Nintendo Could Be The Next Disney (TYO: 7974)

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What is Nintendo?

Nintendo is a Japanese entertainment company that designs, develops, manufactures and sells a range of entertainment products. Most notably known for their video gaming hardware, they also produce a range of mobile games as well as playing cards.

  • Hardware - Gaming devices including the Nintendo Switch, Nintendo Switch OLED and Switch Light
  • Gaming and related IP - Stories and characters they create and use to produce games such as the Legend of Zelda, Mario and Pokemon
  • Mobile games that run on smartphones - Examples include Mario Run and Pokemon Go
  • Playing cards

How does Nintendo generate revenue?

The core of Nintendo’s business is the manufacture of gaming consoles and the production of intellectual property (games). They generate revenue in three ways:

  • Console sales - Revenue from the sale of gaming consoles (hardware). They currently sell three models of the Nintendo Switch
  • Gaming sales - Nintendo produce games using their IP which they sell at a wholesale level through physical stores as well as digitally through their e-shop
  • License / royalty revenue - Revenue from licensing and royalty fees. Third-party developers who make games for Nintendo’s consoles have to pay a licensing fee to Nintendo

How has Nintendo performed?

Nintendo is hitting its revenue peak and has recovered from the disastrous Wii U. Currently Nintendo is a USD 16bn company and benefited massively from the COVID-19 pandemic growing 34% in the last financial year. The company has high margins for a manufacturing business and has been quite profitable (55% Gross Margin and a 38% EBIT margin) - definitely propped up by digital sales the royalty fees it takes from the sale of games.

Source: Forbes


Who does Nintendo compete with?

Comparing Nintendo to other gaming and console companies, they have two major competitors - the Playstation produced by Sony and the Xbox produced by Microsoft. Both these competitors have games that are also available on the Nintendo Switch but also offer games exclusive to that console.

More broadly, Nintendo really keeps with other entertainment and content companies because it’s competing for your attention. Zooming out, Nintendo is a company that does two things:

  1. Produces a product that keeps you entertained
  2. Tells a story through games

Their ‘true’ competitor set is much broader and should include companies like Netflix (who are moving into gaming!), Disney and other content businesses.


What makes Nintendo different?

Nintendo is a classic case of a differentiated product. The release of the Nintendo Switch should be studied as a case study in blue ocean strategy. They created a gaming console that operates in two forms which is unique as a console - no other gaming device had this duality prior to the Switch:

  • A docked console - You can use the Nintendo Switch as a regular docked console, where you play the console on a monitor or TV. Using the switch in this way, you can only play it in a fixed location. Both the Xbox X and Playstation 5 are docked consoles
  • A handheld console - Handheld consoles are ones that have their own screen and can be used anywhere. The unique value proposition of the Nintendo Switch is that you can play it anywhere - it has a screen and it can be docked. This means the Switch can be played anywhere, as well as on a tv or monitor

The games produced by Nintendo are also different - they have a core set of IP that they reuse and recycle into different games such as:

  • Mario and the associated characters (Donkey Kong, Yoshi etc)
  • Pokemon
  • Zelda

These characters have featured in games for over three decades, which means Nintendo is just reusing the IP but with different stories and gaming elements but this highlights the key difference between Nintendo and other gaming companies. Nintendo’s vertically integrated model where they own and produce the IP along with the hardware presents opportunities for future revenue growth both through other games but also in other revenue streams.


What is the future of Nintendo?

It’s a bullish statement that requires lots of levers to be true, but Nintendo could become the next Disney. They follow the same playbook:

  • Create characters that people love
  • Create stories around these characters
  • Build additional stories that feature new characters
  • Reuse new characters and create new stories
  • Leverage existing stories and characters to create new forms of content
  • Rinse and repeat

Sound familiar? Nintendo has amassed the IP, reused it multiple times to create compelling stories and published these stories into games. They’ve even created a theme park! However, Nintendo are too risk-adverse, especially after the Wii U. It’s unlikely they’ll shift to create content but if they decided to follow the Disney playbook, they have the right ingredients to get there.

🎙️ Want more detail on Nintendo and why we think it’s the next Disney? Listen to this week’s podcast here!


Want to learn more about eSports and the gaming industry?

A few months ago we interviewed Phoebe Jin - a portfolio manager from Spaceship. An Australian FinTech investing in ‘where the world is going’. We started with a conversation about how she assess tech companies, and then dove right into the gaming and esports industry covering:

  • The gaming industry and the key players in the industry
  • The segments of the industry and who is best positioned to ‘win’
  • The future of esports and why we think it’s the next big growth industry

Want to listen to our interview? Click here!

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