Partnership between Tencent & Nintendo to launch Nintendo Switch platform in Mainland China

Re: Partnership between Tencent & Nintendo to launch Nintendo Switch platform in Mainland China

Note to: Public

Distribution:  Direct | @yuinausicaa | Futu Niu Niu | Slideshare


* The Console Business *

Two-sided platform

Gaming console is a two-sided platform with specific hardware specs and operating system that connects user and game software. Users first buy gaming consoles on which they play game software, a version specifically developed for the platform. Users buy console because they want to play existing game library and expect game developers to release more games on the platform in the future. Concerns for users to purchase a console include upfront cost, existing library, and future support of software developers to the platform. Developers create games, distribute their content on the platform to reach audience, and then benefit from various monetization methods. Concerns for developers to create games for platform include estimated audience base (installed base and its user profile), resources to put into development (upfront development costs, time to market, how easy it is to develop on the environment…), and other incentives provided by platform holder.

Indirect & direct network effect

A key characteristic of this two-sided platform is indirect network effect which creates a classic chicken-and-egg problem at launch and noises in the first one to two years for a platform with non-mainstream hardware specs. Generally, this problem is solved by subsidizing both the demand and supply by pricing the console at or slightly below the cost and reaching exclusive deals with third party developers. However, it’s not enough to only have third party content so platform holders also create first party games to attract users particularly at launch.

With widespread of internet, connectivity creates direct network effect in multiplayer games. Users can play with others around the globe or around the region (Mainland China is more likely to be the case). Since Nintendo Switch is a hybrid gaming console (home x handheld), the portability gives this console a social aspect unseen in other competing consoles in current / next generation.

Physical and digital distribution of hardware and software

Sales of hardware involve physical distribution no matter the transaction is made online or offline. Hardware inventories are either stocked in “warehouses” or “retail stores.” Software might be either distributed physically or digitally. Life cycle of console might last more than 5 years, and customer relationship built might last for decades. Thus, customer service/support and repair are inevitable. When the business involves physical distribution, supply chain / logistics capabilities become imperative.

Legally introducing Nintendo Switch to the new market

Understanding abovementioned fundamentals is key to evaluation of a platform launch. The goal we’re trying to reach now is to legally introduce an established gaming console to a market dominated by other gaming style and regulated differently. The market share of console gaming in China in 2018 was probably less than 3%. To unlock market is very challenging but this is also a once in a generation opportunity for execution team to create a multi-billion dollars business and make history. What I see here is there’s limited downside for responsible individuals as everybody knows the task is tough while the upside is enormous.

* Go-to-Market & Ecosystem Coordination *

Market penetration before official operation

Before Nintendo’s decision to collaborate with any company to enter China market, I think their most efficient way to penetrate the market was localizing the system and games as many as possible and then just let the market mechanism work for them. The limit of strategy above is obvious – the user base probably would not go beyond early adopters. Those hardcore/enthusiastic gamers have figured out how to enjoy the system without official support. With high penetration of social network/media, communities that facilitate information exchange and transactions are built. However, it’s still not enough for the product to take off and diffuse further without the help from platform holder/ecosystem coordinator. Apparently, gaming console is not a product that can sell or scale by itself in Mainland China. For a system without official support, frictions are too large for potential users to adopt, let alone we have country specific challenges for gaming consoles. Looking at numbers of Xbox and PlayStation with official support, it seems they’re still struggling to gain traction. What the team needs to do includes coming up with a sophisticated go-to-market strategy, testing different growth hacking tactics, coordinating previously unmanaged ecosystem, cultivating Nintendo’s IP…

Since Nintendo knows which game is first enjoyed by a new user, I believe the team has the information about how many wild Nintendo Switch there are in Mainland China. By depicting ecosystem and social graph, it is not difficult to find fair number of existing users belong to different communities to conduct user research. Understanding those early adopters adds value to some extent even though their user profile (demographics, user behavior…) and user stories might be significantly different from that of those primary target audience that the team will spend most time and resources on.

Customer acquisition

  1. Marketing channels
  • Online
    • Device
      • Mobile: Super App / Apps / Browser
      • Desktop
      • Console: Nintendo eShop (post acquisition)
    • Traffic sources (owned/third party): Social Media (UGC), Social Network, Vertical Media Site, Store in Super App, Channel in Super App, App, Website
    • Current China-related owned channels
      • com.hk – ~300K monthly unique visitors in last 3 months (~60% traffic from Mainland China)
      • Nintendo HK Limited @ WeChat
      • NintendoHK @ Weibo – ~169K fans
      • Nintendo HK Limited @ Youku – ~2K fans
      • HK @ Facebook – ~55K followers
      • Nintendo HK @ Youtube – ~30K subscribers
    • Offline/Traditional channels: while the amount of traffic/impression, information diffusion efficiency, timeliness of performance measurement, data collection in offline channels are inferior, clever initiatives might leverage better leading to attractive return on investment. These channels are needed in brand/IP recognition building.
  1. Conversion

It will take longer or much longer compared to other markets where potential mainstream users are familiar with the IPs and value proposition. Current user bases in other markets are more akin to reactivation than acquisition. Cumulative advertising expenses per unit shipped between FY17/3-FY19/3 in other markets was around JPY 5,664. I think even with rigorous budgeting the number in Mainland China probably will be probably three times until the team finds magic formulas on conversion. As potential users are price sensitive, it’s reasonable to expect different subsidies, discounts, bundles to drive demand. Thus, all-in customer acquisition cost (CAC) should be even higher.

