Nintendo’s Q3 financial results have been shared and an overall take could probably be a simple “yep, business as usual”.
Arguably it’s a little better than that, though, with an exceptional Q3 (driven by strong sales in the Holidays) allowing Nintendo to increase its projected profits (albeit while shaving a little off hardware projections). Barring any unexpected shifts in momentum, the Switch will sell well over 20 million systems for the year by the end of March, while around 220 million games will have been sold in that period. As you can imagine, impressive profits are also expected.
Of course, when you drill down into the financial results you can find positives and negatives depending on your mood. As has been highlighted repeatedly, the current year’s results are consistently down on 2020/2021, by almost all metrics. We all know why — 2020 in particular was unique in terms of recent history, when the market for home entertainment went through the roof.
Nintendo’s big strength, as it has been for over three decades, is in producing and selling physical entertainment goods. This isn’t just in terms of the numbers, but in the gaming culture it’s cultivated.
When reading through Nintendo’s briefings and notes the trends are all too familiar. Nintendo’s big strength, as it has been for over three decades, is in producing and selling physical entertainment goods. This isn’t just in terms of the numbers, but in the gaming culture it’s cultivated — you only need to see the sheer volume and variety of physical edition games, and the ‘limited edition’ industry for Switch titles, to appreciate how a significant number of Nintendo fans value and prize physical media and collectibles. It’s a strength that Sony and especially Microsoft have struggled to match in terms of the ‘big hitters’ in console gaming.
If Nintendo ‘rules’ the physical media space, though, it is still arguably lagging behind in the digital sphere; that leapt out in the financial results around other more positive angles. Nintendo’s digital business — which incorporates everything from eShop games, Switch Online subscriptions, microtransactions and more — is behind its rivals. Now to give the results their due, overall revenues from digital sales were up in Q3, in line with the huge figures and momentum being generated by physical copies.
Nintendo’s digital sales and strategies aren’t delivering consistent growth, though, as even a huge Pokémon-fuelled Q3 couldn’t drag the financial year of digital sales past 2020’s figures. The percentage of revenue that digital sales contribute is also rather flat (the red line shows this), and was down to 35.3% in the last quarter. Yes, there was COVID driving a spike in 20/21, but Nintendo has also struggled to capitalise and take its online offerings and revenues forward.
Let’s compare, for example, with PlayStation. Sony’s business in this sphere has some key advantages over Nintendo — for one thing, more revenue is generated from add/ons and microtransactions than games, an extraordinary indication of the power of the likes of Season Passes and FIFA Ultimate Team, areas where Switch largely misses out. The digital side of the market accounts for 62% of Sony’s game sales revenues.
You could argue the other way, of course — Sony’s revenues from boxed sales are comparatively low in relation to various digital sales on PSN. Each company has a particular strength, leading in one facet over the other. Nintendo has a market and culture around physical media that will be the envy of its rivals, while it will have noticed that its digital revenues aren’t in the same ballpark as those on PlayStation (where 3 months of revenue is similar to 9 months for Nintendo). A product of very different ecosystems and game libraries.
Nintendo has a market and culture around physical media that will be the envy of its rivals, while it will have noticed that its digital revenues aren’t in the same ballpark as those on PlayStation
Nintendo, to be fair, has also made steady improvements in its digital offerings. It probably doesn’t promote its Nintendo Switch Online Game Vouchers enough, which open up digital savings on first-party retail games. My Nintendo Gold Points are also a small but underrated perk, building up with each purchase for decent and regular eShop discounts. Nintendo Switch Online and its Expansion Pack are where critics are far easier to find, however, with those positive about the offerings likely outnumbered by those eager to share complaints.
As an attempt at a subscription service that also covers a charge for cloud saves, it’s an area where Nintendo has struggled to win over fans and create a positive narrative. The focus on retro games that were once Virtual Console titles doesn’t suit everyone, nor does the drip-feed of games and continuing absence of some popular titles. While plenty may swallow the costs of NSO to continue online play in the likes of Mario Kart 8 Deluxe, overall sentiment for the service (and in particular the Expansion Pack) never seems particularly strong.
Nintendo hasn’t yet given a firm update on NSO subscription numbers (it may yet do so in a later Corporate Management Briefing), but highlighted the release of Animal Crossing: New Horizons – Happy Home Paradise DLC as contributing to increased non-retail download revenues. The Indie scene remains vibrant on Switch, and it’s also clear that in the Holiday season a decent number of gamers opted for downloads of major retail games, so there are some positive signs for this particular aspect of Nintendo’s business..
If gaming is heading towards a future where user numbers for online services become increasingly vital, though, Nintendo will no doubt continue to review its approaches. The Switch now has a more modern infrastructure than when it launched, but there’s plenty of scope for improvement. Nintendo’s output (and that of third-parties on its hardware) also lags behind in DLC and microtransactions; while the latter aren’t always popular, the former can make games better in many cases, like they did in MK8, Animal Crossing: New Horizons and The Legend of Zelda: Breath of the Wild. It’ll be interesting to see how Nintendo aims to boost its digital revenues, and whether this’ll include more frequent add-on content for its own releases.
It’s a tricky conundrum, but trends suggest that the gaming scales will continue to tip towards the non-physical in the future. While Nintendo can still keep fans happy with physical media, the need to capitalise of the market for those that want more download and online services won’t go away. Whether that’s in new or amended subscription offerings, more DLC content, an eShop shake-up or a mix of all three, it’ll be interesting to see where Nintendo’s ever-shifting strategy takes it next.