Nintendo has released its earnings report for fiscal year 2016. This is the 12-month period ending March 31st 2016.
Nintendo reported FY2016 revenue of ¥489 Billion, down 3% YoY. The decrease was primarily due to the sharp decline in Wii U hardware and software unit sales. This decline was large enough to offset the increase seen from Nintendo 3DS, the 1 month sales of Nintendo Switch and the growth of smart device games. Nintendo reported an operating profit of ¥29.3 Billion, down 10.7% YoY. Net Profit was ¥102.5 Billion, up 521% YoY. The considerable increase in Net Profit was driven by the ¥64 billion sale of the Seattle Mariners and an additional ¥20 Billion in profit from The Pokémon Company due to the success of Pokémon Go.
Nintendo Switch is off to a strong start in 2017. Nintendo originally said they would ship 2 million Switch’s to retail for the launch period. This number always seemed low to me and it became fairly evident very soon that they had shipped more. Nintendo shipped 2.74 million units during the launch period and all retail checks indicate that the device completely sold out across global retailers. Nintendo Switch continues to see higher demand than supply through April and I expect this to continue through to the end of the year. What’s clear from the outset is that this is not a repeat of the Wii U launch. Nintendo struggled to sell through its initial launch quarter allocation for Wii U and the company was forced to slash production almost immediately. With Nintendo Switch the console has sold through its launch month allocation and Nintendo have had to increase production in order to meet demand.
Nintendo skewed shipments of Nintendo Switch hardware and software to satisfy the American market first. Nintendo shipped 1.2 million Switch’s to America whilst only 600,000 units and 940,000 units were shipped to Japan and Europe respectively. It’s good to see Nintendo prioritising the America market, where they are strongest with home consoles, but they will need to ramp up in other territories quickly to capitalise on upcoming game launches such as Mario Kart 8 Deluxe. Software shipments are a similar story. Nintendo shipped 2.86 million units of software to America (2.38 games per hardware unit) vs 0.89 million in Japan (1.48 games per hardware unit) and 1.71m in Europe (1.82 games per hardware unit).
The Legend of Zelda: Breath of the Wild had 2.76 million Packaged Shipments + Digital Sales during the month, 20,000 units higher than the number of Nintendo Switch hardware units shipped. The Legend of Zelda is a system seller for Nintendo Switch right now and with an unheard of 101% attach rate is clearly the reason why everyone has bought the console in its first month. The success of the game is great news for Nintendo who have been developing the game since before the Wii U came out, but it does show how the console launch line-up failed to attract users outside of the core Zelda / Nintendo fan base. NPD, GfK and Famitsu rankings have shown that third party software has struggled on the system with Zelda at launch.
The Nintendo Switch shows promise, it’s a powerful device that is priced well and has the advantage of transforming from a home console to portable at any time. To me it seems that Switch will convert the loyal Nintendo audience first in 2017 before expanding to a wider audience. Nintendo is trying to appeal to both the core console gamer on PS4 and casual / semi core gamer on mobile with Switch but right now the software and price is not quite right to do that. Instead, Nintendo is focused on selling in to the Wii U, 3DS and lapsed Nintendo fan base with its hybrid console this year. Nintendo has a strong first party game for nearly every month this year starting with Zelda in March, Mario Kart 8 Deluxe in April, ARMS in June, Splatoon 2 in July followed by Fire Emblem Warriors, Xenoblade 2 and Super Mario Odyssey in the fall. Each of these titles are strong system sellers that appeal to the core Nintendo crowd. Nintendo has also confirmed that they have other games that will launch this year but have not yet been showcased.
The late success of the New Nintendo 3DS due to Pokemon and the bump Wii U received from games like Splatoon and Mario Maker shows that there is still a sizeable core Nintendo base out there that is willing to purchase Nintendo hardware to play Nintendo software, provided the hardware is affordable and not called Wii U 2. The appeal of Switch as a hybrid allows Nintendo to target both the Wii U and 3DS install base and convert both with strong Nintendo IP that performed well on those systems. This may be enough for Nintendo to keep the Switch niche and profitable, due to the high attach rate the system will have from the core user base, but it won’t be enough to appeal to the wider console audience on PS4 and the casual audience on mobile to allow company to return to “Nintendo like profits”. One big issue that Nintendo faces is core third party support on the system. AAA third parties are wary of the audience mismatch on Switch and that’s why most of the games announced so far are either handheld or family games that performed well on 3DS/Wii U.
