Post by Ztrl on Dec 18, 2005 20:25:59 GMT -5
Latest Line #3: The Truth About Nintendo – Part One
From the looks of Nintendo sites over the past few years, you would think Nintendo is about to pull another Sega.
“Frankly, I'm coming to the conclusion that Nintendo will never be "king" again, simply because they're a 1st party that acts like a third party (that cares only about its own games).” said long-time Nintendo writer Michael Cole in a recent special at PlanetGameCube.com.
Even some of our past editorial writers, such as Phillip Levin, have talked about Nintendo’s market dominance as long gone. “Nintendo can be number one again. But is Nintendo willing to do it? We’ll have to wait and see.” (Nintendo Analysis 4.)
There’s no way around it: what you’re about to read will surprise you. Some of you may want to print this article off and read it in a quiet, secluded place. Others will want to chew in short bites, taking large breaths and gulps of water during breaks. Undoubtedly, this article will challenge many of your preconceived notions about the Big N, and possibly change the way you see the video games systems war forever.
Though you wouldn’t know it from the pages of your normal Sony Fan magazine, or even the gullible, droning editorials of many Nintendo sites, Nintendo actually won the hardware race in 2004. In fact, Nintendo sold so many systems in 2004 that, in most cases, Nintendo outsold Sony and Microsoft’s systems combined.
This is no joke -- and that’s not the only battle Nintendo won. As I’ll reveal and analyze over the next three weeks, Nintendo has also made more money, sold more games and made better games than its competition’s video game sectors.
The numbers aren’t hard to dig up. Weekly, Media Create releases sales numbers in Japan for both hardware and software, and NPD Group in America reports hardware and software sales numbers by the month. Call it laziness or just plain dishonesty, but the mainstream press in America has successfully twisted the facts about the hardware sales race, and we as Nintendo gamers have bought into the myth that Nintendo is #3 behind Microsoft and Sony.
But no more. Call this editorial a call to arms. Call it a reawakening. Whatever you call it, know this: these are no Nintendo talking points, and this is not a fanboy “gotcha!” treatise looking at how the GameCube outsold the Xbox by ten systems in April 2004. And this is no console bash party trying to put down Sony and Microsoft. No: in my usual, freethinking style, I’ve simply done the research and have come out with results that, if you’ve been reading the mainstream press lately, will surprise you.
BATTLEFRONT JAPAN
Japan has traditionally been a tough nut to crack for American companies. In fact, looking at the 2004 hardware sales numbers, an impossible one: Microsoft sold an entire 37,982 Xbox systems in 2004. In contrast, during the last week of 2004 alone, the Game Boy Advance SP (even with the new DS out) sold 116,801 systems.
Thus, it will probably not come to your surprise that Xbox was the #7 video games system in Japan in 2004. The #1 system? The PlayStation 2, with 2,898,774 sales. Everything in between, save the PSP, is Nintendo territory. At a very close second was Game Boy Advance SP with 2,647,762 sales. In third was the Nintendo DS with 1,495,596 sales, and in fourth was the GameCube with 726,640 sales. In fifth was the Sony’s PSP with 482,252 sales, and in sixth was the Game Boy Advance with 200,678 sales. Behind the Xbox, and in eighth, was the PSOne with 14,163 sales.
Now, let’s take a step back and look at the big picture.
In the three-way race between Microsoft, Sony and Nintendo, Nintendo is very far from third place in Japan. In fact, as you can see, it is in first place. Of the 8,503,847 systems sold between the three companies in 2004, Nintendo sold 60% of the video game systems in Japan. Yes, you read that right. Nintendo held a 60% market share in Japan in 2004, outselling Microsoft and Sony combined. (Source: Media Create.)
BATTLEFRONT AMERICA
America in 2004 was no different, save for the fact that the PSP had not yet released. Unfortunately, NPD is not as diligent in releasing hardware and software sales numbers, but there are still plenty of charts available. The last time the cumulative installed base numbers were released (in other words, the total number of systems sold to date) was in July 2004. Below, you can see the total number of systems sold in North America through July 2004.
As you can see once again, for lifetime sales through July 2004, Nintendo took the top spot. (Note, Nintendo sold 22,579,000 Game Boy Advance systems and 7,672,000 GameCube systems.)
However, it gets even more interesting when you go on with 2004. In September 2004, Nintendo sold 641,922 systems (GBA: 527,133, GCN: 114,789), while Sony sold 253,295 systems and Microsoft sold 265,067 systems. In September 2004 and on through the end of the year, Nintendo sold more systems than its two competitors combined. Also for the rest of the year, the Game Boy Advance would outsell the PlayStation 2, meaning Nintendo had the #1 individual system in America for these months as well as the largest market share.
October 2004 is largely the same story as September, so I’ll spare you the graph, but Nintendo sold 574,000 systems (GBA: 464,000 systems, GCN: 110,000), Sony sold 289,000 systems, and Microsoft sold 217,000 systems.
