be worth $2.5 billion for the company. The big open question remains when and to what extent Nintendo will fully embrace in-game spending, both for console and mobile.
Software sales follow hardware sales
In 2017, Nintendo’s hardware revenues grew by 266% year on year to reach $5.5 billion, with 48% of these revenues earned in Q4 2017. This is more than both Microsoft and Sony, which earned $2.4 billion and $5.1 billion, respectively, with hardware. At 60% of total revenues, its share of hardware revenues is at the same time considerably higher than Microsoft’s and Sony’s. Part of this can be explained by the stage of the hardware cycle; Nintendo launched a new console in 2017, while Sony and Microsoft launched upgraded versions of their current generation.
Software sales typically follow hardware sales in the early phase of the console cycle. Nintendo’s software revenues in 2018 will likely grow strongly as console owners buy additional games for their brand new consoles. There is already a selection of popular titles to choose from, such as Super Mario Odyssey and Breath of the Wild, which are both considered “must buys” for every Switch owner. They are just two examples of Nintendo-exclusive games that surpassed the one million marks in unit sales in 2017.
This year, the Switch also has a strong line-up of new game releases, and not just games published by Nintendo itself. The Switch’s success has caught the attention of third-party publishers that are eager to port their games to the console. Finally, if Nintendo were to release the confirmed Pokémon game for Switch in 2018, it would be the first core Pokémon game ever released on Nintendo’s TV console with a very high chance of becoming another blockbuster hit.
Another boost to Nintendo’s console game revenues could come from enabling in-game transactions. Given the profitability of this business model for other publishers, it is almost unimaginable that Nintendo will stick to full game sales only.
The recently announced Mario Kart Tour for mobile phones indicates that Nintendo has not given up on its smart device business. Both Super Mario Run and Animal Crossing: Pocket Camp were among the most downloaded games in Q4 2017, but revenues from both titles were low. In its latest reports, Nintendo confirmed that player retention and monetization were the key challenges for its mobile games.
It is clear that Nintendo is still figuring out its mobile gaming strategy. For example, Super Mario Run was not intended to receive any updates, yet updates have come out and downloads spiked at that time. Regularly updating games and adding content is key to player retention for highly successful mobile franchises, such as Candy Crush and Clash of Clans. Nintendo has also been hesitant to embrace free-to-play games with in-game transactions, the dominant business model for most successful mobile games. However, the fact that Nintendo’s least marketed game on mobile, Fire Emblem: Heroes, was responsible for 80% of all mobile gaming revenues using in-game transactions will surely not be lost on Nintendo executives.
Mario Kart Tour is the fourth game Nintendo is developing for smartphones. The Mario franchise is the most popular Nintendo franchise by units sold; Super Mario Odyssey and Kart are the #1 and #2 most sold games for Nintendo Switch. With the right business model, a good Mario game for smart devices should be able to become a $1-billion-dollar franchise.
Nintendo Switch Online
Nintendo is the last of the three console companies to offer paid online gaming. Online multiplayer is currently free for a selection of Switch games, but that is expected to change once Nintendo Switch Online launches in September 2018. The PlayStation Store and PlayStation Plus, as well as the Microsoft Store and Xbox Live, are hugely profitable for both Sony and Microsoft. Similar to its mobile strategy, however, Nintendo seems reluctant to fully embrace the subscription model; the announced price for online gaming is far lower than its competitors. Nintendo will charge $20 for a full year, compared to $50–60 per year for both Sony and Microsoft.
Nintendo’s $2.5 billion opportunity
If Nintendo unlocks the value of subscription revenues, mobile game revenues, and in-game transactions, it could add as much as $2.5 billion to its software revenues. Assuming its hardware revenues remain stable, its share of software revenues would still be below many competitors that have made the transition to digital and running games as a service successfully over the past years. The key challenge for Nintendo is successfully moving from a traditional approach to development and marketing to running games as a service will require organizational change. That is exactly why it took traditional publishers, such as EA and Activision, years to catch up with the new business model and marketing tactics pioneered by nimbler mobile and PC gaming companies.
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Original article here.
