Review of Nintendo FY3Q19 Earnings Release

Nintendo (7974.JP / NTDOY.US)

[January 31, 2019]

* Review of Nintendo FY3Q2019 Earnings Release *

Bath & Manage

[1.0] Nintendo Switch (NS)

[1.1] NS Hardware

Nintendo managed to ship 9.41M NS in the last quarter (FY3Q19/CY4Q18). The global cumulative shipment of the console comes to 32.27M as of CY4Q18. Nintendo also revises down the forecast of NS from 20M to 17M for the fiscal year ending March 2019.  For reference, the pattern of NS shipment during this FY is as follow: 1.88M / 3.19M / 9.41M for FY 1Q19 / 2Q19 / 3Q19. Nintendo has shipped around 14.5M NS during the first three quarters which makes the new target of 2.5M in FY4Q19 quite reasonable and achievable. The guidance revision can be partially attributed to poor software lineup / schedule in the first two quarters.

The implication from forecast revision and Nintendo’s communication:

  • The revision was inevitable by the end of 2018 since FY4Q19 is unlikely to make up the shortfall from holiday season and the first two quarters in the original guidance.
  • If Nintendo wants to manage the market expectation, the new forecast should be conservative as no one at the company wants to revise down again in March or surprise the market in April.
  • The updated guidance will be the new anchor for next year guidance and expectation.
  • The reiterations of hardware target from Nintendo president Furukawa in the last few interviews might lower his credibility.

[1.1.1] NS JP Shipment Exercise 

I did an exercise on NS JP shipment estimation based on the sell-through numbers and historical patters. I expected the JP shipment was around 1.84M based on cumulative shipment being 7.5% higher than sell-through. It turns out that Nintendo shipped around 2.2M NS which makes the gap between cumulative shipment and sell-through widen to 13%. I can feel that Nintendo tried to push the NS shipment in its home country.

act shipment.png

[1.2] NS Software

As expected, Super Smash Bros. Ultimate, Pokemon Let’s Go Pikachu / Eevee and New Super Mario Bros. U Deluxe did well in the last quarter and Nintendo revised up the software shipment from 100M to 110M.


Thanks to system sellers in holiday season, the overall NS tie-ratio (defined as software shipment during the quarter divided by LTD hardware shipment by the end of the quarter) is back to trend. Given current software schedule, I expect the overall tie-ratio for FY4Q19 will be slightly higher than 1.1x. Lets’ see if Nintendo can schedule Animal Crossing to launch in summer to make the ratio less seasonal even though evergreen titles form the foundation of software sales.


[1.2.1] Digital Sales

Digital sales is performing as well. Digital sales number including Nintendo Switch Online in first three quarters of FY2019 jumped by 38.7% compared to the whole year of FY2018. The proportion of digital sales has increased to 21.8%.


[1.3] Other Metrics

Both inventory and days sales of inventory (DSI) were both reduced to healthy level.


[2.0] Nintendo 3DS

As expected, Nintendo said it will continue to leverage the installed base and rich  library of Nintendo 3DS. That said, the contribution from the handheld console will be less and less significant.

dedicatedplatform[3.0] Smart Device

The performance of Smart Device was not impressive as the company is still experimenting in this space.



【直球緩球】スイッチ目標は維持 任天堂・古川俊太郎社長 – 産経新聞

That said, if they keep their mediocre reporting on smart device performance and communicate their mobile app focus like below, this business segment is not going anywhere in the foreseeable. Targeting by number of new apps per year is another sign that the company still has no direction in app gaming space. Maybe Nintendo has some update in the business briefing next day.

As we endeavor to develop future planned applications, we will also focus on continued service operations for applications that have already been released so that consumers can enjoy playing them for a long time.

[3.1] Mario Kart Tour Postponed to this Summer

In order to improve quality of the application and expand the content offerings after launch, the release date has been moved to summer 2019.

At least it’s a delay rather than a re-development like Metriod Prime 4.

[3.2] Dragalia Lost

If you see the advertisement after two month since launch like below, it’s probably not a good sign.