November 2004, however, is where the numbers really get interesting. Nintendo sold a whopping 1,929,000 systems – that’s nearly 2 million. The Game Boy Advance alone sold 1,100,000 units, despite the release of the Nintendo DS; the Nintendo DS sold 479,000, and the GameCube sold 350,000. Sony sold 694,000 systems (PS2), while Microsoft sold 708,000 systems (Xbox).
The numbers are absolutely mind boggling. Remember how Nintendo sold 60% of the systems in 2004 in Japan? There, Microsoft was a no show. In November 2004, Nintendo sold 58% of the systems. Granted, the Nintendo DS was out and the PSP wasn’t (unlike in Japan), but even in September 2004, Nintendo sold 55% of the systems. (Source: NPD.)
WHAT THESE NUMBERS MEAN
Well, they mean one thing for sure: Nintendo isn’t going third-party any time soon. Nintendo held a clear market dominance in 2004, both in hardware sales and, as we’ll analyze next week, profit. It is absolute folly to think that Nintendo is somehow suffocating at the hands of Sony and Microsoft.
Let’s be clear: the GameCube isn’t in 1st place – that award goes to the PlayStation 2, with the Game Boy Advance in 2nd. It is likely that the GameCube is behind the Xbox in worldwide sales, though the race is really too close to call. Going by the companies’ own numbers in financial statements (note that all the previous numbers I’ve given you thus far are from Media Create and NPD, not from the companies), the Xbox sold 13.7 million worldwide through the end of 2003, according to Microsoft, while the GameCube sold 13.94 million worldwide through the end of 2003, according to Nintendo. This is a very slim margin, but Microsoft most likely gained more ground during 2004, with the Xbox picking up increased sales in North America and Europe and the GameCube picking up increased sales in Japan.
But the Xbox and GameCube race aside, Nintendo has done remarkably well in the race for total market share.
AND WHAT THE PSP REALLY MEANS TO NINTENDO
However, the release of Sony’s PSP means that, in 2005, Sony could quite possibly takeover Nintendo in total marketshare, which will come as a surprise to you who thought Sony overtook Nintendo for good a decade ago. While much of the press has made the DS vs. PSP race to be a win or die situation for Nintendo (meaning, if the PSP wins, Nintendo could slip out of the video games hardware race), it’s quite clear that Nintendo is nowhere close to dying. Instead, the emergence of the PSP simply means that Nintendo could lose its market dominance.
Thus far, the Nintendo DS is doing quite well against the PSP in Japan (the below graph shows lifetime sales through April 10th.)
However, and here’s the key thing: thus far, Nintendo has maintained its lead by the Game Boy Advance SP nearly matching the PlayStation 2 in sales, and with the GameCube putting Nintendo over the top. Now, for Nintendo to maintain its lead, the Nintendo DS, Game Boy Advance and GameCube must match the PlayStation 2 and PlayStation Portable. Even if the Nintendo DS beats the PlayStation Portable in sales, which is very likely, the PlayStation Portable will still add even more sales to Sony’s column, meaning more for Nintendo to make up. Thus far in Japan 2005, the scenario of Nintendo losing its 2004 market dominance is becoming reality.
And that’s the real reason why the release of the PSP is such a big thing for Nintendo, and why Nintendo has chosen to go the three pillar route.
WAKE-UP CALL
I’ve written this article, researched the facts and drawn up these graphs not out of some foolish fanboy spite for Microsoft and Sony (if it was, I wouldn’t have included the above section), but to show to you, the reader, the real present state of Nintendo. Whether it’s the multiplatform magazines or even Nintendo fansites, there has been a peculiar laziness among gaming journalists in researching the market race, leading gamers everywhere to make broad statements such as: “Nintendo will go the way of Sega,” “Nintendo will never be #1 again,” or “Nintendo is #3 behind Sony and Microsoft.”
In fact, even if Nintendo were to get killed in market share, Nintendo would still be alive and well, as long as it continued making profit. Market share is only one piece of the puzzle. But anyway you spin it, Nintendo is doing quite well for itself as a company.
It’s time to start the discussion. It’s time to challenge the mainstream press, which has been able to dominate the public’s perception of Nintendo for far too long. It’s time to challenge the conventional ways of thinking and begin intelligent gaming discourse.
Latest Line #4 - The Truth About Nintendo – Part Two
Success, I’ve always said, is much more than market share.
To have a successful system, you must not only sell a lot of the system, but make money off it, too. You can sell all the systems you want, but if you don’t turn a profit, you’ll go down the drain as a company.
Nintendo understands this – nay, it lives by it. While many have been irked by Nintendo’s conservative business practices, if you look at the company’s bottom line, it’s not hard to see why it has gone down the path of fiscal responsibility.
Many have made a big deal over the race between Xbox and GameCube, with Xbox in the lead with slightly over a million (19.9 million vs. 18.8 million). However, I find this lead to be more or less irrelevant. One, you have a system in another corner, Sony’s PlayStation 2, murdering each system by almost 70 million. The lead by the Xbox suddenly becomes quite small, doesn’t it?
