Astral Chain – Social Analytics Exercise on Game Release

Click the tweet below to see the whole thread of tracking Astral Chain.

 

Fire Emblem: Three Houses – Social Analytics Exercise on Game Release

Click the tweet below to see the whole thread of tracking Fire Emblem: Three Houses.

 

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

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.

swsales

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.

tier

[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%.

digitalsales

[1.3] Other Metrics

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

dsi_new.png

[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.

smart

(スマホゲームは)1回売って終わりではなく、お客さまとの関係を構築していくサービス運営型のビジネスだ。ゲーム専用機でやっていることと違うので、経験を積んでいる最中。さまざまなジャンルのゲームをお届けしたいと思っている。収益の柱を支える一つにしていきたい 

【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.

drag

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