Shulou(Shulou.com)11/24 Report--

When Nintendo Switch sales in Japan plunged 26% in the second quarter from a year earlier, a Nintendo spokesman said the problem was temporary and that the decline in Nintendo Switch sales was "only affected by a shortage of semiconductor components."

Now that the new quarterly results are released, operating profit growth is nearly stagnant and Nintendo Switch sales continue to fall, Nintendo seems to be suffering from far more serious problems than expected.

In terms of financial indicators, Nintendo's net profit has been declining since the last fiscal year, and has repeatedly adjusted its Switch shipping forecasts. In addition, over-reliance on the production processes of third-party companies, lack of innovative software and hardware products have been questioned by all parties, and subcontractors in North America have been involved in sexual harassment scandals in the gaming industry.

The competition with Sony is at a disadvantage, and all kinds of challenges come one after another. how can Nintendo face this belated "midlife crisis"?

(photo from UNsplash) Nintendo's troubles: Switch sales decline, profit growth close to zero on November 8, Beijing time, Nintendo released Q1 and Q2 results for fiscal year 2023 (statistical period April 1 to September 30, 2022), the data are not optimistic. In the last trading day, its share price plummeted, closing down more than 4%, indicating that the capital markets were not satisfied with the performance of the report.

First of all, increasing income without increasing profits is the first problem facing Nintendo. Nintendo's total revenue during the reporting period was 656.9 billion yen, up 5.2% from a year earlier, and operating profit during the period was 220.3 billion yen, up 0.2% from a year earlier, below market expectations, according to the results. Operating profit margin fell 1.7 percentage points to 33.5% from 35.2% in the same period last year. Fortunately, current account profit recorded a year-on-year increase of 36.5% to 322.4 billion yen.

Looking back at the performance of the same period in the past two fiscal years, Nintendo has had its ups and downs, with revenue and profits on a roller coaster. In the same period in fiscal 2021, Nintendo's data peaked: revenue rose 37% year-on-year, and net profit soared 98% year-on-year. But in fiscal 2022, Nintendo Q1-Q2 sales fell 18.9 per cent year-on-year to 624.3 billion yen, while net profit fell 20.6 per cent to 236.3 billion yen.

Although the performance for the same period in fiscal year 2023 has improved somewhat from the previous year, it is still dwarfed by the peak. In just two years, Nintendo has fallen from heaven to earth.

Second, Switch sales fell short of expectations and the supply chain crisis is still simmering. Hardware and software are equally important in Nintendo's revenue structure. Nintendo Switch sold a total of 114 million units by the end of September, making it Nintendo's most important source of revenue, according to the earnings report.

But in the past two quarters, Switch's sales performance has declined significantly, which has become the main reason for the decline in Nintendo's revenue and profit growth.

Nintendo sold 6.68 million Switch consoles on Q1-Q2, down 19.2% from a year earlier, according to data. Judging from the growth curve, Nintendo's hardware business changed from boom to bust in fiscal year Q2 in 2022, and has fluctuated all the way down since then. Last year's Q2, Nintendo Switch sales fell 21.7% from a year earlier, and lowered its full-year shipping forecast.

Nintendo said it has stepped up procurement and expanded production lines in an effort to meet delivery targets, and expects Switch capacity to improve from the end of September. But the supply chain crisis may not be resolved by 01:30, the production model that relies entirely on third-party factories has also weakened Nintendo's control of the production line, and the prospects for Switch delivery remain gloomy.

Currently, Foxconn is the main contract manufacturer of Nintendo Switch, and other core components also have stable suppliers, such as wireless handles, which have long been provided by HORI. In early 2020, Nintendo urgently placed additional orders with Foxconn and even made a better offer. The Foxconn plant in Yantai, Shandong province, has also received temporary orders from Nintendo several times in the past few years and launched a special bonus incentive program to recruit employees.

Unfortunately, affected by the epidemic and the shortage of semiconductor components, some contract factories and suppliers are also busy taking care of themselves.

Compared with the continuous decline in Switch hardware, game sales are in line with expectations. Data show that as of the end of September this year, the cumulative sales of games on the Switch platform was 918 million. Of this total, 9541 million copies were sold during the reporting period, an increase of 1.6 per cent over the same period last year.

However, from the perspective of sales of individual games, the old IP still supports more than half of the country, and it will take time for new games to grow. Among them, "Malio go-kart 8 deluxe version", "gather together!" Animal Forest Friends and Nintendo Star Battle Special Edition ranked in the top three with sales of 4841, 4017 and 2953 respectively, while Jet Warrior 3, newly launched in September, sold only 7.5 million copies.