And two, the market share comparison ignores the profitability of the systems, something I see as intrinsic to success. If Nintendo had the Xbox right now rather than GameCube, it would be struggling as a company. Xbox is not a profitable system. Microsoft can afford to lose money on Xbox simply because it is Microsoft and makes billions of dollars off other divisions, but Nintendo can’t – it sells only video game hardware and software. It’s make money or die.
In The Truth About Nintendo – Part One, this space took a look at market share – one contributor to Nintendo’s success. Nintendo, as I noted, not only makes the GameCube, but also the Game Boy Advance and Nintendo DS, off which it garners many, many sales. The stated purpose of these columns is to show that Nintendo is certainly not pulling another Sega anytime soon. We can’t forget the other two systems when discussing Nintendo’s health as a company.
However, this week may hold the most important piece of the puzzle – profitability. Once again, the numbers aren’t hard to find – Nintendo, Sony and Microsoft, all publicly traded, are required by law to release their fiscal results every quarter. But, for whatever reason, financial health has often been ignored by the press. This column will take a look at what truly keeps Nintendo going – profit.
SELLING SYSTEMS, LOSING MONEY
In the current video game market, in which consumers are demanding more and more powerful video game consoles, but also at a reasonable price, companies like Microsoft have found it necessary to sell their systems at a much cheaper cost than is required to make them. In other words, for every system Microsoft sells, it loses money. The company then hopes that the price of manufacturing lowers over time, and the lost money will be made up through software sales.
Though Microsoft doesn’t announce how much it costs to make an Xbox, analysts have put the system at over $300 – some say $375, while more conservative analysts put it at about $325. While it is true that the price of manufacturing lowers over time, and it may have dipped below $300 by now, Microsoft is now selling the Xbox cheaper than it did at launch -- $150, compared to $300. Microsoft is losing at least $100 per system sold, and possibly more, and coupled with other expenses, as you’ll see below, they haven’t exactly been able to make up for it.
Sony is facing a similar situation with PlayStation Portable (and the PS2 before that, but the PS2 was able to overcome this obstacle very quickly because of strong sales). A recent Bloomberg report says it costs 30,000 yen to make a PSP, or roughly $275. Sony is selling the PSP for $250 in America, so a $25 loss is not bad at all. But the system goes for a low 19,800 yen, or roughly $185, in Japan, meaning a $90 loss per system. Sony does say the price of manufacturing should go down soon, though, once the outsourced companies making much of the system’s parts see the system is successful.
In the final corner, Nintendo has it much better. When the system wars began, Nintendo GameCube was actually making money for each system sold, as Nintendo didn’t bother with all the extra non-gaming functions of its competitors, like DVD movie playback. The system was still making Nintendo money at $150, and it wasn’t until its $99 price tag that it was estimated Nintendo was losing money – but only in the single digits.
The same goes with Nintendo DS; Nintendo has done everything possible to keep manufacturing costs down and to make a profit with each system sold. For instance, the Nintendo DS doesn’t play GB and GBC games primarily because this would cost more money. Nikkei Electronics Asia also has a very interesting article on the cost control features of the Nintendo DS.
Now, it may be hard to understand how this affects each of the companies, but it all makes sense when we look at each of the companies’ financial reports.
EXPLAINING TERMS
Before we dive in to the intimidating world of financial reports, though, let’s define a few terms first.
First, you have “sales,” or revenue. This is a pretty raw number which tells us how much money a company made in selling products. Secondly, and probably the most important term for this discussion, you have “operating earnings,” also known as operating profit (if you made money) or operating loss (if you lost money). Operating earnings is, essentially, “sales” minus the cost of goods sold (how much it cost to make the products), marketing expenses (which the Big 3 certainly have a lot of), administrative costs, etc. So, this is where big spending and taking a loss on system sales may come to haunt a company.
Finally, you have “net profit” (or “net loss”), also known as the bottom line. This would normally be the most important thing to look at in a company’s financial reports, as it tells us the final amount of revenue a company made after taxes. However, companies like Microsoft and Sony only report “net profit” for the entire company. If we were only to look at net profit, Microsoft would win because it also makes products like Windows. In this discussion, we will look at operating earnings because those numbers are available for each of the company’s game divisions.
There is one other word of caution I must make – Sony and Nintendo have a different fiscal year than Microsoft. Yes, companies are strange and don’t start their years with January and end with December. Instead, Sony and Nintendo start with April and go through the next March in reporting fiscal results, while Microsoft starts with July and goes through the next June. While Sony and Nintendo’s most recent fiscal year results are out, Microsoft’s are not, because they are not finished with the fiscal year. For this discussion only, I will include the fourth quarter of its last fiscal year along with the first three quarters of its current fiscal year in examining financial health. (Basically, the numbers below take a look at the four most recent quarters for each company).
THE BIG TEST: OPERATING EARNINGS
I’ll start with Microsoft. As I alluded to earlier, the Xbox isn’t exactly doing a lot for Microsoft financially. Every fiscal year, Microsoft has reported a sizeable loss in operating earning for its Home and Entertainment division. Now, the Home and Entertainment division does not only do Xbox – it also does PC games and Microsoft’s “TV platform” – but the Xbox makes up the largest part of the division.