  1. Sales channels
  • E-commerce
    • Direct-to-Customer – storefront/marketplace/Nintendo eShop
    • Third party
  • Brick-and-Mortar (geographically selective, density calculated, capital intensity)
    • Wholesale
    • Retail
    • Direct-to-Customer (maybe Nintendo SH/BJ/SZ)

Launch of platform

  1. Exiting internal resources for initial business planning and new recruitment for on-going platform operation and forward strategy formulation/execution
  2. Determination: models (NS, NS Lite, or rumored NS upgrade/Pro), Accessories, SKU, software pre-install (if any) and account integration (if any)
  3. Hardware / software regulatory application and approval
  4. Channels / logistics / supply chain / customer support / backend ready
  5. Timing determinants: global software pipeline / hardware launch schedule, global seasonality, local seasonality, regulatory approval, regulatory application in pipeline
  6. Games officially available at launch and software lineup subject to approval for both retail and digital version

By that time, we will officially know how strong Nintendo as a brand and their IP are in Mainland China beyond early adopters.

  1. On-going operation, business intelligence and strategy planning

Customer engagement & retention / customer lifetime value (CLTV or LTV)

Customer engagement and retention is key in nowadays gaming business (from single game in any device, to gaming console, to digital gaming storefront, to cloud gaming service). Thanks to internet and various monetization methods adopted, on-going revenue streams from specific user after games being installed or services being used become possible. Game operators want to keep their users active (prevent them from churn) to benefit from DLC/season pass or in-game monetization. It’s even more important for massive multiplayer online game and games with strong social aspect as user activity determines whether network can reach critical massive and its sustainability. Key financial metric migrates from contribution profit from one-time software sales to customer lifetime value.

Because of supply aggregation and higher customer acquisition costs on gaming console, loss from customer churn multiplies. In the past, the platform holder would just keep bringing high quality games to the platform (better if they’re exclusive) until it’s time for next generation hardware with limited channels for customer engagement. With widespread of social network/media site/UGC site (adjacent platforms) …, channels to reach players increase while competition for user’s interest and time spent become fierce than ever. Like user behavior in gaming console, users generally multi-home on those adjacent platforms. I expect competitive landscape would be described as market-sharing with clear power law which might impact how the primary platform builds relationship and collaborates with adjacent platforms.

Ecosystem and communities

By visualizing participants in the primary gaming platform, adjacent platforms and sales and marketing, the concept of ecosystem is easy to grasp. By zooming into social network and micro level interaction, online and offline communities (meetup, unofficial tournament…) can be identified.

Ecosystem coordination might benefit not only customer engagement and customer acquisition but future platform business. Coordination involves policy implementation, regulation enforcement, and resource allocation.

* Business Intelligence, Traction & Metrics *

        Information to be gathered, shared and monitored, and data to be collected and analyzed are shown below.

Supply information

  • Hardware (plan→suppliers→shipment→sell-in→sell-through)
    • Nintendo production plan
    • Nintendo product roadmap
    • Supplier capacity – assemblers and component suppliers
    • Inventory level in supply chain: work in progress, finished goods, in transit
    • Inventory level in sales channel
    • Sell-through
    • Grey market supply
    • Second-hand market activity
    • Customer support and repair
  • Software
    • Software pipeline and release schedule
    • Approval pipeline and schedule
    • Retail version allocation and inventory level
    • Sell-through

User behavior information

  • Engagement & retention
    • Number of systems activated (system/sell-through)
    • Number of active users (DAU, WAU, MAU…)
    • Engagement (DAU/MAU…)
    • Power user (L7, L30…)
    • Definition of churn: natural and bricked
  • Gaming preference & behavior
    • First Party/Third Party/Nindies
    • Retail/Digital
    • Title/Series/Genre
    • DLC/in-game purchase
    • Time spent
  • Demographics & profile
    • Cohort analysis
    • Segmentation analysis

Platform performance and unit economics

  • Marketing channel conversion
  • Sales channels performance
  • Installed base (cumulative sell-through or cumulative activated systems or cumulative activated accounts)
  • Active user
  • Customer acquisition cost (all-in sales and marketing expenses/sell-through)
  • Software attach rate (cumulative software sell-through/installed base)
  • Accessories attach rate (cumulative accessories sell-through/installed base)
  • Average software revenue per user (cumulative software revenue/installed base or software revenue in given time horizon/active user in given time horizon)
  • Average accessories revenue per user
  • Customer lifetime value (estimation: ongoing contribution profit from user, its churn, retention/supporting cost, and CAC)

Social network/media, media site, UGC sites, owned channels

  • Traffic (existing and new sites)
  • Follower (existing and new channels)
  • Engagement (existing and new channels)
  • Customer feedbacks

Traction, milestone and target

  • Early indicator for outsiders: followers or fans on owned channels (threshold for primary channel: 1 million), and regulatory application and approval records
  • Meaningful shipment jumps in Other area in Nintendo’s quarterly report. Hopefully Nintendo will carve out Greater China eventually
  • Time to million sold (new user acquired and existing user migration or second console)
  • First year target: triple current user base in Mainland China
  • Timing: hopefully sync with Pokemon Sword and Shield (if officially approved) or around 2020 Chinese New Year

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