Nintendo’s Competitive Position in the 8th and 9th Console Generation — Part 1
My career in tech started in the video game industry, and with Nintendo being a company that I’ve always admired, I thought it would be fun to do an analysis of its current competitive position.
Nintendo Co., Ltd. is a Japanese consumer electronics and video game company headquartered in Kyoto. The company was founded in 1889, as a playing card company. From those origins it moved into multiple lines of business including toys. It now operates with a focus on the global video game industry, which in 2019 was estimated to be worth $151B USD.¹
The Industry
The global video game industry is currently in a transition phase between the 8th and 9th generations of home console hardware. The 8th generation comprises the Nintendo Switch, Sony PlayStation 4, and Microsoft Xbox One. Earlier in the generation Nintendo released the Wii U, however it failed and was replaced by the (much more successful) Switch. The 9th generation kicked off in November 2020, with the release of the PlayStation 5 and Microsoft Xbox Series S/X consoles.
From its current estimated value, the global video game industry is expected to grow at a CAGR of 12.9% until 2027,² reaching a value of $398B. However this figure includes computer and smartphone gaming, which compete with Nintendo’s core business of home console hardware and software.
Capabilities & Values
In order to make sense of Nintendo’s competitive position, we first need to understand its capabilities and values, and how they align.
Nintendo.com³ lists the following as “commitments:”
- Smiles for our customers (it is important to note that Nintendo defines this as “to provide all of our consumers with safe and enjoyable gaming experiences”)
- Smiles for our supply chain
- Smiles for our employees
While Nintendo.co.uk⁴ has the following “core values:”
- Uniqueness — Our goal is to constantly redefine entertainment — offering our customers the typical Nintendo experiences with unique and surprising products.
- Flexibility — The entertainment market is ever-changing, and Nintendo aims to deliver innovative ways to create fun experiences for everyone.
- Sincerity — We aim to be humble, while doing the best job we can. We aim to learn from our experiences in order to improve and evolve.
From a customer-facing standpoint, Nintendo’s values of uniqueness and innovation strongly align with its capabilities and output. On the hardware side, the company has constantly surprised, using its toy company DNA to pioneer many innovations in the game console industry, including the directional pad, touch controls, motion controls, dual-screen displays and stereoscopic 3D without the need for glasses. While Sony and Microsoft fight to release consoles with the best graphics and most cutting-edge hardware specs, Nintendo has always focused on fun and uniqueness of experience, at the expense of graphics, processor speed etc.
On the software side Nintendo has definitely focused on family-friendly games (“provide all of our consumers with safe and enjoyable gaming experiences”), with appropriately understated “humble” marketing to support. This focus on the family leverages the uniqueness of Nintendo’s library of homegrown exclusive IP such as Mario and The Legend of Zelda, well-established brands that are over 30 years old. The company is also known to delay its games for months or even years if needed, in order to ensure a high level of quality and fun is achieved, in other words the “typical Nintendo experience” that the core values describe.
However this perhaps stubborn commitment to both perfection and doing things the “Nintendo way” has also caused the company to lag behind in major trends such as online multiplayer, digital distribution and subscription and micro-transaction business models.
Competitive Position
At this point it’s important to understand the economics of game consoles. Generally speaking, they are sold at a loss. For example, when Sony released the PlayStation 3 in 2006, it was losing roughly $240 per console sold at $599.⁵ Although hardware revisions through the learning curve and economies of scale likely improve margins over the years, ultimately the real profits come from selling software. As such, this analysis will largely focus on software.
From this analysis of Nintendo’s values and capabilities alignment, a few takeaways regarding Nintendo’s software strategy emerge:
- A focus on family-friendly games
- A content strategy based on original IP
By translating these takeaways into data points and plotting them on a map with its competitors, we get a very clear idea of where Nintendo sits with regards to that competition:
* The ESRB (Entertainment Software Rating Board) rating scale was taken and converted into numerical values between 1–5. The ESRB rates games based on their levels of mature and/or violent content
† “Core-franchises” are considered to be long-running IP which are owned by, exclusive to and synonymous with that console manufacturer, and whose existence can be generally considered part of the console purchasing decision. Examples: Mario and Nintendo, Uncharted and Sony, Halo and Microsoft
‡ 8th generation consoles for the purposes of this analysis are considered to be the Switch, Playstation 4 and Xbox One
§ Sources: Nintendo, Sony, Microsoft
As we can see, Nintendo has been successful in both differentiating itself from its competition, and executing on its alignment of values and capabilities:
- The company has released substantially more core-franchise games than its competitors so far in the 8th console generation, fully leveraging its back catalogue of popular IP
- On average, its core-franchise games are the most family-friendly
- Its core-franchises are by far the most popular games on the Switch, indicating high quality, fun experiences
We can also infer that Nintendo is much less reliant on outside developers for “killer app” software, and that it seeks to control the user experience more than competitors. We can validate this hypothesis by:
- Compared to competitors, little M&A/partnership activity allowing outside developers to work with its IP
- Its expressed commitments to innovation, fun and the “typical Nintendo experience” listed above — these are much easier to control with an emphasis on in-house development to lead software sales
This desire for control and quality is nothing new. We can go back to the company’s rigid “seal of quality” program for outside developers in the 80’s and 90’s, which effectively gave Nintendo the final say on a game’s contents, and limited how many games per year developers could release on Nintendo systems.