The news isn’t all bad – in Microsoft’s second quarter of fiscal year 2005, the Home and Entertainment division made profit for the first time ever, thanks to $300 million in sales by Halo 2 alone and overall revenue of $1.4 billion. Microsoft ended the quarter with an operating profit of $84 million. However, the very next quarter, the Home and Entertainment division was back to where it began, with sales of $593 million but an operating loss of $154 million. That kinda cancels that one out, doesn’t it?
Backtracking, in the first quarter of fiscal year 2005, the Home and Entertainment division reported $632 million in revenue, but ended with an operational loss of $142 million. And in the fourth quarter of fiscal year 2004, the Home and Entertainment division reported $499 million in revenue, but a $339 million operational loss.
Put it all together, and for the last four quarters, Microsoft’s Home and Entertainment Division has reported revenue of over $3.1 billion but a $551 million operational loss. The Xbox’s selling at a loss, as well as very high marketing spending, were major contributors to the operational loss.
Next, we have Sony; unlike Microsoft, its games division was profitable during the most recent fiscal year. Overall, revenues were at 729.8 billion yen, or approximately $6.76 billion. Its operating profit was 43.2 billion yen, or $400 million. Still, that’s over a $6 billion drop going from revenue to operating profit, and a 36.1% drop from the previous fiscal year. One of the prime instigators, says GameSpot? The PlayStation Portable launch.
And finally, we have Nintendo. Even with three systems in its hands, including a recent launch of the Nintendo DS, Nintendo’s operating profit increased by 3.6% in the new fiscal year to 111.5 billion yen, or $1.03 billion. Its revenue was also 515.3 billion yen, or $4.77 billion, meaning a $3.74 billion drop from revenue to operating profit, compared to Sony’s $6.36 billion drop. Quite simply, Nintendo’s conservative business principles have allowed the company to turn respectable operating profits. No drop because of the DS launch or even less GCN sales here.
INVESTORS TRUST NINTENDO
You may not hear a lot about Nintendo’s fiscal strength in the press, but investors understand it well. According to Reuters, in the most recent fiscal year, Nintendo was one of the few video game companies that gained in the stock market. The company's shares rose 11.3 percent in the last fiscal year, while Electronic Arts lost 3.6 percent, Microsoft dropped 3 percent and Sony lost 2.1 percent.
WHAT THESE NUMBERS MEAN
Just like last week, we can pretty much nail one thing right off the bat – Nintendo certainly isn’t going to pull another Sega any time soon. What we have here is a successful company that knows what it has to do to turn a profit.
We also see the fiscal consequences of managing a video game system like Microsoft, or even Sony. It should be abundantly clear that if Nintendo made the GameCube more powerful than Xbox, put DVD movie playback features into the GameCube, took the ‘Cube online like Microsoft, etc., it would only have negative consequences on the company.
Let’s be clear – Microsoft can afford to lose money on Xbox. In fact, spending as lavishly as Microsoft has done on the Xbox will only help the company in the long run, and Microsoft expects to start making profit by fiscal year 2007. But Nintendo isn’t Microsoft – they don’t have a Microsoft Windows to absorb any losses.
THE REVOLUTION REVISITED
In the last Latest Line, with Nintendo’s market share analyzed, we looked at how Nintendo’s decision to bring out a third pillar really did make sense.
Similarly, an analysis of Nintendo’s profitability helps us understand Nintendo’s path with Revolution. The PlayStation 3 and Xbox 360 will be many times faster than their predecessors, while the Revolution will only be 2-3 times faster (says USA Today, anyway). It seems clear that, if Nintendo desires to remain profitable, trying to win a video games arms race isn’t going to help much, and Nintendo has realized that.
WAKE-UP CALL: PART TWO
I didn’t mention it in the article, but Nintendo ended its most recent fiscal year with its net profit skyrocketing 163% over the previous year. Next year, it expects to pull in another 75 billion yen in net profit; in comparison, Sony as an entire company (including the electronics division, games division, etc) expects to bring in 80 billion yen. And Nintendo only makes video games.
Are we really supposed to believe Nintendo is struggling?
Success is a funny thing. Most of the time, as video gamers, we have a tendency to look at how game companies are doing from our glasses only, meaning how many sales their consoles have made in North America and how much third-party support each system has - and that’s to be expected.
But when we take a step back and try to see the big picture, especially from Sony, Microsoft and Nintendo’s perspective, we see a different ball game. Suddenly, we see that Nintendo is actually pulling in a nice amount of cash, that Nintendo depends on more than just GameCube for market share, and that Microsoft isn’t doing as well in territories like Japan as it is in North America. When we determine the success of companies like Nintendo, we must not limit ourselves to simply North American console sales.
The next Latest Line, and the final part of this trilogy, will take a look at yet another reason for Nintendo’s success: game sales. I hope you’ll stick around to see how, now more than ever, Nintendo derives much of its success from its innovative games.