AAA service games like Destiny 2, Star Wars Battlefront II, Call of Duty 2017, Red Dead Redemption 2 and Ghost Recon are nowhere to be found on Switch. Whilst technical reasons do explain some of it, there is still plenty of reluctance and caution from third party developers when it comes to releasing these titles on Switch. There is a reason why EA is only releasing FIFA, Take Two is only releasing NBA 2K and Ubisoft is only releasing Steep. These publishers are using these titles to test the waters and see if the audience mismatch from the Wii U and 3DS era is still there on Nintendo systems. If these games underperform then AAA publishers will treat the system like the Wii U and 3DS. In other words, they’ll only bring over family games that succeeded on the Wii U and handheld franchises that succeeded on the 3DS. All the AAA service based games will remain on PS4 and XB1. This could be damaging for the wider adoption of Nintendo Switch and limit the appeal of the console to the PS4/XB1 audience in year 3 and 4.
This brings me on to my next point about the family / casual games segment. Sony and Microsoft have focused more and more on the core 24-45 year old console gamer this gen with little thought for the casual crowd. This may be because Sony and Microsoft believe that crowd is long lost to mobile, but I believe that with the right investment and products there could be room for a family/casual audience on Switch. Nintendo already has a number of titles such as Just Dance, Skylanders and Lego on Switch. However, these franchises haven’t innovated much since they came out and the audience for them has been shrinking since the Wii and DS days.
One thing that I was interested in was the Monopoly showcase during the Nintendo Direct. Not because I think Monopoly is going to do well, but because it took advantage of Switch’s USP in a great way. Nintendo and third parties need to build more games that act and play differently depending on the set up of Switch (TV, Portable, Table Top). There is a lot of untapped potential there imo. It’s an area that AAA publishers can cater to and even indie/mobile developers can take advantage of that USP and the joycons. I believe this is one way that Nintendo Switch can increase its appeal to the family / casual segment and differentiate itself from mobile gaming. But of course, the big question is whether those currently satisfied with mobile gaming are even willing to part with $$$ for a ‘better’ gaming experience when their mobile gaming experience is ‘good enough’.
EDIT: Dragonball Xenoverse 2 is an example of one of these games. More like that is what I want to see.
Nintendo is forecasting 10 million units of hardware to be shipped during FY2017/18 for a cumulative of 12.74 million units of March 31st 2018. This is an extremely achievable goal in my opinion and gels with the 10 million unit sales I forecasted for the end of calendar year 2017. I am extremely optimistic that the strong first party lineup (Including unannounced games) for year 1 will drive sales this year. The Wii U, 3DS and lapsed Nintendo fan base will migrate extremely fast to Switch in 2017 but it is unknown whether Nintendo will be able to maintain the momentum through 2018 and beyond right now.
Wii U / 3DS
Nintendo Wii U was discontinued at the end of 2016. Nintendo shipped no new stock of the console during the last quarter which means that only 760,000 units were shipped through the year. The lifetime hardware total for Wii U is 13.56 million and no further units will be sold. Wii U software sales also saw a sharp drop as new releases dried up. Wii U software sales were 14.8 million for the year, down 46% YoY. That being said, the Wii U version of Breath of the Wild did sell over 1 million units during March 2017 which is fairly impressive and just goes to show Wii U owners are extremely core Nintendo fans. Nintendo first party games on Wii U sold extremely well as many bought the system just to play these high-quality Nintendo developed games. Nintendo published software on Wii U accounted for more than 70% of all sales on the system with many games such as Mario Kart 8 having a more than 50% attach rate to the system. I believe that the early adopter crowd on Switch is extremely similar to crowd on Wii U and this will lead to high attach rates of Nintendo software on Switch during the first couple of years
The Nintendo 3DS has had an interesting story. This time last year we were all predicting that sales would be down and that FY2016 would be the final year that 3DS had any sort of major presence. That prediction was correct until Pokemon Go came out and boosted worldwide awareness of the Pokemon brand to insane levels. Pokemon Go directly led to an increase in merchandise, hardware and software sales during the year. Nintendo 3DS hardware sales increased globally, except for Japan where the device had already reached saturation, and software sales were also up due to the record breaking launch of Pokemon Sun and Moon. Nintendo shipped 7.27 million 3DS hardware units in FY2016, up 7% YoY. Software sales hit 55 million units, up 14% YoY. Pokemon Sun and Moon accounted for more than 28% of all 3DS software sold in FY2016.
