TOKYO – Nintendo has a coronavirus era problem of which its rivals can only dream of: it can’t make gaming products fast enough to meet roaring stay-at-home demand.
As the world reels amid cratering economic growth, rising unemployment and shaky asset prices, the Kyoto-based consumer electronics company saw its profit more than triple in the first quarter year on year.
That US$830 million operating profit owes largely to surging sales of its Switch game console and to the serendipitously timed March 2020 launch of its Animal Crossing: New Horizons game, which has been a smash hit.
With the popular Wii and Switch consoles and a legendary gaming portfolio that includes world-renowned series Super Mario, The Legend of Zelda and Pokémon, the sky is the limit for Nintendo as pandemic-driven change in consumer behavior forces billions to entertain themselves at home.
Nintendo’s hybrid console and its latest runaway hit game has taken even chief executive officer (CEO) Shuntaro Furukawa by surprise. “Animal Crossing’s impact was bigger than expected,” he told investors recently.
The game enables users to create their own idyllic towns inhabited with neighborly talking animals and interface with other on-line players. It helped Nintendo sell 21 million Switch consoles for the fiscal year that ended in March, comfortably north of its 19.5 million forecast.
Nintendo sold a whopping 4.2 million units worldwide in March alone, figures one might ordinarily see over the holiday season, accounting for almost a fifth of the year’s total console sales. Furukawa’s team earlier expected to sell 19 million units in the current financial year.
That makes Nintendo a rare corporate animal: a Covid-19 era winner. By comparison, Sony, maker of the rival PlayStation gaming console, just reported a 57% drop in operating profit for the January-March period.
The question, however, is can Nintendo keep the good profitable times rolling? The answer — and how Nintendo arrives at it — could be a telling sign for how Japan Inc technology icons ultimately profit or lose amid the Covid-19 storm.
Nintendo’s widespread appeal has been seen in its 40% share-price rally since mid-March, twice Sony’s 20% gain. Part of Nintendo’s toybox-like charm lies in its child-friendly content with deep-but-accessible gameplay mechanics. Most of its peers aim their wares at older gamers, often to violent effect.
Being seen as “not harmful to kids” and a “reliable brand” means demand will “likely continue to be strong,” predicts Hirokazu Hamamura, head of Famitsu Group, an outfit which produces gaming magazines.
At the same time, Masahiro Ono of Morgan Stanley MUFG Securities, reckons the coronavirus shock will “trigger long-term structural changes in demand” as more casual gamers swing from smartphones back to home consoles.
Nintendo was arguably late to the smartphone gaming party, only embracing the trend in 2016 with a portfolio of mobile offerings based on its trademark titles and characters that have since generated more than $1 billion in lifetime revenue from global player spending on Apple’s App Store and Google Play, industry data shows.
Now, though, there are clear signs that demand is migrating back toward clunkier, high-functionality products. That has much to do with untold millions gaming in their sitting rooms rather than while on-the-go.
The game-changing appeal of Switch’s console, though, is that it offers multiple ways to play, with its core innovation being that it can be docked and displayed on a television or played in handheld mode. Nintendo is also selling cheaper Switch Lite units that offer only handheld play.
Going forward, the more immediate question for the legendary hardware and games developer is whether it can repeat its 33.3% gain in net profit, which rose to $2.43 billion in the fiscal year that ended in March. It won’t be easy, analysts say.
One potential pitfall: plunging global demand for everything as incomes dry up and unemployment rises everywhere.
Of the nearly 12 million units of Animal Crossing sold last fiscal year, 70% of the shipments were made overseas. The same is true of demand for other titles, including recent entries in the Super Mario and Pokémon series.
Nintendo will thus have to hope that less spending power and more nights-at-home rather than out-on-the-town equate to more gaming purchases. Supply-chain troubles are another challenge, as technology companies source from all corners of the globe, including those more badly affected by the virus crisis than Japan.
Any hold ups in the circuitry, plastic, glass, packaging, coding and assembly that goes into products bedevil the production process, never mind the shelter-in-place quarantine orders that have upended every phase of manufacturing across multiple geographies.