From the looks of Nintendo sites over the past few years, you would think Nintendo is about to pull another Sega.
“Frankly, I'm coming to the conclusion that Nintendo will never be "king" again, simply because they're a 1st party that acts like a third party (that cares only about its own games).” said long-time Nintendo writer Michael Cole in a recent special at PlanetGameCube.com.
Even some of our past editorial writers, such as Phillip Levin, have talked about Nintendo’s market dominance as long gone. “Nintendo can be number one again. But is Nintendo willing to do it? We’ll have to wait and see.” (Nintendo Analysis 4.)
There’s no way around it: what you’re about to read will surprise you. Some of you may want to print this article off and read it in a quiet, secluded place. Others will want to chew in short bites, taking large breaths and gulps of water during breaks. Undoubtedly, this article will challenge many of your preconceived notions about the Big N, and possibly change the way you see the video games systems war forever.
Though you wouldn’t know it from the pages of your normal Sony Fan magazine, or even the gullible, droning editorials of many Nintendo sites, Nintendo actually won the hardware race in 2004. In fact, Nintendo sold so many systems in 2004 that, in most cases, Nintendo outsold Sony and Microsoft’s systems combined.
This is no joke -- and that’s not the only battle Nintendo won. As I’ll reveal and analyze over the next three weeks, Nintendo has also made more money, sold more games and made better games than its competition’s video game sectors.
The numbers aren’t hard to dig up. Weekly, Media Create releases sales numbers in Japan for both hardware and software, and NPD Group in America reports hardware and software sales numbers by the month. Call it laziness or just plain dishonesty, but the mainstream press in America has successfully twisted the facts about the hardware sales race, and we as Nintendo gamers have bought into the myth that Nintendo is #3 behind Microsoft and Sony.
But no more. Call this editorial a call to arms. Call it a reawakening. Whatever you call it, know this: these are no Nintendo talking points, and this is not a fanboy “gotcha!” treatise looking at how the GameCube outsold the Xbox by ten systems in April 2004. And this is no console bash party trying to put down Sony and Microsoft. No: in my usual, freethinking style, I’ve simply done the research and have come out with results that, if you’ve been reading the mainstream press lately, will surprise you.
BATTLEFRONT JAPAN
Japan has traditionally been a tough nut to crack for American companies. In fact, looking at the 2004 hardware sales numbers, an impossible one: Microsoft sold an entire 37,982 Xbox systems in 2004. In contrast, during the last week of 2004 alone, the Game Boy Advance SP (even with the new DS out) sold 116,801 systems.
Thus, it will probably not come to your surprise that Xbox was the #7 video games system in Japan in 2004. The #1 system? The PlayStation 2, with 2,898,774 sales. Everything in between, save the PSP, is Nintendo territory. At a very close second was Game Boy Advance SP with 2,647,762 sales. In third was the Nintendo DS with 1,495,596 sales, and in fourth was the GameCube with 726,640 sales. In fifth was the Sony’s PSP with 482,252 sales, and in sixth was the Game Boy Advance with 200,678 sales. Behind the Xbox, and in eighth, was the PSOne with 14,163 sales.
Now, let’s take a step back and look at the big picture.
In the three-way race between Microsoft, Sony and Nintendo, Nintendo is very far from third place in Japan. In fact, as you can see, it is in first place. Of the 8,503,847 systems sold between the three companies in 2004, Nintendo sold 60% of the video game systems in Japan. Yes, you read that right. Nintendo held a 60% market share in Japan in 2004, outselling Microsoft and Sony combined. (Source: Media Create.)
BATTLEFRONT AMERICA
America in 2004 was no different, save for the fact that the PSP had not yet released. Unfortunately, NPD is not as diligent in releasing hardware and software sales numbers, but there are still plenty of charts available. The last time the cumulative installed base numbers were released (in other words, the total number of systems sold to date) was in July 2004. Below, you can see the total number of systems sold in North America through July 2004.
As you can see once again, for lifetime sales through July 2004, Nintendo took the top spot. (Note, Nintendo sold 22,579,000 Game Boy Advance systems and 7,672,000 GameCube systems.)
However, it gets even more interesting when you go on with 2004. In September 2004, Nintendo sold 641,922 systems (GBA: 527,133, GCN: 114,789), while Sony sold 253,295 systems and Microsoft sold 265,067 systems. In September 2004 and on through the end of the year, Nintendo sold more systems than its two competitors combined. Also for the rest of the year, the Game Boy Advance would outsell the PlayStation 2, meaning Nintendo had the #1 individual system in America for these months as well as the largest market share.
October 2004 is largely the same story as September, so I’ll spare you the graph, but Nintendo sold 574,000 systems (GBA: 464,000 systems, GCN: 110,000), Sony sold 289,000 systems, and Microsoft sold 217,000 systems.