Still waiting for more details to be disclosed in the business briefing. However, we can get some colors from CyberAgent’s presentation.


Power laws might also apply to mobile gaming so whether the uptick in January probably driven by cac depends on the fundamentals of gameplay and monetization.

[4.0] Overall Impression from this Earnings Release

Delays in Metriod Prime 4 and Mario Kart Tour, downward revision of Nintendo Switch shipment forecast and the conservative financial forecast make me feel Nintendo is enduring a transition period where it wants to bath and manage the expectation.

More color after business briefing.

~ My Relate Posts ~

~ Corporate Event ~

  • February 1, 2019: Business briefing

Nintendo – Note – 20190129

Nintendo (7974.JP / NTDOY.US)

[January 29, 2019]

Note: Interview, Metriod Prime 4 & Exercise

[1.0] The Sankei News Interview

Nintendo president Shuntaro Furukawa had an interview with The Sankei News and it was released on January 25, 2019. Furukawa talked about strong performance during holiday season, pricing of Nintendo Switch, product development of Nintendo’s home console, the 20M Nintendo Switch shipment target, smart device business, and talent acquisition when the overall economy is doing well. We have already known most of stuffs Furukawa talked about so I only comment on those that I think have implications.

[1.1] Nintendo Switch


[1.1.1] Reiteration of 20M Nintendo Switch Shipment Guidance

Since it’s very close to the earnings release, we expect Nintendo will maintain the guidance number however the actual shipment was in the last quarter.

[1.1.2] Haven’t Considered Successor of Nintendo Switch so far

The keyword here is the “successor” (後継機種). Since Nintendo Switch is performing, Nintendo will expect the console has relatively long product life cycle. Therefore, it’s too early for Nintendo to either have clear idea or discuss the idea publicly on next generation home console when Nintendo Switch just starts its third year. That said, I still believe it’s very beneficial for Nintendo to have a product roadmap for the platform. Another point is that the “successor” is different from model revision / upgrade / variation. So the possibility of a different Nintendo Switch model for this year is still can not be ruled out.

[1.1.3] Haven’t Considered Price Cut for Nintendo Switch so far

Since Nintendo Switch is on track or probably meets Nintendo’s expectation, there’s no reason for Nintendo to consider a price cut in the first two years of Nintendo Switch’s product life cycle. However, Nintendo Switch did have bundles which effectively offered the hardware at a discount. We’re not sure whether Nintendo will adopt a direct price cut, do more bundles, or just do both in this holiday season.

Nintendo mentioned before that it’s would not sell Nintendo Switch below cost so how deep the price could be cut depends the cost reduction of the hardware.

[2.0] Restart of Metriod Prime 4 Development

Nintendo released a development update on Metriod Prime 4 on January 25, 2019 announcing that the current development was halted and that Nintendo decides to restart the development from the very beginning under Retro Studio.

The public feedback is generally positive for Nintendo’s transparency.

For restarting the a game development under different developer, I would expect anything capitalized in the original development should be recorded as a loss. So we might see an extraordinary loss on the income statement next quarter (or this quarter depending on the timing they reflect the economic reality of their business decision). The extraordinary loss should have less impact on the cashflow. Previous research and development expenses are unlikely to generate future benefit for the new development. Most of previous previous R&D on the project was wasted but it also depends on how well Nintendo can keep experience from those R&D. Delayed software launch means the contribution from the franchise is pushed back. Since Metriod is not as big as other system sellers, the overall financial impact is limited.

The change of leadership and strong performance of Nintendo Switch create rooms for more decisions like this.

[3.0] Exercise on Japan Shipment Estimation

ns jpshipment

If the Nintendo Switch in Japan follows previous patterns that cumulative shipment is around 7.5% higher than the cumulative sell-through, then Japan shipment of Nintendo Switch in calendar year 4Q 2018 would be around 1.84M. The Japan share of global shipment in the last quarter should drop significantly if the result of last quarter shows the possibility for Nintendo to achieve their guidance.

