Nintendo’s Competitive Position in the 8th and 9th Console Generations — Part 2

8 min readJun 9, 2021

In Part 1 of my analysis of Nintendo, I looked at its alignment of values and capabilities, and its general competitive position. In Part 2, I’ll explore more deeply the competitive landscape Nintendo operates in, its internationalization and diversification strategies, and how it delivers value to its various stakeholders.

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

Although the company has been and continues to be innovative through a blue ocean strategy of differentiation, it has also shown itself to be slow to adapt to new business models and trends.

Competitive Landscape

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 2027,¹ 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.

The home console market is relatively mature overall, without any new serious (or successful) hardware entrants since Microsoft in 2001, with much shakeout and consolidation of third-party developers who supply the consoles with the majority of their titles. However new avenues for both growth and disruption are coming from a variety of angles — the continuing boom of gaming as a mainstream activity, robust mobile games growth, and new streaming and Netflix-style GaaS (Games as a Service)/bundling services that cater to casual gamers by offering a plethora of titles with little to no hardware investment up-front.

Based on the potential impact of the technologies and business models in the emergent phase of the competitive life cycle, and clear consumer preference for digital distribution over physical media,² we may now be starting a new S-curve in the game industry, that of the “post-console” era. Video streaming technology, high speed internet and cloud/remote computing are essentially going to be doing away with dedicated game console hardware.

This plays nicely into main rival Sony’s hand, as it can build game streaming hardware into its TVs, and (back-end streaming infrastructure costs aside) at little cost compared to manufacturing dedicated consoles (which are historically sold at a loss³).

For Nintendo, this creates a challenge. A key differentiating factor for the company is the innovation it puts into its hardware, a reflection of its values and toy company DNA that are woven into the company. Nintendo then utilizes this custom hardware to make games that are often difficult or impossible to reproduce on competing consoles, drawing users to its hardware. Will potential streaming technology limitations hurt its ability to innovate with hardware?

How Nintendo will handle the possibility of its competitors leaving dedicated console hardware behind is an interesting question. The company isn’t standing still however, as its R&D costs continue to rise as it spends on “a variety of studies, which include investigating ways to enhance our digital business, and future services that will help maintain long-term relationships with our consumers.”⁴ To get up to speed, Nintendo may need a back-end partner to execute on GaaS/Cloud — just as it partnered with DeNA for entering the mobile game space.

Diversification

Nintendo is not a diversified company, and perhaps until relatively recently it did not need to be. However, as the competitive life cycle above indicates, emerging technologies and business models that do not play to Nintendo’s strengths or experience are rising up. Greater diversification may be a potential mitigation strategy.

Nintendo currently segments its revenue into three categories:

Sources: Nintendo FY 21 Financial Results

As is made clear by the above figures, almost all of Nintendo’s revenue comes from its core business of console hardware and software, with the remainder split between mobile game revenue, royalties from the use of its IP and playing cards.

And while its R&D costs continue to rise, the company has indicated its intention to continue focusing on its core business, with CEO Shuntaro Furukawa recently saying “we are aiming to grow by continuing our integrated hardware-software entertainment business.”⁴

In any case, Nintendo’s competitive advantage in mobile games is somewhat muted because it must balance efforts there with the risk of cannibalizing the core home console business. As stated in Part 1 of this analysis, its values do not necessarily mesh well with microtransaction and gacha-based business models.

Apart from its slow, careful entry into mobile gaming, a more recent diversification attempt is Nintendo partnering with Lego to bring connected Super Mario playsets to market. Lego is a strong prestige brand itself, with a history of working with top notch IP (Star Wars, Harry Potter). When combined with the huge forecasted growth for connected toys,⁵ this should bode well. Additionally, there is strong alignment between the two companies’ values. Nintendo has never been nearly as heavily merchandised as IP such as the Marvel Universe or Star Wars, but there is a huge opportunity here. In 2015, it was estimated that a Star Wars movie year was worth $5–7B in merchandising revenue for Disney.⁶

The other news is Nintendo-themed areas opening within Universal Studios theme parks worldwide, starting in Osaka, Japan. Demand for travel and attractions post-pandemic is expected to be strong, but there is uncertainty around future lockdowns and new COVID variants.

Lego Super Mario Playset and Super Nintendo World

Vertical integration in the supply chain from a diversification standpoint does not fit in with Nintendo’s scope of business at this time.

Internationalization

Nintendo has had a strong international focus since the opening of Nintendo of America in 1980, and this is reflected in the proportion of its revenue that comes from outside Japan.

Sources: Nintendo annual reports

Although Nintendo’s overseas revenue has grown steadily YoY since the introduction of the Switch in 2017, its international business as a proportion of total revenue has remained flat. Could Nintendo grow their international business even more? There are a few barriers to doing so:

Remaining markets for home console sales expansion such as the BRIC countries have historically been challenging for a number of reasons — from rampant piracy to the grey market to import taxes and cultural/political sensitivities. Mobile games that can run on cheap Android phones could bolster Nintendo’s internationalization.
However Nintendo does not have a strong presence on smartphone right now (mobile games accounted for only $520M or 3.2% of total revenue in FY 2021⁷)

To its credit, Nintendo has made a renewed effort in China, partnering with technology conglomerate Tencent to market and sell the Switch in the country⁸. Given forecasts of China’s middle class hitting 1.2B people by 2027⁹, this makes sense. However Nintendo will need to be patient, working within whatever rules (and there are many) that the government puts in place, while it seeks to create a deeper interest and loyalty in consoles and foreign software. The government’s ban on consoles from 2000 to 2015 (out of fear of game addiction with youth) in tandem with the rise of high speed internet and smartphones drove gamers to domestic titles on PC and mobile, something Nintendo will need to reverse to an extent.

Stakeholder Analysis

Nintendo summarizes its values as such:

“Our goal is to deliver surprises and, ultimately, smiles to our many Nintendo stakeholders, including our business partners, customers, and employees.. That means advancing responsible business practices, supporting human rights, and ensuring we continue to reach ever-higher standards as we grow and learn.”¹⁰

With the above in mind, the company has developed a competitive position that aligns its values, capabilities and the opportunities it pursues in a clear, cohesive manner. The stakeholder map below breaks down key stakeholders and Nintendo’s relationship and value delivery to each of them.

Conclusion

Although it is in a strong position currently, new consoles from competitors and the potential of a post-console world are major threats. Increasing R&D spend on digital and services is encouraging, but going forward Nintendo needs to do a better job balancing innovation and differentiation with where buyer demand and technology is headed (and the speed at which it is moving). It could also be more aggressive in utilizing its unique beloved IP to grow hardware and software sales through brand awareness, while bringing in more licensing revenue. Entering the theme park world is a major step in that direction, although only time will tell how successful it will be.

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

Nintendo’s Competitive Position in the 8th and 9th Console Generations — Part 2

Written by Kevin Oke

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