November 2004, however, is where the numbers really get interesting. Nintendo sold a whopping 1,929,000 systems – that’s nearly 2 million. The Game Boy Advance alone sold 1,100,000 units, despite the release of the Nintendo DS; the Nintendo DS sold 479,000, and the GameCube sold 350,000. Sony sold 694,000 systems (PS2), while Microsoft sold 708,000 systems (Xbox).
The numbers are absolutely mind boggling. Remember how Nintendo sold 60% of the systems in 2004 in Japan? There, Microsoft was a no show. In November 2004, Nintendo sold 58% of the systems. Granted, the Nintendo DS was out and the PSP wasn’t (unlike in Japan), but even in September 2004, Nintendo sold 55% of the systems. (Source: NPD.)
WHAT THESE NUMBERS MEAN
Well, they mean one thing for sure: Nintendo isn’t going third-party any time soon. Nintendo held a clear market dominance in 2004, both in hardware sales and, as we’ll analyze next week, profit. It is absolute folly to think that Nintendo is somehow suffocating at the hands of Sony and Microsoft.
Let’s be clear: the GameCube isn’t in 1st place – that award goes to the PlayStation 2, with the Game Boy Advance in 2nd. It is likely that the GameCube is behind the Xbox in worldwide sales, though the race is really too close to call. Going by the companies’ own numbers in financial statements (note that all the previous numbers I’ve given you thus far are from Media Create and NPD, not from the companies), the Xbox sold 13.7 million worldwide through the end of 2003, according to Microsoft, while the GameCube sold 13.94 million worldwide through the end of 2003, according to Nintendo. This is a very slim margin, but Microsoft most likely gained more ground during 2004, with the Xbox picking up increased sales in North America and Europe and the GameCube picking up increased sales in Japan.
But the Xbox and GameCube race aside, Nintendo has done remarkably well in the race for total market share.
AND WHAT THE PSP REALLY MEANS TO NINTENDO
However, the release of Sony’s PSP means that, in 2005, Sony could quite possibly takeover Nintendo in total marketshare, which will come as a surprise to you who thought Sony overtook Nintendo for good a decade ago. While much of the press has made the DS vs. PSP race to be a win or die situation for Nintendo (meaning, if the PSP wins, Nintendo could slip out of the video games hardware race), it’s quite clear that Nintendo is nowhere close to dying. Instead, the emergence of the PSP simply means that Nintendo could lose its market dominance.
Thus far, the Nintendo DS is doing quite well against the PSP in Japan (the below graph shows lifetime sales through April 10th.)
However, and here’s the key thing: thus far, Nintendo has maintained its lead by the Game Boy Advance SP nearly matching the PlayStation 2 in sales, and with the GameCube putting Nintendo over the top. Now, for Nintendo to maintain its lead, the Nintendo DS, Game Boy Advance and GameCube must match the PlayStation 2 and PlayStation Portable. Even if the Nintendo DS beats the PlayStation Portable in sales, which is very likely, the PlayStation Portable will still add even more sales to Sony’s column, meaning more for Nintendo to make up. Thus far in Japan 2005, the scenario of Nintendo losing its 2004 market dominance is becoming reality.
And that’s the real reason why the release of the PSP is such a big thing for Nintendo, and why Nintendo has chosen to go the three pillar route.
WAKE-UP CALL
I’ve written this article, researched the facts and drawn up these graphs not out of some foolish fanboy spite for Microsoft and Sony (if it was, I wouldn’t have included the above section), but to show to you, the reader, the real present state of Nintendo. Whether it’s the multiplatform magazines or even Nintendo fansites, there has been a peculiar laziness among gaming journalists in researching the market race, leading gamers everywhere to make broad statements such as: “Nintendo will go the way of Sega,” “Nintendo will never be #1 again,” or “Nintendo is #3 behind Sony and Microsoft.”
In fact, even if Nintendo were to get killed in market share, Nintendo would still be alive and well, as long as it continued making profit. Market share is only one piece of the puzzle. But anyway you spin it, Nintendo is doing quite well for itself as a company.
It’s time to start the discussion. It’s time to challenge the mainstream press, which has been able to dominate the public’s perception of Nintendo for far too long. It’s time to challenge the conventional ways of thinking and begin intelligent gaming discourse.
Latest Line #4 - The Truth About Nintendo – Part Two
Success, I’ve always said, is much more than market share.
To have a successful system, you must not only sell a lot of the system, but make money off it, too. You can sell all the systems you want, but if you don’t turn a profit, you’ll go down the drain as a company.
Nintendo understands this – nay, it lives by it. While many have been irked by Nintendo’s conservative business practices, if you look at the company’s bottom line, it’s not hard to see why it has gone down the path of fiscal responsibility.
Many have made a big deal over the race between Xbox and GameCube, with Xbox in the lead with slightly over a million (19.9 million vs. 18.8 million). However, I find this lead to be more or less irrelevant. One, you have a system in another corner, Sony’s PlayStation 2, murdering each system by almost 70 million. The lead by the Xbox suddenly becomes quite small, doesn’t it?
