Here's what at stake for Nintendo when it launches the Switch console Friday
Nintendo has a lot riding on its new game console.
With the launch of Nintendo (Tokyo Stock Exchange: 7974.T-JP)Switch this Friday, the storied Japanese game maker not only hopes to climb back into the fight for the attention of gamers, but to regain favor with external, third-party publishers. But cautious reviews and an opaque roadmap from company officials have created some unease among investors. (Since Dec. 9, Nintendo shares are down from $32.10 to just under $26.)
The Switch marks more than just a new console generation for the company. It's also the formal end to the company's worst-selling home console of all time. The Wii U, launched in 2012, sold just 13.56 million units worldwide in its time on the market — far short of the company's initial expectations of more than 100 million units.
Nintendo's president, Tatsumi Kimishima, told Japan's Nikkei newspaper that the new device could sell as well as the Wii (which moved more than 100 million units in its lifetime). But if the Switch posts numbers closer to the Wii U, analysts say it could be a big blow.
"The Wii U bought them time to figure out when to launch the Switch, but if you look at Nintendo's overall business model, you have hand-held revenue, mobile gaming revenue, some incremental theme park revenue, future TV and/or film revenue and a significant amount of hardware and software revenue expected from Switch," said P.J. McNealy of Digital World Research. "So if Switch misses, that hurts all of their IP, which hurts all of the parts of their business."
Ben Schachter of Macquarie Capital notes that, ironically, should Switch fail, Nintendo's stock could actually rise, since it could push the company to focus solely on software sales, something a group of investors has been advocating for years.
But few expect the system to flop as majestically as Wii U did. McNealy says the trajectory of Switch should be visible within three months of its launch.
"We're expecting 2 million units at launch," he said. "If they sell out immediately, it's a good early indicator, then the refresh rate in April, May and June bears close watching."
Mike Hickey at Benchmark Capital agrees. He says that while no one expects Switch to turn in Wii-like sales numbers, sales projections in the 35 million to 55 million range are appropriate. And, he adds, given Switch's design, it could open the door for future system upgrades, rather than having to reinvent how gamers access games.
While there's pent-up demand among gamers for a new Nintendo system — and Nintendo has shown an ability to use its own stable of invaluable IP (like Mario, Zelda, "Donkey Kong" and "Pokemon") to sustain its systems on its own — the ideal scenario for Nintendo is to lure back third-party publishers (like Electronic Arts (NASDAQ: EA) and Take-Two Interactive Software (NASDAQ: TTWO)) that have largely abandoned its platforms.
That likely won't happen until the company establishes a significant installed base of Switch owners. Michael Pachter of Wedbush Securities notes we should get an idea of how open other game publishers are to working with Nintendo early this summer.
"While we expect the Switch to be successful, we believe that the hardware will require significant third-party software support to remain a hot seller," he said in a note to investors. "We won't know too much about third-party support until E3 in June, so we think that it is too early to jump on the Nintendo bandwagon."
One thing is certain, though. Nintendo will not easily give up the fight for a strongly positioned home console. While those units don't make much, if any, money in their early days, they become more profitable as time goes on and (since they're built to Nintendo's own specifications) they ensure the company's internal game developers, including Mario creator Shigeru Miyamoto, get to make exactly the type of games they want.
"Hardware is still critical because they want people to experience Nintendo's own IP wherever they are — on a phone, in the living room, on the go — and they don't want to cede the living room to Sony and Microsoft (NASDAQ: MSFT) and maybe Amazon (NASDAQ: AMZN) or Apple down the road," said McNealy. "Could Nintendo morph into a software only [company]? Sure. But no time in the short term."
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