Finally, let's take a look at the revenue contribution of each region. Japan and north America remain Nintendo's core markets, accounting for 24.1% and 43.5% of revenue during the reporting period, respectively, according to the results. Although still affected by the conflict between Russia and Ukraine, the performance of the European region has also picked up, with revenue accounting for 23%, while other regions account for less than 10%.

In the past, the two strongholds of Japan and North America were profitable enough that Nintendo was not in too much of a hurry to develop other markets.

But what now? Switch is struggling with the supply chain, game innovation is declining, and the number of users in North America and Japan is nearing the ceiling, so Nintendo must plan ahead in time.

However, the potential Chinese market is a tough bone for Nintendo.

The national version of Switch has an ill-fated fate, why can't Nintendo play the Chinese market? Pan-Pacific has been the growth engine of the global gaming market, accounting for nearly 50 per cent of global revenue in the past two years, well ahead of 26 per cent in North America, according to the Newzoo report. In each segment, China and the United States are the world's largest game markets, with revenues of $44 billion and $41.3 billion respectively last year.

At last year's annual meeting of the China Game Industry, Zhang Yijun, vice chairman of the China Audio and Digital Association, said that the size of China's console game market grew by 22.3% against the market last year, which is a rare bright spot against the background of the shrinking global market. In addition, in terms of payment rates, the willingness of Chinese gamers to pay is still low, with individual players spending only $69, far less than $217 in the United States and $291 in Japan, and there is much room for improvement.

For all game manufacturers, China and the United States are places that must be fought for-but Nintendo is a serious subject, and Switch is mediocre in the Chinese market, more like a carnival in the circle of a small number of players.

Reviewing the history of Switch's entry into China, Nintendo does not ignore the Chinese market and has courted Tencent, a powerful partner. The value Research Institute believes that the reason why it is unable to replicate the success in the North American and Japanese markets is related to many factors, such as policy environment, consumption habits, timing of entry, and so on.

First of all, the launch time of the national version of Nintendo Switch is not early, the overseas popularity has passed the highest point, and the Chinese market has long been surrounded by heroes.

The national version of the Nintendo Switch represented by Tencent went on sale in December 2019-two years after the hot product went on sale overseas and a full four years after the launch of Sony's PS4.

Even the iterative version of Sony PS4 Pro went on sale two years earlier than Switch, and Sony has long accumulated a certain user base and brand awareness in the Chinese market. According to Niko Partners, sales of Sony's PS4 national version exceeded 1.5 million before Nintendo Nintendo Switch went on sale.

As a partner of Nintendo, Tencent has made many efforts to boost the popularity of Switch: the online press conference and the offline activities of ChinaJoy in August of that year successfully led to the enthusiasm of gamers and led to a sharp rise in the popularity of Switch in China, which many media and industry insiders even regarded as a major turning point in China's console game market.

Thanks to the efforts of all parties, Switch and the Chinese market did have a very unforgettable honeymoon.

On December 10, 2019, the sales of major platforms exceeded 10,000 seconds; in March of the following year, the editions of "Odyssey" and "Malio go-kart 8" were ransacked by players. The former once set a record for Nintendo games; in September 2020, the popular game "Fitness Ring Adventure" was launched as a national version, due to stepping on the trend of national fitness, with the help of WeChat Mini Programs, it became popular overnight, and even went out of the circle on Weibo hot search …...

In its 2020 earnings report, Nintendo wrote several times that it was "very satisfied with the performance of the Chinese market." But at that time, Nintendo Switch accounted for only 5.7% of sales in China-Nintendo's confidence in the Chinese market was more of an expectation for the future.

Nintendo has said many times that it will spend more time with Tencent to expand market share, but Switch has been in China for nearly three years, and the enthusiasm of Chinese players is gradually cooling, but the controversy is growing.

This brings us to the second headache for Switch: the policy is not accustomed to soil and water.

As we all know, hardware and games are equally important to Nintendo, and if the supply of games on the Switch platform cannot meet the demand, the Switch handset will not escape the fate of being abandoned by players in the corner. However, in the early days of Switch's entry into China, it happened that the Ministry of Industry and Information Technology tightened game copyright review-this time, even luck was not on Nintendo's side.

For some time after the launch of the national version, Switch only had the launch game "New Super Malio Brothers Deluxe Edition". It was not until March 2020 that the domestic game version number gradually returned to normal.

However, throughout the first half of 2020, only a few games such as Rope skipping Challenge and Rainbow fall developed by domestic teams gained more attention and sales. The next popular style will be the fitness ring adventure that launched in September mentioned above.

As mentioned above, the potential of the Chinese market has not yet been fully unleashed, and Nintendo, Sony and even Microsoft, the latest entrant, still have a chance to break through. However, in the face of the ever-changing market environment, the three giants of mainframe games should carefully deal with the challenges of the future.

