The Massive Nintendo Paradigm Shift

By Steve Peterson   Google+

Posted November 8, 2013



Nintendo's latest earnings report left many observers worried about the company and its prospects, Yes, Nintendo made a small profit of $6 million this time, compared to losing $282 million in the same quarter last year. That's a significant turnaround. What's worrisome is that the Wii U has yet to show a sustained turnaround (sales have jumped since the price cut, but it's only been a few weeks) and 3DS hardware sales showed a decline from last year. These indicators are interesting, but miss the larger picture that puts Nintendo's current status in the proper perspective.

Let's step back in time to the 1980's, when Nintendo first began to make an impact on the video game industry. From the industry low point in 1985 of about $100 million in retail sales ($213 million in inflation-adjusted dollars) following the crash of 1983, Nintendo led the industry to billions of dollars in annual sales. By 1990, retail sales were at about $5 billion (close to $9 billion adjusted for inflation) – and Nintendo represented 90 percent of those sales.

Think about that for a minute. In 1990, Nintendo was the game industry. Sure, there were some PC games being sold, and some quarters being spent in arcades. Any company that aspired to be a major player in the games business, though, had to build their strategy with Nintendo in mind. Either you built products that worked with Nintendo, or you were competing directly against Nintendo. Consumers who thought about games at all mostly associated them with Nintendo and the company's iconic characters.

Today, most people in the industry (as well as most consumers) remember this at a visceral level. Many people had a Nintendo game as their very first gaming experience, and Nintendo was the dominant gaming brand of their formative years. Even for older executives, their early careers were dominated by Nintendo, and their memories of the industry at that time are heavily influenced by Nintendo's actions, their products and their marketing.

The picture in 2013 is completely different. The Gartner Group projects total worldwide revenue for games at $93 billion for all of 2013. Nintendo is projecting its revenue for the current fiscal year (which ends in March, but we'll throw in the first quarter for free) at 920 billion yen, or about $9.3 billion dollars. In other words, Nintendo this year represents about 10 percent of the game industry.

That's a stunning change – from 90 percent of the industry to 10 percent in 23 years. And it's not that Nintendo shrank; in fact, the company revenues in 2013 are twice what they were in 1990. The industry, however, has grown about 20-fold in that same time period. This is a remarkable achievement both for Nintendo and the game industry, one that's rarely seen in any industry, much less a tech-based one. Typically early leading companies in a field will either continue to be significant leaders, or they will be acquired, or go out of business. Nintendo's done none of those things – it's just continued to do well, some years better than others, but it's been steady. The industry has grown tremendously around it.

Here's the change that many long-time gamers and even industry executives haven't really internalized: Whatever Nintendo does just doesn't affect the whole industry any more. It's only 10 percent of the total business, and there are billion-dollar companies making games that aren't even sold in the same geographic areas as Nintendo, much less in the same market segments. Other companies, for the most part, don't base their investment decisions or strategies around Nintendo's actions. Sure, some publishers (a very small number) do at least consider creating products for Nintendo hardware, but even for most of them that's not anywhere near the majority of their business. Total Nintendo-based revenue for Capcom or Ubisoft or Konami does not come anywhere near a majority of the company's income.

Yet we still worry about Nintendo, and that the sales of its hardware aren't going to be leading the pack. We shouldn't worry about the competitive picture, because Nintendo doesn't. The company is rightly concerned with making a profit, and doing that by making good games. Nintendo is back to profitability, and while it may not be the immense profitability of the Wii in its heyday, that's still a good thing. Will the Wii U become a solid seller? Maybe, maybe not... but Nintendo has had consoles before that never sold particularly well (*cough* GameCube *cough*). If the Wii U doesn't generate the sales Nintendo expects in a couple of years, the company will create some new hardware to replace it.

In the meantime, Nintendo is profitable and has $10 billion in cash to see it through any possible transitions it needs to make. Do mobile games affect its business? Yes, indeed. Does that mean Nintendo can't sell handheld gaming devices any more? The 3DS line has sold tens of millions of units so far. Those are respectable enough numbers that many third-party publishers are building games for the platform.

Does the Wii U compare in graphics or CPU horsepower to the PS4 or the Xbox One? Not hardly, but that doesn't matter. Nintendo's really working on a very different level than Sony and Microsoft, selling the experiences to kids (and those gamers who remember the fun they had with Nintendo as kids). Sony and Microsoft are really targeting older gamers, and pushing the wide variety of media capabilities of their platforms. Deeply immersive experiences await Xbox One and PS4 players, as well as some really cool technology and useful features for all sorts of lifestyles.

Meanwhile, Nintendo just keeps focusing on games that are fun, which goes all the way back to its founding as a playing card company. Nintendo's always made things for people to have fun with, including toys and games and playing cards. That's the company legacy, and even though that mostly revolves around technology these days the goal is still to help people have fun. We would all do well to remember that when we think about Nintendo and its place in the game industry.

Nintendo's got a strong lineup of fun games coming for the Wii U, with Super Mario 3D World about to come out, and Donkey Kong Country: Tropical Freeze and Mario Kart 8 and Super Smash Bros. coming out next year. The 3DS has an even more jampacked release schedule of titles, but we're all too busy playing Pokemon X and Y right now to notice these: The Legend of Zelda: A Link Between Worlds, Mario Party: Island Tour, Monster Hunter 4, and Super Smash Bros., among many others. 

When Nintendo stops making games that are fun, that's the time to get worried about the company. That time is not now, nor is it any time soon.





 


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