The 3DS has some momentum going in to FY2017 and Nintendo are trying to capitalise on this momentum with the announcement of new games from both first party and third party developers for the 2017 calendar year. That being said, the majority of these games are quick low budget titles that are either designed for the eShop or for a small niche audience. 3DS hardware sales have done well in a smartphone dominated world but it’s clear that these games for 2017 won’t boost hardware sales like Pokemon Go did last year. Nintendo is forecasting hardware sales of 6 million units for FY2017 and I’m fairly certain that they will miss this target as momentum swings towards Switch and the list of 3DS games for 2017 fails to attract a new audience. That being said, I do expect Nintendo to achieve its target for software sales on Switch due to the high install base of the console and big titles like Dragon Quest XI coming out in Japan. The Nintendo 3DS install base will exceed 70 million by the end of this year and that is large enough to support strong software sales and help offset the decline from Wii U.
Nintendo’s smart device and royalty segment has begun to deliver results in FY2016. Nintendo is fully aware that another Wii U situation would be a disaster for the company where 90%+ of its revenue is generated from the traditional console business. Targeting smartphone gamers is an attempt to-
1. Boost Nintendo IP appeal and reach a wider audience
2. Generate a new revenue stream
3. Drive synergy with console business.
Pokemon Go was proof of concept for Nintendo with how the game blew up overnight, reached 500 million downloads and generated over $1 billion in revenue. The game was hugely successful in 2016 and Nintendo did benefit from the success of the game, even if they did not develop or publish it. Nintendo recognises profit from the game through the 32% stake it has in The Pokemon Company. Nintendo recognised ¥12 billion in profit via the equity method during the July to September quarter. ¥4.7 billion In profit during the October to December quarter and ¥3.5 billion in profit during the January to March quarter. In total Nintendo recognised profit of ¥20.2 billion / $180 million from the success of Pokemon Go in FY2016.
Please note that Nintendo do not recognise any revenue from Pokemon Go in its smart device segment. Just profit. The games that are recognised in the smart device segment are Miitomo, Super Mario Run and Fire Emblem Heroes. Miitomo didn’t do much for smart device segment revenues in FY2015. Total sales for the year were ¥5.7 billion. The release of Super Mario Run and Fire Emblem Heroes in FY2016 increased annual revenues to ¥24.2 billion. Nintendo’s strength lies in its IP and its ability to create high quality games targeted at all gamers. That being said, the company still has a lot to learn about the mobile segment and was wise to partner with DeNA to develop its mobile strategy.
Super Mario Run was a good choice for the first Nintendo published game on smartphones. The game had the full backing of Apple and the world’s most recognisable IP, that being said, Nintendo made a number of mistakes when it came to distributing the game which led to it falling short of expectations. It’s almost as If they overruled DeNA on a few key decisions and that may have cost them some dollars. The first issue was that the game cost $10 to unlock all content. This led to a number of complaints about the high cost of the game as the majority of gamers on mobile are not willing to pay $10 for a runner game that they normally can download for free. The second major issue was the on boarding process for the game. The game had multiple screens to go through and a very short amount of gameplay before introducing the $10 cost. This left a good number of gamers feeling frustrated and misled as the $10 cost was not noted before downloading the game. I’m not saying Super Mario Run had to be F2P to succeed, but a lower more transparent cost, better on boarding process and longer free gameplay session may have worked better.
Nintendo noted that it has not hit its goal of 10% conversion on Super Mario Run and I’m fairly certain they never will. That being said the game has been downloaded over 150 million times and has probably generated in the region of ¥8.5 billion ($75 million) to date. As it is a paid game its unlikely to have a long lifecycle. Nintendo also noted that today that the number of Fire Emblem downloads was 1/10th that of Super Mario Run but that revenue was much higher. This is backed up by the success of the gacha mechanic in Japan where the game performed well. Smart Device revenues in Japan were ¥11.8 billion for the year vs ¥9.3 billion in America so this does back up what I’ve noticed. Fire Emblem Heroes has much better long term potential due to its free to play nature and ongoing content updates from Nintendo.
Nintendo plans to release around 2 to 3 mobile games per year and the next one to launch will be Animal Crossing for Mobile. All we know is that it is a free to play game. I’ve long believed that Nintendo can create a $1 billion smart device category with a handful of successful games. There is a huge opportunity to grow Nintendo IP on smart devices, create a new profitable segment and drive synergy with consoles through online services and interoperability with console games.
Online Services and Digital Content
Nintendo has always lagged when it comes to online services and digital content. The company has seen digital download rates below the industry average and was the only company to see a decline in digital sales this year despite the industry wide trend of strong growth in digital sales. Nintendo generated ¥32.5 billion in digital download sales in FY2016, down from ¥43.9 billion in FY2015.