The Future of console Games: is Software more important than hardware? By the end of last year, Sony had 46% of the global console gaming market, well ahead of Nintendo's 29% and Microsoft's 25%. But if you take a closer look, Sony, which is firmly in the throne, actually has its own troubles.

Sony sold 11.5 million PS5 units in fiscal year 2021 (as of the end of March 2022), below market expectations and PS4's 15 million units in the same period. If you focus on some of the major markets, the situation is even worse. According to Japanese media Famitsu, PS5 sales in the Japanese market fell 26% in the second quarter compared with the same period last year. It is worth mentioning that Switch sales in the domestic market also fell sharply in that quarter.

A year ago, I'm afraid no one would have thought that the PS5 had such a weak stamina, and its annual sales were more than 3 million units lower than the previous generation's PS4. You know, the initial launch of the PS5 broke many records in Sony's game console business: it sold 7.8 million units in half a year, nearly 200000 more than the PS4, and became the fastest console in Sonny's history, taking nearly a month less than the PS4.

The sales of trump cards of Sony and Nintendo are both lower than expected, which inevitably makes people worry about the future of the console game market.

In the view of the value Research Institute, apart from the objective factors of shortage of semiconductor components and declining production capacity, the peak of user scale is also a phenomenon that needs attention.

The PS platform and membership system, which Sony is proud of, have been slightly underpowered in recent quarters.

Sony has about 47 million PlayStation Plus subscribers in 2021, down 0.4 per cent from a year earlier, according to official figures. In 2019 and 2020, the figures recorded growth of 14 per cent and 15 per cent, respectively. In addition, PlayStation's monthly active users have declined for five consecutive quarters since the fourth quarter of 2020, underperforming even the Nintendo NS platform.

Nintendo certainly has its own problems: the proportion of monthly active users paid by users has plummeted since 2019, and the growth rate of software shipments fell to 2% year-on-year last year, close to zero growth.

In the field of mainframe games, the speed of hardware upgrading is slow, and it is not realistic to rely on hardware sales to maintain long-term growth. On the contrary, spending on console game software reached an all-time high over the past year, a direct driver of the industry, according to Ampere. If several console game manufacturers want to break through the current growth bottleneck, the software side, including games and service systems, is the focus of reform.

Nintendo's focus has always been on game development. In fiscal year 2020, Nintendo's R & D spending reached an all-time high of $880 million, but the R & D spending rate was only 5.3 per cent. Fortunately, this figure has continued to grow in the last two fiscal years. In the last fiscal year, Nintendo's R & D investment increased by 10.7% compared with the same period last year, and overseas R & D teams also continued to increase.

In addition to spending the same amount of money on developing games, Sony and Microsoft are also exploring innovations in service systems. Microsoft's Xbox Game Pass subscription service, for example, achieved good results last year, with more than 25 million subscribers as of the first quarter of this year.

The biggest selling point of Xbox Game Pass is its cheapness. At the beginning of the launch, priced at only $14.99 a month, you can enjoy a large number of game libraries, which is a great bargain for players. The rise of digital rights in games contrasts with the decline of boxed games that Nintendo is good at, indicating that this generation of console gamers pay more attention to performance-to-price ratio, which also reflects the combined influence of a series of factors, such as the economic downturn and the rising awareness of paid subscriptions.

For Microsoft, low prices don't mean a loss: the ability to quickly absorb new users and increase user stickiness is enough to offset a small portion of the immediate loss of profits. Perhaps it can be said that console games are moving closer to streaming, cosying up to penny-pinching young people with packaged games, while preparing for future growth.

In September of this year, Universal Group announced that Super Nintendo World, a theme park jointly created with Nintendo, will soon be located at Universal Studios in Hollywood. Although the opening date has not yet been set, many media and fans can't wait to get a glimpse of the real face and pick out the main facilities and highlights of the new theme park.

It is reported that Nintendo designer Shigeru Miyamoto, known as the "father of Super Mario", was personally involved in the planning of the park, including the Mushroom Kingdom and Princess Brigitte Castle. In addition, the main buildings of the park are restored in proportion to the game scene, which is believed to arouse the feelings of many old players to the classic IP of Super Mario.

In the face of challenges in the main business, Nintendo is trying to find a way out of the predicament. Working with Universal Studios to develop a theme park is a new attempt to tap the value of IP, a Nintendo game.

As a century-old store, Nintendo has experienced two world wars and nearly ten economic crises, and there is no doubt about its ability to withstand stress. In the new era, Nintendo and the console gaming industry as a whole are facing a whole new test, and the situation is not optimistic, and the effect of these new attempts is unknown-but it is always worth affirming that you dare to make changes and get out of your comfort zone.

This article is from the official account of Wechat: Institute of value (ID:jiazhiyanjiusuo), author: Hernanderz

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