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Nintendo’s mastery of physical game sales hides limited digital growth

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Image: Nintendo Life

Nintendo’s Q3 financial results have been shared and overall can be a “yes, business as usual”.

Arguably it’s a bit better than that, however, with an exceptional Q3 (due to strong sales during the holidays) allowing Nintendo to increase its expected profit (although while scraping away a bit of the hardware projections). Without any unexpected change in momentum, the Switch would have sold more than 20 million systems for the year by the end of March, while around 220 million games would have sold during that time period. As you can imagine, impressive profits are also expected.

Of course, when you dive into financial results, you can find positives and negatives depending on your mood. As has been emphasized many times, the results for the current year are consistently falling into 2020/2021, by most indicators. We all know why – 2020 in particular is unique in recent history, when the market Home page entertainment has gone through the roof.

Nintendo’s great strength, which has been around for more than three decades, is in the production and sale of physical entertainment merchandise. This is not just in terms of numbers, but in terms of gaming culture, it’s nurtured.

When reading through Nintendo Meetings and Notes trends are all too familiar. Nintendo’s great strength, which has been around for more than three decades, is in the production and sale of physical entertainment merchandise. It’s not just about numbers, it’s about the culture of gaming, it’s nurtured – you just have to see the sheer volume and variety of physical edition games and the ‘limited edition’ industry for Switch titles, to gauge the importance of Nintendo fan reviews and awards for physical media and collectibles. It’s a strength that Sony and especially Microsoft have struggled to compare with the ‘big boys’ in the field of console gaming.

However, if Nintendo ‘rules’ the physical media space, it is still seen as lagging behind in the digital realm; that delivers financial results around other more positive angles. Nintendo’s digital business – which combines everything from eShop games, Online Switch subscriptions, microtransactions and more – lags behind its rivals. Now to deliver results on time, overall revenue from digital sales increased in Q3, matching the huge numbers and momentum generated by physical copies.

Digital sales
Image: Nintendo

However, Nintendo’s strategy and digital sales failed to deliver consistent growth, as even a giant Pokémon-powered Q3 failed to pull the financial year on in terms of digital sales. The number surpasses that of 2020. The percentage of revenue that digital sales contribute is also pretty flat (red line shows this) and fell to 35.3% last quarter. Yes, COVID fueled the 20/21 spike, but Nintendo has also struggled to capitalize on and move its online services and revenue forward.

For example, compare with PlayStation. Sony’s business in this area has several key advantages over Nintendo – for one thing, more revenue is generated from add-ons and microtransactions than from games, a sign phenomenal on the strength of names like Season Pass and FIFA Ultimate Team, areas the Switch largely misses out on. The digital side of the market accounts for 62% of Sony’s game sales.

Sony Digital Sales
Image: Sony

Of course, you could argue otherwise – Sony’s revenue from boxed sales is relative low compared to various digital sales on PSN. Each company has its own strengths, leading in one respect over another. Nintendo has a market and culture around physical media that will make competitors jealous, while they will find that their digital revenue doesn’t equal the revenue from media channels on Nintendo. PlayStation (where 3 months of revenue is equivalent to 9 months for Nintendo). A product of a very different ecosystem and game library.

Nintendo has a market and culture around physical media that will make competitors jealous, while they will find that their digital sales don’t equal a playing field like on the PlayStation.

To be fair, Nintendo has also made steady improvements in its digital offerings. It may not be promoting enough Nintendo Switch Online Game Coupons, which offer digital savings on first-party retail games. My Nintendo Gold Points are also a small but underrated perk that accumulates with each purchase for regular and consistent eShop discounts. However, Nintendo Switch Online and its Expansion Packs are a place where critics are much easier to find, with the positives about the services possibly more than those eager to share complaints.

As an effort for a subscription service that also includes cloud savings, it’s an area where Nintendo has struggled to win over fans and create a positive narrative. The focus on classic games that used to be Virtual Console titles isn’t right for everyone, as does the trickling feed of games and the continued absence of some popular titles. Although many people may have to pay the cost of NSO to continue playing online like Mario Kart 8 Deluxegeneral affection for service (and especially the Expansion Pack) never seemed particularly strong.

Animal Crossing's Happy Home Paradise DLC is hailed as a success, giving a welcome update to the hugely popular New Horizons
Animal Crossing’s Happy Home Paradise DLC is hailed as a success, giving a welcome update to the hugely popular New Horizons (Image: Nintendo)

Nintendo has yet to issue a firm update on the number of NSO subscriptions (it will probably do so in a later Corporate Management Brief), but has emphasized the release of NSO subscriptions. Animal Crossing: New Horizons – Happy Home Paradise DLC contribute to non-retail download revenue. The Indie scene is still vibrant on the Switch, and it’s clear that during the Holiday Season a large number of gamers have opted to download major retail games, so there are some positive signs for the business aspect specifically. This is from Nintendo..

However, if the game is moving towards a future where user numbers for online services become increasingly important, Nintendo will certainly continue to consider its approaches. The Switch now has a more modern infrastructure than it did when it launched, but there’s a lot of room for improvement. Nintendo’s (and third-party’s) output on its hardware also lags behind DLC and microtransactions; while the latter is not 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 will be interesting to see how Nintendo aims to increase its digital revenue and whether this includes additional content more often to its own releases.

It’s a conundrum, but trends suggest that gaming will continue to scale towards non-physical well into the future. While Nintendo can still keep fans happy with physical media, the need to capitalize on the market for those who want more downloads and online services isn’t going away. Whether it’s in new or revised subscription services, more DLC content, starting an eShop, or a combination of the three, it will be interesting to see how Nintendo’s ever-changing strategy continues. any.

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