And two, the market share comparison ignores the profitability of the systems, something I see as intrinsic to success. If Nintendo had the Xbox right now rather than GameCube, it would be struggling as a company. Xbox is not a profitable system. Microsoft can afford to lose money on Xbox simply because it is Microsoft and makes billions of dollars off other divisions, but Nintendo can’t – it sells only video game hardware and software. It’s make money or die.
In The Truth About Nintendo – Part One, this space took a look at market share – one contributor to Nintendo’s success. Nintendo, as I noted, not only makes the GameCube, but also the Game Boy Advance and Nintendo DS, off which it garners many, many sales. The stated purpose of these columns is to show that Nintendo is certainly not pulling another Sega anytime soon. We can’t forget the other two systems when discussing Nintendo’s health as a company.
However, this week may hold the most important piece of the puzzle – profitability. Once again, the numbers aren’t hard to find – Nintendo, Sony and Microsoft, all publicly traded, are required by law to release their fiscal results every quarter. But, for whatever reason, financial health has often been ignored by the press. This column will take a look at what truly keeps Nintendo going – profit.
SELLING SYSTEMS, LOSING MONEY
In the current video game market, in which consumers are demanding more and more powerful video game consoles, but also at a reasonable price, companies like Microsoft have found it necessary to sell their systems at a much cheaper cost than is required to make them. In other words, for every system Microsoft sells, it loses money. The company then hopes that the price of manufacturing lowers over time, and the lost money will be made up through software sales.
Though Microsoft doesn’t announce how much it costs to make an Xbox, analysts have put the system at over $300 – some say $375, while more conservative analysts put it at about $325. While it is true that the price of manufacturing lowers over time, and it may have dipped below $300 by now, Microsoft is now selling the Xbox cheaper than it did at launch -- $150, compared to $300. Microsoft is losing at least $100 per system sold, and possibly more, and coupled with other expenses, as you’ll see below, they haven’t exactly been able to make up for it.
Sony is facing a similar situation with PlayStation Portable (and the PS2 before that, but the PS2 was able to overcome this obstacle very quickly because of strong sales). A recent Bloomberg report says it costs 30,000 yen to make a PSP, or roughly $275. Sony is selling the PSP for $250 in America, so a $25 loss is not bad at all. But the system goes for a low 19,800 yen, or roughly $185, in Japan, meaning a $90 loss per system. Sony does say the price of manufacturing should go down soon, though, once the outsourced companies making much of the system’s parts see the system is successful.
In the final corner, Nintendo has it much better. When the system wars began, Nintendo GameCube was actually making money for each system sold, as Nintendo didn’t bother with all the extra non-gaming functions of its competitors, like DVD movie playback. The system was still making Nintendo money at $150, and it wasn’t until its $99 price tag that it was estimated Nintendo was losing money – but only in the single digits.
The same goes with Nintendo DS; Nintendo has done everything possible to keep manufacturing costs down and to make a profit with each system sold. For instance, the Nintendo DS doesn’t play GB and GBC games primarily because this would cost more money. Nikkei Electronics Asia also has a very interesting article on the cost control features of the Nintendo DS.
Now, it may be hard to understand how this affects each of the companies, but it all makes sense when we look at each of the companies’ financial reports.
EXPLAINING TERMS
Before we dive in to the intimidating world of financial reports, though, let’s define a few terms first.
First, you have “sales,” or revenue. This is a pretty raw number which tells us how much money a company made in selling products. Secondly, and probably the most important term for this discussion, you have “operating earnings,” also known as operating profit (if you made money) or operating loss (if you lost money). Operating earnings is, essentially, “sales” minus the cost of goods sold (how much it cost to make the products), marketing expenses (which the Big 3 certainly have a lot of), administrative costs, etc. So, this is where big spending and taking a loss on system sales may come to haunt a company.
Finally, you have “net profit” (or “net loss”), also known as the bottom line. This would normally be the most important thing to look at in a company’s financial reports, as it tells us the final amount of revenue a company made after taxes. However, companies like Microsoft and Sony only report “net profit” for the entire company. If we were only to look at net profit, Microsoft would win because it also makes products like Windows. In this discussion, we will look at operating earnings because those numbers are available for each of the company’s game divisions.
There is one other word of caution I must make – Sony and Nintendo have a different fiscal year than Microsoft. Yes, companies are strange and don’t start their years with January and end with December. Instead, Sony and Nintendo start with April and go through the next March in reporting fiscal results, while Microsoft starts with July and goes through the next June. While Sony and Nintendo’s most recent fiscal year results are out, Microsoft’s are not, because they are not finished with the fiscal year. For this discussion only, I will include the fourth quarter of its last fiscal year along with the first three quarters of its current fiscal year in examining financial health. (Basically, the numbers below take a look at the four most recent quarters for each company).
THE BIG TEST: OPERATING EARNINGS
I’ll start with Microsoft. As I alluded to earlier, the Xbox isn’t exactly doing a lot for Microsoft financially. Every fiscal year, Microsoft has reported a sizeable loss in operating earning for its Home and Entertainment division. Now, the Home and Entertainment division does not only do Xbox – it also does PC games and Microsoft’s “TV platform” – but the Xbox makes up the largest part of the division.