~ My Related Posts ~

Preview of Nintendo FY3Q19 Earnings Release

Nintendo (7974.JP / NTDOY.US)

[January 19, 2019]

* Preview of Nintendo FY3Q2019 Earnings Release *

[1.0] Nintendo Switch

[1.1] NS Hardware

  • The haunting 20M hardware shipment guidance for the Fiscal Year ending in March 2019 is finally approaching to the end as both management and market will have relatively high confidence whether it can be reached as of third quarter results being released. The shipment target now rolls over to next fiscal year.
    • If Nintendo maintains giving guidance on hardware shipment for next fiscal year, it becomes a little be tricky for them. This fiscal year the hardware traction is distorted by software pipeline/schedule making business shows more seasonality compared to historical pattern. The management was plagued by exacerbated seasonality and the guidance becomes kind of a challenge rather than a low ball which Nintendo is more familiar with. Nintendo probably will be reluctant to provide “aggressive” guidance but considering the signaling effect of guidance, Nintendo is unlikely to give a down or even a flat guidance. Best estimate for next guidance (FY2020) might be slight growth on last guidance(FY2019) and FY2020 guidance is the best estimate of hardware shipment.
    • If Nintendo stops giving guidance on hardware shipment, the best estimate for FY2020 hardware shipment is the actual result of FY2019.
    • Nintendo is likely to show how Nintendo Switch tracks / surpasses the pattern of Wii installed base again in their presentation material.
    • Important line item and metric to observe are inventory level and days sales of inventory. Based on what we have know, both line item and metric should drop significantly but maintain at certain level to support the 20M guidance (this also depends on how many Nintendo Switch sales channel can absorb).


  • According to what we have known about the software lineup, it seems the seasonality will be mitigated this year if the lineup is carefully scheduled and successfully executed.
  • WSJ reported that Nintendo might release a “new version” of Nintendo Switch as soon as this summer. The term “new version” is very interesting because it has implication on product life-cycle, product trajectory and long-term ecosystem. New version might be a revision (Switch 2.0, tech improvement), upgrade (Switch +, tech upgrade), variation (Switch Lite, taking out features)… Timing is another issue, as the Nintendo Switch is only in year 3 of its life-cycle, it’s more likely Nintendo is taking a installed base perspective on this new version to grow the installed base rather than product trajectory / ecosystem perspective on strategic/product roadmap. Very understandable Nintendo wants to make the cycle of Nintendo Switch longer than typical console. The success of Nintendo Switch gives the company some time to think deeper so short-to-intermediate term their focus in public will be on lengthening current cycle.
  • There are factors like software pipeline from 1st-Party, 3rd-Party and Nindie, household penetration (second Nintendo Switch) and mobility / social aspect that help Nintendo Switch keep some “momentum” in Year 3. That said, considering the competition, difference in product and ecosystem, and product life-cycle, Nintendo will keep pushing the hardware for the next few years. Tactics include but not limit to strong and steady software pipeline, better discovery and gamer acquisition for all 3rd Party on the platform, attractive bundle, thoughtful marketing/adverting, new version, and price discount (it’s reported that Nintendo’s policy for Nintendo Switch is not to be sold at loss. So bundle is more likely than price cut but it’s subject to the reduction of production cost). Sometimes two-sided platform with cross-side network effect working is thought of a conceptual flywheel. However, once the platform is designed with a particular business model and competes with other platforms in reality, platform holder will consistently look at both sides. Some might focus on the balance between supply side and demand side. What is dynamics for a platform where its business model is selling hardware to distribute digital content? For this business, installed base expansion is one question and how the keep the installed base engaged (manage the churn/keep retention) is another.

[1.2] NS Software

  • Strong performance of Super Smash Bros. Ultimate, Pokemon Let’s Go Pikachu / Eevee and Super Mario Party as expected.
    • Nintendo might be showing some data about the synergy between Pokemon Let’s Go and Pokemon Go.
    • These three holiday season titles would help boost the Nintendo Switch overall tie-ratio (defined as software shipment in the quarter divided by LTD cumulative hardware shipment at the of quarter) in last quarter.