Back in February, Nintendo was caught unprepared for the surge in demand for its products. In North America, Switch consoles suddenly became hard to find as Amazon, Best Buy, Target, Walmart and others quickly sold out of their units.
Scalpers took to eBay and other online bazaars to hawk consoles at extortionate markups. “Sold Out” signs also became the norm in East Asia, from Singapore to Tokyo.
Chinese fans have been paying premiums of up to 50% for imported, unlocked Switch consoles that enable gamers to avoid regulatory hurdles. China’s game licensing guidelines are among the strictest in the industry, with local laws requiring games to be individually approved by the government.
At present, the Chinese version of Switch, launched by Nintendo and local gaming giant Tencent, currently sports just three games, in sharp contrast to the more than 2,000 titles available for purchase in other regional markets.
That, says analyst Daniel Ahmad of gaming research firm Niko Partners, “will always lead to core console players importing the gray market versions first.”
In the US alone, video game sales hit a record $10.8 billion in the first quarter of this year, an increase of 9% year-on-year. That boom was made possible by non-gamers looking for new ways to pass the time under coronavirus lockdown.
Home isolation led to surging demand for Ring Fit Adventure, a popular fitness game released by Nintendo last October that has continued to ride high atop Japanese sales charts, second only to Animal Crossing.
The game offers a novel but robust workout using motion-tracking on the Switch’s Joy-Con controllers to track exercises like knee lifts and thigh presses performed using a pilates ring-style accessory.
But stock shortages and coronavirus-induced supply issues have made Ring Fit Adventure so difficult to find that Nintendo president Shuntaro Furukawa earlier this year extended an apology to vexed consumers eager to stay fit while under quarantine.
“As people have stayed at home more, they’ve utilized gaming not only as a diversion and an escape, but also as a means of staying connected with family and friends,” says analyst Mat Piscatella of the NPD Group research consultancy.
“Whether it was on console or mobile, PC or virtual reality, gaming experienced play and sales growth during the first quarter,” he said.
At the time, says Serkan Toto of consultancy Kantan Games, Nintendo could’ve sold “multiples of what was in the inventory.” The Kyoto-based firm has since scrambled to get more creative at sourcing components that suddenly went scarce at factories in China, Vietnam and elsewhere.
As a Nintendo spokesman puts it, the company is at risk of Switch production “possibly being affected if there continues to be issues involving the procurement of necessary components.”
As such, he acknowledged “a decrease in production and sales volume is expected for a certain period of time.”
One of Nintendo’s key challenges is how it chooses to weigh the spending of its research and development budget between core console games and upstart mobile-based offerings. That’s an industry-wide conundrum, as is rolling out a steady stream of new hit games.
The old “content is king” maxim matters: the rollout of new titles helps to reel in new players while keeping the thumbs of loyal users busy. That goes, too, for younger gamers rallying around benign user experiences like that provided by Animal Crossing.
“It’s an uncertain world already, and no one wants war and horror games in their living room,” opines analyst Hideki Yasuda of Ace Research Institute. “Animal Crossing keeps the parents happy, too.”
Some industry watchers had pointed to an apparent dearth of blockbuster titles on the Switch’s upcoming release roster. Apart from reissuing stand-outs from its deep library of older titles, Nintendo had been tight-lipped about new game releases since the start of the outbreak.
The surprise announcement in May of Paper Mario: The Origami King, though is set to reboot a colorful fan-favorite series whose sales could help to keep investor sentiment buoyant upon its release in July.
Sony, too, must grapple with the same dilemma as it copes with production delays for major titles and tries to meet a scheduled rollout for PlayStation 5 by the 2020 holiday season. Ditto for Microsoft’s next-generation Xbox series.
To be sure, Nintendo would be wise to update its three-year-old Switch hardware at a moment when Sony and Microsoft are doing just that. Still signs point to Nintendo setting investors up for another favorable surprise in this new fiscal year.
The 130-year-old consumer electronics icon is famously conservative in its forecasts for sales, profits and the trajectory of both the Japanese and global economies. This, analysts say, makes its projections credible.
“Nintendo expects to sell 19 million Switch console units between April 2020 and March 2021,” says analyst Rupantar Guha of research firm GlobalData.
