How Nintendo Pulled Off a Gaming Turnaround
And why it’s a Baby Apple
It is no secret that Nintendo has experienced breakthrough success with the Nintendo Switch. To date, the Switch has lifetime sales of 132.5 million units, making it the 3rd highest selling console of all time and eclipsing its eighth (and ninth!) gen competitors.
Yet the Switch will soon turn seven years old. By the conventional “five year” console generation cycle, it is ancient. And sales are declining: Nintendo Switch unit sales declined by 22.1% year-on-year by Mar 2023 to 18.0 million units. A quick glance at Nintendo’s FY2023 (April 2022 to March 2023) financial results will reveal that Switch sales, as well as overall revenue and profit, are declining.
At this point, it might be easy to question Nintendo’s medium-term business prospects. For one, there has been little news about a new console. Sure, rumours are swirling regarding Nintendo’s next console — dubbed the Switch 2 — though Nintendo, like always, has kept hush about this. Even if you believe that a console is coming soon, the sheer fact that the Switch is approaching its seven-year anniversary without a successor yet is grounds for worry.
Next, even if Nintendo does release its next console soon, it has a patchy track record with console success. The Nintendo 64 hit was followed by the GameCube miss, which was followed by the Wii hit, which was followed by the Wii U miss, which was followed by the Nintendo Switch hit, (which will be followed by the Nintendo “Switch 2” miss?).
But this argument is fundamentally flawed. Nintendo no longer has an inherently unpredictable business model, where a failed console could be a fatal blow. Rather, its business model is increasingly stable and predictable, based on recurring revenue streams and a hardware ecosystem not due for disruption anytime soon.
History of the Console Industry
To understand why Nintendo’s future does not fit this cyclical console generation pattern anymore, it is important to understand how this cycle came about in the first place.
Traditionally, major console manufacturers such as Nintendo, Sony, Sega and Atari released new consoles every few years, each with technological advancements, improved graphics, and enhanced gameplay experiences.
The rapid pace of technological advancements in the gaming industry meant that each new console generation introduced cutting-edge capabilities that significantly outpaced its predecessor. As such, console makers had to rebuild their customer bases each generation, as gamers simply chose their consoles based on which one had the best specs, and not based on any material sense of brand loyalty.
Moreover, the lack of backward compatibility (the ability of new consoles to run older games) exacerbated the console industry’s volatility. Gamers used to accumulate significant libraries of games during console generations, only to abandon them in the next. If backward compatibility was present, it was usually for one console generation at most. This lack of continuity made retaining a dedicated customer base across console generations difficult, as there was little value in sticking to the same console maker when upgrading to the next generation.
This setup posed a structural business flaw for console makers. The success of a new console determined market share, profitability, and the ability to attract game developers to their platform. Hence, a misstep in a console generation could lead to years of sales decline, market share collapse, and profit loss. Prior success had little bearing on future performance, so intense console wars shifted industry dominance between console makers each generation, making long-term success unpredictable.
The Perpetual Switch Ecosystem
But Nintendo’s business model has evolved from this. It has fundamentally transformed with the creation of an enduring Switch ecosystem. The company’s next console will not upend this ecosystem, but rather improve the existing Switch family lineup. Nintendo won’t have to tear down its 117-million-strong Switch user base, but can instead retain and expand it.
If all this talk of a consumer ecosystem sounds familiar, that’s because it is. Nintendo’s switch ecosystem today resembles a nascent version of Apple’s consumer ecosystem, one that is largely responsible for Apple’s status as the world’s most valuable company today.
Why exactly does Nintendo today resemble a “baby Apple”? In my opinion, there are three main reasons: Nintendo Accounts, backward compatibility, and iterative upgrades.
1: Nintendo Accounts & Nintendo Switch Online
Nintendo’s online customer systems have catalysed its transformation, increasing brand loyalty and creating a more resilient revenue stream. Two key systems facilitate this: Nintendo Accounts and Nintendo Switch Online (NSO). Nintendo Accounts is a cross-platform customer system, linking console games and mobile apps, enabling users to access downloaded games on all of their connected devices. With over 330 million accounts as of September, it allows Nintendo to extend its relationship with customers past their hardware, meaning that Nintendo will not have to rebuild its user base from scratch when it releases its next console.