  • Nintendo might show the sales of Nintendo Switch software is the fastest in its history. Maybe the company will revise software shipment guidance upward.
  • See if there’s update on software pipeline and schedule. The current pipeline looks decent. New Animal Crossing and New Pokemon (Gen 8) are clearly highlights of 2019. They are both considered as system sellers.
  • Unlikely but it would be great if Nintendo talk about the Nintendo eShop status (not just release digital sales related numbers) and how to further improve the discoverability / visibility / curation for developers on the platform.
  • Finally the system is about to fully support Traditional and Simplified Chinese. More color on Mainland China business?

[1.3] NS Online

  • Might further disclose some statistics (not sure whether Nintendo will release adoption data). In addition, Nintendo might mention that Super Smash Bros. Ultimate help fuel the adoption.

[2.0] Smart-Device

  • See what kind of information about Dragalia Lost Nintendo releases.
  • Mario Kart Tour release date might be announced. (Can this title leverage Niantic’s technology?)
  • Fire Emblem Heroes is likely to sustain the stable performance.
  • Super Mario Run and Animal Crossing Pocket Camp turns out to be more like marketing tools for customer awareness / engagement / reactivation.
  • Probably reiterate 2-3 titles each fiscal year and partnership potential.
  • The reporting style might indicate the potential of Smart-Device business.

[3.0] Nintendo 3DS

  • Nintendo 3DS is in late stage of product cycle. As the gaming console is long term business, Nintendo is keep “supporting” it for a while. Contribution from Nintendo 3DS is will be less and less meaningful. While the price, form factors, game library  seem to be good for onboarding younger audience, what really matters is still consumer behavior (in this case it’s probably those who potentially buy 3DS for the audience).
  • Nintendo probably adopts wait-and-see strategy for this product to phase out while release some 1st Party games for show the “support.” Would be surprised if there is successor.
  • Large installed base with rich library: might be suitable to try some monetization methods.

[4.0] Minor Stuffs

[4.1] Nintendo Switch + Tech Program 

  • What’s the result of this program with Scrum Venture? Any plan to keep doing this or collaborate with other partners?

[4.2] Relationship with Niantic

  • Any plan to further leverage the relationship and their technology?

An article at Business Insider on January 16, 2019:

The other facet of Niantic’s business is the Real World Platform, which the company teased in the middle of last year.

Essentially, the Real World Platform will enable software developers to take advantage of the technology Niantic created for its own games. Developers will be able to use Niantic’s augmented reality tech, as well as the company’s secret sauce for multiplayer gaming and for connecting gameplay to real-world locations.

Finally, Hanke says that Nintendo and the Pokémon Company — the Nintendo joint venture that owns the trademark — have been very pleased with both “Pokémon Go” and “Pokémon: Let’s Go,” and are looking for more “synergies” between the game and the core franchise. That’s good news for Niantic, too, Hanke says.

~ My Related Posts ~

~ Corporate Events ~

  • January 31 (Thu), 2019: FY3Q2019 Earnings Release
  • February 1 (Fri), 2019: FY3Q2019 Business Briefing (TBA)


Entering a market where existing platforms have network effect working

The title of this post is very generic because I observed or studied cases in different industries that new entrants want to penetrate markets where incumbents already have their network effect working.

By leveraging its resources or capabilities, new entrants might be willing to acquire “users” (depending on dynamics of business, platform might want to focus on particular side of users) by providing monetary subsidy or aggressive pricing.

Digital Distribution in Gaming (PC/Mobile)

If we put the recent “price war” between distribution platforms chronically, it looks like below:


On December 1, 2018, Steam announced it would introduce tiered revenue split mechanism based on revenue level to its long-time 30% rake on games sold on Steam.

  • “When a game makes over $10 million on Steam, the revenue share for that application will adjust to 75%/25% on earnings beyond $10M”
  • “At $50 million, the revenue share will adjust to 80%/20% on earnings beyond $50M”
  • “Revenue includes game packages, DLC, in-game sales, and Community Marketplace game fees”

Some smaller developers think the adjusted mechanism is still in favor of larger publishers and developers who are more likely to hit those revenue thresholds.