“This guidance is conservative given the rising market demand, and reflects the company’s inability to predict with any degree of confidence when production will be back on track,” he adds.
That conservatism was a major attraction for US activist firm ValueAct Capital Partners, which in April took a $1.1 billion stake in Nintendo. It spoke for many long-term investors when it urged CEO Furukawa to widen the company’s audience by expanding beyond today’s Switch hardware.
ValueAct is also spotlighting the future potential for Nintendo’s software unit to reinvent itself as a more diversified entertainment juggernaut. The San Francisco-based firm is no tech interloper. In the past, it has worked with Microsoft, Adobe and others to unlock what it has seen as untapped shareholder value.
And beyond Nintendo, ValueAct is now known to be scouring the corporate landscape to add additional cash-rich Japan Inc names to its portfolio
Herein Japan offers a range of advantages in the Covid-19 era: Not only has it handled the crisis with far less carnage than in the West, but massive stimuli are being rolled out by Tokyo left, right and center.
“Companies are fat with cash…consumption should hold up far better,” says analyst Nicholas Smith of CLSA Japan. As a result, Japanese stocks “…should be the preferred destination for outflows from markets that mishandled the crisis,” he predicts.
The Topix Index, Japan’s broadest major stock market barometer, is trading at 18 times expected future earnings, compared to the S&P500’s far more modest 21%. Smith also points to a recession-hit Japan rolling out a second $1 trillion stimulus package.
It helps that, as Smith puts it, “corporate Japan has a vast cash cushion: 56% of Topix non-financials are net cash.” At moments like this, Japan Inc’s rigidities have their merits.
For example, it is difficult for Japanese firms to shed staff at anywhere near the rate seen in the US. That means more locals maintain the earnings heft to buy Nintendo’s wares.
A shrinking labor pool caused by greying demographics, meantime, means each Japanese jobseeker can select between 1.39 jobs available: the working age population has shrunk 260,000 so far this year.
“With secure jobs, consumers can continue to consume,” Smith says. “Money fleeing harder-hit regions will likely target Japan’s dirt-cheap market.”
Nintendo’s challenge now is to keep both new and old users coming back for more. The risk, of course, is complacency. But Nintendo has proven to be among a rare grouping of Japan Inc firms with the potential to come out of 2020 stronger than it began.
As ValueAct wrote in an April letter to investors: “We believe Nintendo will be one of the largest digital media services in the world, in a category with the likes of Netflix, Disney+, Tencent Interactive Entertainment and Apple Music.”
Alexander Windsor-Clive of Lindsell Train Investment Trust says Nintendo has the wherewithal to “flourish in the long term, driven both by trends in the industry and the enduring resonance of its ubiquitous intellectual property, which has entertained quite literally hundreds of millions of people across the world over a multi-decade period.”
Nintendo has enviable intellectual property assets, positioning the company to “capitalize on the digital shift and future innovations in the sector,” Windsor-Clive says.
“Developments in cloud gaming, virtual reality, augmented reality and e-sports are still nascent but have the potential to fundamentally reshape the industry.”
Nintendo can thus offer Japan Inc a timely case study for a fabled company both adapting to a fast-changing industry and embodying the “Cool Japan” vibe that Prime Minister Shinzo Abe’s team has been trying to sell to the world.
Abe famously arrived at the closing ceremony of the 2016 Rio Olympic Games by popping out of an oversized green drainpipe positioned mid-stadium dressed as Mario, the mustachioed Italian plumber behind one of Nintendo’s most iconic and beloved game series. Immediately, “Abe Mario” trended across the Twitterverse.
As Abe began work in 2012 to revive the economy, he harnessed names like Panasonic, Sony and, yes, Nintendo, to popularize his “Cool Japan” campaign, which grew out of American political scientist Joseph Nye’s “soft power” strategy to harness cultural sensations to generate goodwill.
Intentionally or not, Nintendo has helped millions to take their minds off the misery and woe of global pandemic and immerse themselves in other, less threatening worlds. And it’s put Japan Inc at the profitable forefront of virus-induced changes in consumer demand and behaviors.