The news isn’t all bad – in Microsoft’s second quarter of fiscal year 2005, the Home and Entertainment division made profit for the first time ever, thanks to $300 million in sales by Halo 2 alone and overall revenue of $1.4 billion. Microsoft ended the quarter with an operating profit of $84 million. However, the very next quarter, the Home and Entertainment division was back to where it began, with sales of $593 million but an operating loss of $154 million. That kinda cancels that one out, doesn’t it?
Backtracking, in the first quarter of fiscal year 2005, the Home and Entertainment division reported $632 million in revenue, but ended with an operational loss of $142 million. And in the fourth quarter of fiscal year 2004, the Home and Entertainment division reported $499 million in revenue, but a $339 million operational loss.
Put it all together, and for the last four quarters, Microsoft’s Home and Entertainment Division has reported revenue of over $3.1 billion but a $551 million operational loss. The Xbox’s selling at a loss, as well as very high marketing spending, were major contributors to the operational loss.
Next, we have Sony; unlike Microsoft, its games division was profitable during the most recent fiscal year. Overall, revenues were at 729.8 billion yen, or approximately $6.76 billion. Its operating profit was 43.2 billion yen, or $400 million. Still, that’s over a $6 billion drop going from revenue to operating profit, and a 36.1% drop from the previous fiscal year. One of the prime instigators, says GameSpot? The PlayStation Portable launch.
And finally, we have Nintendo. Even with three systems in its hands, including a recent launch of the Nintendo DS, Nintendo’s operating profit increased by 3.6% in the new fiscal year to 111.5 billion yen, or $1.03 billion. Its revenue was also 515.3 billion yen, or $4.77 billion, meaning a $3.74 billion drop from revenue to operating profit, compared to Sony’s $6.36 billion drop. Quite simply, Nintendo’s conservative business principles have allowed the company to turn respectable operating profits. No drop because of the DS launch or even less GCN sales here.
INVESTORS TRUST NINTENDO
You may not hear a lot about Nintendo’s fiscal strength in the press, but investors understand it well. According to Reuters, in the most recent fiscal year, Nintendo was one of the few video game companies that gained in the stock market. The company's shares rose 11.3 percent in the last fiscal year, while Electronic Arts lost 3.6 percent, Microsoft dropped 3 percent and Sony lost 2.1 percent.
WHAT THESE NUMBERS MEAN
Just like last week, we can pretty much nail one thing right off the bat – Nintendo certainly isn’t going to pull another Sega any time soon. What we have here is a successful company that knows what it has to do to turn a profit.
We also see the fiscal consequences of managing a video game system like Microsoft, or even Sony. It should be abundantly clear that if Nintendo made the GameCube more powerful than Xbox, put DVD movie playback features into the GameCube, took the ‘Cube online like Microsoft, etc., it would only have negative consequences on the company.
Let’s be clear – Microsoft can afford to lose money on Xbox. In fact, spending as lavishly as Microsoft has done on the Xbox will only help the company in the long run, and Microsoft expects to start making profit by fiscal year 2007. But Nintendo isn’t Microsoft – they don’t have a Microsoft Windows to absorb any losses.
THE REVOLUTION REVISITED
In the last Latest Line, with Nintendo’s market share analyzed, we looked at how Nintendo’s decision to bring out a third pillar really did make sense.
Similarly, an analysis of Nintendo’s profitability helps us understand Nintendo’s path with Revolution. The PlayStation 3 and Xbox 360 will be many times faster than their predecessors, while the Revolution will only be 2-3 times faster (says USA Today, anyway). It seems clear that, if Nintendo desires to remain profitable, trying to win a video games arms race isn’t going to help much, and Nintendo has realized that.
WAKE-UP CALL: PART TWO
I didn’t mention it in the article, but Nintendo ended its most recent fiscal year with its net profit skyrocketing 163% over the previous year. Next year, it expects to pull in another 75 billion yen in net profit; in comparison, Sony as an entire company (including the electronics division, games division, etc) expects to bring in 80 billion yen. And Nintendo only makes video games.
Are we really supposed to believe Nintendo is struggling?
Success is a funny thing. Most of the time, as video gamers, we have a tendency to look at how game companies are doing from our glasses only, meaning how many sales their consoles have made in North America and how much third-party support each system has - and that’s to be expected.
But when we take a step back and try to see the big picture, especially from Sony, Microsoft and Nintendo’s perspective, we see a different ball game. Suddenly, we see that Nintendo is actually pulling in a nice amount of cash, that Nintendo depends on more than just GameCube for market share, and that Microsoft isn’t doing as well in territories like Japan as it is in North America. When we determine the success of companies like Nintendo, we must not limit ourselves to simply North American console sales.
The next Latest Line, and the final part of this trilogy, will take a look at yet another reason for Nintendo’s success: game sales. I hope you’ll stick around to see how, now more than ever, Nintendo derives much of its success from its innovative games.