Charts below illustrate STEAM rake schedule and overall rake on game revenue.


Steam Overall Rake

Not every developer/publisher on the supply side of the platform are equal, STEAM clearly wants to focus on those with hit games and hopes their pipeline can keep network effect working.

As shown in the announcement about the new revenue share tiers posted on STEAM community:

It’s always been apparent that successful games and their large audiences have a material impact on those network effects so making sure Steam recognizes and continues to be an attractive platform for those games is an important goal for all participants in the network.

Our hope is this change will reward the positive network effects generated by developers of big games, further aligning their interests with Steam and the community.

The rationale behind is the characteristics of the digital distribution platform without control of gaming experience access: Power law and long tail on revenue distribution across suppliers, and multi-homing on both consumer and supplier sides.

Two underlines in the quote above need some discussion:

  • Large audience / traffic certainly brought by marquee suppliers certainly benefit smaller suppliers. However, making the the platform attractive to marquee supplier will never be a goal for smaller suppliers. There is not much smaller supplier can do besides focusing on their own games and audience.
  • Actually, the adjusted revenue sharing system does not “further align the interests with STEAM and community” but just reduce the likelihood that marquee suppliers leave the platform. All other other things being equal, the new revenue sharing system will make marquee suppliers more likely to distribute their games on this platform rather than starting their own storefronts/launchers or moving to other platforms permanently even though they have choice to multi-home. More audience a developer has, the more economics of scale it can enjoy: bargaining power on 3rd party digital distribution or even internalize the digital distribution.

Steam Revenue

On a separate note, you can see different attitude toward developers on different type of digital distribution platform. Just look at Nintendo eShop. I know it’s console gaming, I know it’s Nintendo (with access platform supported by its strong 1st Party IP) but the point I want to make here is consumer bases / communities on the demand side for each platform are not created equal. The attitude toward existing suppliers in term of pricing somewhat reflects its consumer base behavior which is path dependent for established digital distribution platform. For emerging digital distribution platforms, besides leveraging its existing resources/capabilities/credibility…, they tend to solve chicken-and- egg problem from the supply side. Emerging platform can gain some initial traction by securing some exclusives or timed exclusives. As shown below later, financial incentive might be the easiest way to get the ball rolling. In the longer term, platform might go deeper in demand and supply side ecosystem or facilitate communication between two sides. As multi-homing is one of characteristics that digital distribution platforms share,  building lock-in factors in the ecosystem without increasing frictions might be a key to success.

The last question on the move to change revenue sharing scheme is:


[EPIC Games Store]

On December 4, three days after STEAM’s new revenue tiers got revealed, EPIC Games announced they would launch EPIC Games Store outlining several principles. Among those principles, the most eye-catching one is:

All Developers Earn 88%

In other words, the rake on this emerging storefront is only 12% for all size of developers compared to STEAM’s tiered rake system where 20% rake is the limit (overall rake is approaching 20% when gross revenue get larger).

Rake comparison

As the chat above shows, the pricing to distribute on EPIC Games Store is so attractive to all size of developers that the tendency to multi-home is inevitable. The exclusives or timed exclusives might be limited due to limited initial consumer base which represents relatively small addressable market compared to established distribution platform. Pricing aggressively is a way to secure enough initial supply and attract other suppliers later on.


By covering the 5% engine royalty for sales on the Epic Games store, out of Epic’s 12%, EPIC makes effective rake 5% higher for games using UE4 on competing distribution platforms.

This revenue split might look attractive to those who distribute their games using UE4 (not sure if any exists) at variable cost higher than 7% of gross revenue. If this platform can provide benefits similar to operating their own storefronts/launchers while saving fixed costs in operation, probably having in-house distribution channel might be hard to justify economically.

Leveraging own capabilities and being competitive on pricing are probably not enough to beat existing network effect so EPIC Games takes ecosystem/community approach reflected in principles shown in the announcement.

  • Have a Direct Relationship With Players
  • Connect with Creators
  • Developers Control Their Game Pages
  • All Engines Are Welcome

Within 10 days, EPIC Games went one step further with the announcement of their 2019 Cross-Platform Online Services Roadmap.