Nintendo has been slow to embrace online infrastructure that allows for account based systems in a similar way to PSN or XBL. The simple fact is that Nintendo is still stuck in the past when it comes to online and even third parties know that there are too many limitations on Nintendo consoles for them to successfully monetise games post launch or interact with an online community like they can on PS4 or XB1. That being said, Nintendo has taken some steps to rectify this and last year they launched a new Nintendo account system which allows gamers to have a single account which can be managed through a PC, Console or Mobile device.
Nintendo has been missing out on a huge opportunity in the digital space for a long time here and its finally time for them to jump in. We now live in a world where FIFA Ultimate Team can generate $800 million a year and where Call of Duty Black Ops III generates huge revenues from paid add ons each month. Nintendo has started to embrace this model with games like Super Smash Bros, Mario Kart 8 and Splatoon. It’s all part of Nintendo’s plan to transition their games into services similar to Grand Theft Auto V where players will buy the game, play it, and then stick around for the additional content and updates. Two of those games are launching on Switch and if Nintendo is smart they should have a live service plan in action from day 1. This can also act as a proof of concept for third parties who are waiting to see if the Nintendo crowd embraces this model.
Nintendo has also seen how successful Sony and Microsoft have been in the online space and so it’s no surprise that the company will start charging for its own online service this fall. However, Nintendo will need to offer a level of service that rivals or exceeds the one provided by its competitors and so far, Nintendo hasn’t been able to achieve that on prior consoles. The service for Switch will need to improve significantly. Nintendo are already adding value to the online service with free monthly game downloads and a dedicated smart device app that allows you to play and chat with friends, however the service will need to work seamlessly and continue adding value if users will be willing to pay for it. Sony has seen its annual PlayStation Network revenue jump from ¥35 billion in FY2009 to ¥700 billion in FY2016. Nintendo’s online revenue for FY2016 was less than Sony’s FY2009 number.
Other Growth Drivers
The Toys to Life market has struggled in 2016 with Disney leaving the sector due to growing costs, Skylanders taking a break, Lego not releasing new content for Dimensions. Even Nintendo is seeing sharp declines in the number of amiibo shipped this year. Nintendo only shipped 9.1 million amiibo figures in FY2016 vs 24.7 million in FY2015. The decline in shipments can be attributed to less amiibo figures having been released but it’s fairly clear that there is a wider trend of declining interest in the sector as everyone is feeling the burn. Toys to Life is mirroring the music / rhythm fad back when Guitar Hero was popular.
That being said, Nintendo is the strongest player in the sector due to the power of its IP. It needs to find an audience beyond collectors and give gamers a reason to purchase amiibo again. In addition to introducing new amiibo, Nintendo needs to find a way to integrate game software more with toy hardware and reduce the friction between toys and the game. Perhaps allowing toys to work in all games on console and mobile could work, or even allowing amiibo to have multiple uses outside of games. The ideas are endless, but it’ll be up to Nintendo to rejuvenate this sector. The launch of Nintendo Switch gives the company a reason to invest more in amiibo.
The NES Classic was launched at the end of 2016 and promptly discontinued at the end of the fiscal year. Nintendo intended for this to be a short term stop gap for the Christmas Holiday season as Wii U was discontinued and there was nothing new till Switch. Not so much for it to be a revenue driver, but for it to be a hot Christmas item and boost the value of the Nintendo brand in a way that Pokemon did + encourage people to look to Switch. I guess Nintendo contracted a manufacturer to make around 1.0m units based on sales of other plug and play consoles which hadn’t even sold half that. It very quickly sold out and Nintendo hasn’t really done much in terms of production since. I’m currently of the opinion that Nintendo never intended for it to become this big of a success and did not plan to scale up production. I’d say Nintendo always saw this as a stop gap product for holiday and the wild success was something they never thought would happen. I’d imagine Nintendo is trying to work out the best way to monetise VC. Whether that’s in the form of a SNES Classic or a new service on Switch / other devices remains to be seen.
Nintendo has begun licensing their IP a bit more recently but they’ve always been very cautious when entrusting their IP to others. Nintendo have started to license their IP to game developers such as Koei Tecmo, Bandai Namco and many others. So far most of the investments have been worth it and have delivered for Nintendo. Nintendo need to take this same approach outside of traditional gaming and to be fair they have shown that they are now more open to invest in other opportunities such as the partnership with universal to open theme park rides at Universal’s Parks & Resort.
There are many opportunities for licensing Nintendo IP to Film companies, TV companies, merchandise companies and more. Nintendo can do all this without damaging their IP and earn royalty fees whilst they’re at it. Nintendo have the opportunity to go transmedia with their IP and they should take that opportunity.