Take it from Shuntaro Furukawa, the President of Nintendo. In a shareholder AGM session this year, he provided the following response to a question:
Regarding the transition to the next-generation platform, in the past, hardware was the only way for us to connect with our consumers, and so with each new platform, we needed to rebuild our relationships. But in the case of Nintendo Switch, we can directly connect with a wide range of consumers via Nintendo Accounts. More than 290 million Nintendo Accounts have been created by people around the world, not only via our dedicated video game platform but also via mobile apps. Regarding the move from Nintendo Switch to the next-generation platform, we will make good use of Nintendo Account to make this a smooth transition for our consumers.
Meanwhile, NSO is a subscription model (tied to users’ Nintendo Accounts, of course) that offers online multiplayer, cloud saves, and a library of classic NES and SNES games, amid some other minor features. Boasting 38 million subscribers, it has created lock-in effects that makes it harder for customers to switch to other platforms, thereby reducing churn and driving a more indefinitely resilient business model.
How? Through the sheer value proposition that NSO offers customers. NSO allows users to save their player data on the cloud, carrying it over to other Switch devices that they purchase in the future. Further, its large and growing library of classics ensures uninterrupted access to nostalgic games, regardless of what console gamers are using. Along with the larger Nintendo Account framework, these features allow users to maintain their in-game progress indefinitely.
Why is maintaining in-game progress so important to users? For the non-gamers, imagine if you spent 50 hours dedicated to finishing the main quest of The Legend of Zelda: Breath of the Wild, widely considered one of the best games of all time. (By the way, 50 hours isn’t an exaggeration, it’s the consensus estimate). Imagine all that time spent exploring the game’s intricate puzzles, challenging enemies, completing quests and exploring the deep plot narratives. So much effort, time and emotional attachment.
Now imagine that Nintendo releases a new console, and you can’t carry over any of the progress. All that investment, gone! If all your progress is gone, what reason do you have to stick with Nintendo in the first place? We’ll be back to the cyclical and unpredictable five-year console generations of decades past.
When you multiply this feeling to a library of hundreds of classic and new titles, you can understand how truly important carrying over in-game progress is. Clearly, Nintendo recognizes this sentiment. The Nintendo Account and NSO systems hence give players the important peace of mind that they can seamlessly transition to the newer hardware without fear of losing their achievements and experiences. This increases the switching costs for customers thinking about leaving the Nintendo ecosystem, hence locking them in.
Astute observers will see the parallel to Apple’s “walled garden”. Given the preciousness of user data, apps, and other exclusive services like Apple Music, Apple News, iCloud and more, Apple has similarly created a sweet lock-in effect making it difficult for customers to leave.
Similarly, Nintendo Accounts and NSO have redefined Nintendo’s relationship with its customers from one based on consoles, to one based on online accounts and subscriptions, while offering essential services like maintaining player progress. These services are hence shaping up to be major long-term drivers for customer attraction and retention.
2: Backward compatibility
Technological innovations in the console industry have made backward compatibility easier than ever before. Without going into too much technical detail, the environment and architecture for console development has become increasingly standardised. This standardisation reduces the need for modifications when switching to newer consoles, so hardware and software systems can more smoothly adapt to previous versions’ interfaces.
Moreover, the proportion of console games that are online has increased. This is important as the technical ease of adapting new consoles to run online games is far lower than for physical games. Furthermore, cloud and emulation technologies make backward compatibility even easier, with these technologies already being used today. Games like Assassin’s Creed Odyssey and Resident Evil 7 are already running on Switches through the cloud. Emulation also allows classic NES and SNES and N64 games to be run, bundled with an NSO subscription. All these factors make it much easier for games and player progress to be transferred to new consoles, incentivising brand loyalty as customers stay to play the same games, with their progress intact.
3: Iterative Upgrades and Planned Obsolescence
Beyond backward compatibility, Nintendo is leveraging its Switch ecosystem to lock-in customers with iterative, not disruptive upgrades.