At Epic, our goal is to help game developers succeed. Throughout 2019, we’ll be launching a large set of cross-platform game services originally built for Fortnite, and battle-tested with 200,000,000 players across 7 platforms. These services will be free for all developers, and will be open to all engines, all platforms, and all stores. As a developer, you’re free to choose mix-and-match solutions from Epic and others as you wish.

Market Dynamics

It seems the STEAM’s new sharing revenue tiers was an attempt to preempt EPIC Games Store. However, it’s quite likely the the rake gap is so large that STEAM’s move cannot reduce the multi-home tendency.

There are other emerging platforms who might be agile enough to follow the price war in short period time.

So, Chain Reaction?


On December 14, 2018, 10 days after EPIC Games Store released its disruptive rake, Discord suddenly announced that they had figured out it doesn’t cost 30% to distribute games in 2018 so it decides to reduce their rake from 30% to 10% from 2019.

Turns out, it does not cost 30% to distribute games in 2018. After doing some research, we discovered that we can build amazing developer tools, run them, and give developers the majority of the revenue share.

So, starting in 2019, we are going to extend access to the Discord store and our extremely efficient game patcher by releasing a self-serve game publishing platform. No matter what size, from AAA to single person teams, developers will be able to self publish on the Discord store with 90% revenue share going to the developer. The remaining 10% covers our operating costs, and we’ll explore lowering it by optimizing our tech and making things more efficient.

Discord let all users have access to store beta and new Nitro subscription options in October 2018. It’s unlikely that a company has venture capital firms on its cap table to roll out some major business / features without strategic simulation and operational / financial modeling. So it’s not about how much it costs to distribute games but how much storefront wants to monetize or subsidize (the new market dynamics and second underlined sentence in the quote increase the likely this likelihood) on distribution. Apparently, it’s a strategic move driven by market dynamics.

While having some advantages on the consumer side and strategy on the ecosystem, Discord still needs to at least match the rake to make their platform relevant on the supply side in this kind of price war if it has resources to do so and being supported by capital providers. Discord stated 10% rake is enough to cover “operating costs” but what’s its role in unit economics and at what scale are unclear.

Maybe we can borrow some strategic perspectives from venture capitalist.

Charts below show the rake and net revenue comparison among three platforms.

Rake 3 Comps

Rev 3 Comp

~ The Platform Being Disrupted ~

Certainly, the pricing offered by emerging platforms is disruptive. However, the reason why STEAM might be being disrupted is that if the cost structure /organization is built on 30% rake, it will be very difficult for the platform to overcome internal frictions to take timely, bold counteractions.

The introduction of revenue sharing tiers might be an early indication. It’s very interesting to see how long it takes for STEAM to make next move.

When it comes to competition among platforms, defender or passive side generally doesn’t have luxury to adopt wait-and-see strategy.


*    *    *

Digital Payment in Japan

This is basically a game of user acquisition by subsidy among fragmented, multi-homing platforms.


On December 4, 2018, PayPay launched a 20% rebate program with total allowance amount of 10B Japanese Yen subject to certain T&C. The amount was used up by December 13, 2018.

[LINE Pay]

On December 14, one day after PayPay’s program ended, LINE Pay launched a similar 20% rebate program from December 14 to December 31, 2018 without limit subject to certain T&C.


Mercari is planning to launch its own digital payment service next year. It definitely can learn something from user acquisition wars between PayPay and LINE Pay. With its C2C marketplaces, hopefully Mercari might be able to adopt a more sophisticated, less cash burning way to launch service.

The case of digital distribution platform shows “your margin is my opportunity” and “network effect can still be beaten.” This is one of major risks that Mercari’s C2C marketplaces might face in the future.

~ Related Posts ~

Epic Games’ Epic Battle on Storefront Space (follow up post)

Gaming-related Platform Ecosystem Competition and the Financing behind (follow up post)

Networks can be still be beaten

Mercari (4385.JP) – Initial Analysis