* Sources: Nintendo, Sony, Microsoft
Nintendo has a strong install base (34% market share) that it can provide games for, while its approach to relying on exclusive family-friendly IP like Mario, Animal Crossing and Pokemon has provided a differentiated experience that consumers clearly value. In fact, for fiscal year 2021 the company had record operating profits, and its second highest revenue ever.⁶
* Microsoft’s 2021 Q4 is still ongoing, data only available up to the end of Q3
Sources: Nintendo, Sony, Microsoft
The results of this latest fiscal year can be attributed to the pandemic-induced interest in gaming (which also bolstered the competition), but also a very strong line up of new exclusive Nintendo-developed titles. However as this chart and the five forces analysis below show, console games are a highly competitive industry.
Current Trends and the 9th Console Generation
The above table shows some of the major trends and potential revenue streams in gaming, and who is playing where. Nintendo’s positioning is explained in more detail below.
With the recent release of the 9th generation of consoles, Nintendo’s long-rumoured Switch Pro (upgraded hardware reportedly with 4K output and faster clock speed⁸) will now face stiffer competition when/if it is released. And as better technical specs are unlikely to make casual gamers and families spring for an upgrade, Nintendo will need a strong lineup of exclusive software to appeal to Sony and Microsoft’s teen-young adult male demographic — mature titles and perhaps the new Zelda game currently in development.
Since the release of the Wii in 2006, Nintendo has increased its focus on hardware differentiation/innovation, and moved away from trying to compete on having the best graphics and most muscular specifications. With the launch of the Switch midway through the 8th generation as a replacement for the failed Wii U, and its decision to release an upgrade of the Switch rather than a new console for the start of the 9th generation, Nintendo is now “out of step” with the traditional cadence of new console releases.
This going “out of step” may be telegraphing a new future strategy with console hardware, one that is even less reliant on competing directly with Sony and Microsoft. In any case, what will the true successor to the Switch look like, and when will it be released? The last time Nintendo had a smash hit console with the Wii, it followed up with the Wii U, a disaster that Nintendo had to correct mid-generation with the Switch. Nintendo can’t afford another stumble like that.
Note: Microsoft does not segment out its digital download and services revenues
* Includes subscriptions, software (both downloadable versions of packaged software, and download-only) and add-on content
Sources: Sony and Nintendo financial reports
Nintendo’s cautious approach to online has put them behind the curve with digital distribution, new related business models and multiplayer gaming. Meanwhile an amazing 91% of 2020’s overall game industry revenue came from digital.⁹ Although it has made recent headway with its Nintendo Online subscription service, it needs to be less risk averse and move more quickly going forward, to ensure it can access adequate distribution channels (especially given dropping sales in brick and mortar shopping) and new revenue streams.
* The 2021 calendar year smartphone game market value is forecasted
Sources: Nintendo financial reports, App Annie yearly reports
Although Nintendo’s smartphone business unit revenue has grown over 40% since its creation in 2018, it is still very small ($520M revenue in 2021) and has basically remained flat as a proportion of its total business. With Nintendo now set to see increased competition here,¹⁰ can it grow its mobile business without cannibalizing console hardware sales, all while sticking to its values? The company has been critical in the past of popular free-to-play¹¹ and gacha¹² mobile game business models as not being in line with its values.
Conclusion
Given industry growth estimates and its recent success, the future looks solid for Nintendo with its “blue ocean” differentiation strategy, but it is not without concerns. Industry forecasts are relying on continued growth in mobile gaming, digital distribution and evolving online technologies and business models such as streaming, subscriptions and bundling. Nintendo is currently not as well positioned to access these opportunities as competitors are.
On the console side, there are questions about how the Switch Pro will compete against the new 9th generation consoles, and Nintendo’s console hardware strategy in general going forward.
(Part 2 of my analysis can be found here.)
I help businesses get unstuck, innovate and grow. As a serial technology entrepreneur and consultant in product, strategy, innovation, sales & marketing, I have over 15 years’ experience across a variety of industries. Reach out to me if I can help.
References
1. https://www.grandviewresearch.com/industry-analysis/video-game-market
2. https://www.grandviewresearch.com/industry-analysis/video-game-market
3. https://www.nintendo.com/about/
4.https://www.nintendo.co.uk/Corporate/Career/About-Nintendo/
5. https://fortune.com/2006/11/16/sonys-loss-is-at-least-
6. https://www.vg247.com/2021/05/06/switch-84-million-sales-record-nintendo-profits/
7. https://www.bloomberg.com/news/articles/2021-05-06/nintendo-profiter&d&cmpId=google
8. https://www.tomsguide.com/round-up/nintendo-switch-pro-release-date
9. https://gamerant.com/2020-game-industry-revenue-digital/
10. https://www.eurogamer.net/articles/2021-04-10-sony-plots
11. https://www.gamesindustry.biz/articles/2015-03-23-iwata-takes-issue-with-insincerity
12. https://www.japantimes.co.jp/corporate-business/ng-shaky-ground-new-mobile-game