What’s the difference? Let’s return to the Apple comparison. An iterative upgrade will be swapping in an iPhone 12 for an iPhone 15, while a disruptive upgrade will be swapping in an iPhone 12 for a Vision Pro. An iterative upgrade builds upon an existing customer base, a disruptive upgrade starts from zero. Similarly, an iterative upgrade for a Nintendo customer will be switching from the original Switch to a Switch OLED, while a disruptive upgrade will be switching from the Wii U to a Nintendo Switch.
Nintendo’s actions since the Switch’s release reveal that its medium-term plan is to make iterative upgrades to the Switch family, and not disrupt it entirely with a completely different console. Yet the beauty in this is that every few years, technological innovation will inherently render older Switch versions obsolete, allowing Nintendo to reap the benefits of planned obsolescence: customers are incentivised to upgrade to newer and better Switch devices every few years, while still maintaining their progress and data due to backward compatibility. This allows Nintendo to maintain its customer base while keeping pace with technological innovation.
Of course, Nintendo won’t stick with the Switch in its current form forever. But such is the nature of progress, that the iPhone 1 can dramatically transform to the iPhone 15 through only iterative, not disruptive, upgrades. Some may argue that the nature of consoles is such that their form is much more varied than phones, and hence Nintendo will have to disruptively upgrade its console some day. Fair enough. But at that point, it’s fair to say that Nintendo’s relationships with its customers won’t be defined by consoles, but by customer accounts. Coupled with the increasing ease of backward compatibility, this should allow for a seamless transition to Nintendo’s “next” console, whenever that comes around.
What iterative upgrades has Nintendo made thus far? Nintendo has not released a direct sequel to the original Switch (i.e. a Switch 2), but it has expanded the Switch family with the Switch OLED and Switch Lite. The Switch OLED is a premium version of the original which features upgraded specs, most prominently a 7-inch OLED screen, for an additional $50. Meanwhile, the Switch Lite is a smaller, handheld-only version of the original that costs $100 less. These three price points are eerily reminiscent of Apple’s “good, better, best” product line-up, and for good reason. By creating three versions of a similar product at different price points, Nintendo has increased the TAM of the Switch and shown its commitment to building the Switch ecosystem. For proof, just take a look at this graph, taken from a financial presentation for Nintendo’s FY24 Q1 (April to June 2023). It shows that the OLED Model has already overtaken the original model in sales, as customers seek to either upgrade their old Switches to the new and improved model. The trend is clear: Nintendo does not need to stick with the original Switch to maintain the Switch family ecosystem.
It’s important to note that backward compatibility and planned obsolescence are not contradictory. Planned obsolescence creates replacement demand as customers upgrade their consoles to enjoy the benefits of innovation. Simultaneously, backward compatibility ensures that when customers do upgrade their consoles, they stick with Nintendo so that they can port over their favourite games, along with their in-game progress and data.
Again, this parallels Apple’s hardware business model. Backward compatibility and planned obsolescence have allowed Apple to generate steady iPhone sales, driven primarily by replacement demand (i.e. people upgrading their iPhones) rather than demand for an entirely new phone (i.e. switching from other phone brands to the iPhone). In the same way, they will allow Nintendo to generate resilient sales.
Conclusion
These three distinct but interrelated features of Nintendo’s ecosystem — backward compatibility, iterative upgrades, and the Nintendo Account system — have enabled a business transformation toward a more stable customer base and revenue stream.
If you doubt that this can happen to a console maker, just take a look at Nintendo’s competitors. The Xbox Game Pass and PlayStation Plus subscription models have become greatly important to customers, and users’ experiences with Xbox and PlayStation are now primarily dominated by their online accounts, not their consoles.
If Nintendo’s competitors have proven that this transformation can take place, why do people still doubt Nintendo? Nintendo has historically been perceived as a laggard in adopting new technologies and trends, with a prominent example being its failures in mobile gaming.
Historically, this has been true. But on this front of building a strong integrated hardware-software gaming ecosystem, Nintendo has succeeded. Arguments of “peak Switch” are as baseless as those of “peak iPhone” in the early 2010s. Nintendo is no longer at the mercy of the unpredictable booms and busts of the traditional console generation cycle.
