Nintendo, Disney, and Cultural Determinism
Beginning in 2013, I began a series of essays that outlined my vision for an OTT “Disney as a Service” subscription, including how it would work, its likely pricing ($6) and release date (2019), and why it was likely to rapidly attract tens of millions of customers. These pieces were based on my reading of (and obsession with) Disney’s corporate strategy and culture, the strength of its IP, the decisions it’d begun to make behind the scenes, as well as the developing changes in media technology and business models. Vox/Recode has reported on how the “DAAS” series has influenced Bob Iger and Kevin Mayer.
To this end, I’m often asked about Nintendo (one of few companies I adore more). Many believe that Nintendo is Disney circa 2014 or 2015 or 2016 or 2017 — and thus poised for substantial growth as it makes the transition to online or D2C or OTT distribution or mobile or [new thing]. And certainly, there are many similarities. There is no other gaming company with more beloved and long-running IP, a stronger culture of creativity in storytelling, a deeper history of immersive/technological innovation, more resonant content brand, and so on.
In fact, it’s easy to map the Disney ethos to Nintendo’s more recent public positioning. In early 2019, Nintendo of America President Reggie Fils-Aime gave a speech in Seattle where he said that Nintendo aspires to be an "entertainment" company, not a gaming one: “That time you spend surfing the Web, watching a movie, watching a telecast of a conference: that's all entertainment time we’re competing for. [Nintendo]’s competitive set is much bigger than [its] direct competitors in Sony and Microsoft. [Nintendo] competes for time.”
Furthermore, Fils-Aime declared that the Nintendo now had three "pieces of business": (1) a dedicated proprietary hardware video game business ("the way most of our consumers interact with us"); (2) a mobile gaming business; (3) the expansion of Nintendo’s IP outside of core gaming applications (“[Nintendo is] about Mario, Zelda, Pokémon — all these wonderful intellectual properties… How we leverage these across a variety of entertainment platforms is how we're looking to grow the company… a belief that [consumers will] come back, maybe buy a Mario T-shirt, eat that Mario cereal, or buy a Switch, because of affiliation and affection they have with that IP.”)
This framing feels a lot like Disney saying films are the core of its entertainment flywheel, that OTT streaming video is the company’s new growth and investment area, and that it will continue to proliferate its IP into emergent categories. And, as with Disney in the early- to mid-2010s, there’s evidence of this transition. The company is underway with its first-ever theme park lands, its first feature film in nearly three decades, and several new interactive merchandise partnerships with the likes of Lego and more.
More broadly, one could argue Fils-Aime’s positioning and Nintendo’s commercial expansions suggest a company ready to conquer all entertainment platforms as part of the ever-growing “IP” wars. The focus on minutes, for example, sounds more like a mega-cap tech company like Microsoft, Netflix, or Amazon than it does a modest Japanese game maker. And while Nintendo might be late to individual battles, one key lesson of the past twenty years is that top IP is more valuable and extensible than ever believed before. And thus, for the very same reason Nintendo’s IP feels under-tapped today, it can be tardy and still rise to the top — like Disney in streaming. And given the enormous growth potential in the category (which some consider to be in the trillions), Nintendo could grow several fold (prior to COVID, Disney was up 45% since announcing Disney+).
However, the “Nintendo is Disney” thesis is deeply flawed. It feels more like a desire to apply a pattern than to find a real analogue. Elements of Nintendo certainly represent Disney, but they represent Disney insofar as both companies are best in class creators of four-quadrant, multi-generational content. Otherwise the businesses are fundamentally different, their management styles fundamentally different, and their approaches to content itself are fundamentally different, too.
The best way to unpack this is to walk through Nintendo’s culture in (1) Hardware; (2) Content, as is shown through the company’s efforts in mobile; and (3) Ambition. After that, I’ll discuss the company’s future (sections four and five).
#1: Nintendo’s Hardware Culture
There are essentially four types of companies in gaming:
Platforms like Microsoft, Sony and Valve, which produce hardware and/or operate digital stores that allow players to play games. In exchange, the platforms take a percentage of each game sold for their platforms (and associated in-game sales), plus charge various license fees to publishers, and often sell additional services to their user base
Publishers like EA and Activision Blizzard, which finance the creation of games and manage their marketing and distribution, in exchange for (or by loaning out) IP, equity in the title, and the associated majority of profits
Developers like Naughty Dog and Visual Concepts, which literally design and “make” a game
Infrastructure and middleware providers like Epic Games, Unity, Amazon and Microsoft, which operate extensive technology suites that enable developers to more easily create, distribute, and operate their games. In this case, they take a licensing fee, typically as a percentage of revenue or based on total traffic/data/etc.
Each of the major platforms also owns (or has exclusivity agreements) with top publishers, which in themselves own (and/or have exclusive agreements with) top developers. This allows the platforms to differentiate their hardware through exclusive content. This is particularly helpful when releasing a new generation of consoles. At launch, a console’s player base is too small for major developers to prioritize versus building games for the outgoing generation (which, by definition, will have a larger customer base than ever before). However, a platform’s goals are much broader than maximizing the sales of a specific title — it hopes to build an ecosystem where it nets revenue from the sale of all titles. Other variations of this model exist. Valve, for example, sometimes develops games (which it then publishes) to drive not just its platforms (Steam) but also its game engine, Source, or the industry overall (e.g. virtual reality).
Nintendo is unique as a “hardware platform” because it really isn’t one anymore. To quote Tim Sweeney, founder and CEO of Epic Games, “something is a platform when the majority of content people spend time with is created by others.” Although Nintendo operates a hardware platform like Microsoft’s Xbox or Sony’s PlayStation, 85% of Nintendo’s software revenue comes from Nintendo’s own titles. This is the reverse of industry averages. This makes Nintendo a sort of fifth type of company. They make hardware so that its development arm can make the games it wants to make, which also happens to be hardware that other developers can distribute their games through but mostly don’t. (It is true that the NES and SNES era saw vast third-party libraries, but Nintendo being the standard-bearer of third-party gaming content has not been valid since 1995, when the PlayStation launched).
And over the past forty years, it’s indisputable that Nintendo’s development arms have been the best in the business. Per GameRankings/Metacritic, five of the top ten and nine of the top twenty best reviewed games of all time come from the Kyoto-based company.
Because Nintendo thrives at content but doesn’t generate platform-like profits, investors have long argued Nintendo should get out of the hardware business and focus exclusively on games. This would produce value in several ways. First, hardware sales typically generate little to no profit as it’s sold below and/or near manufacturing cost. This low margin strategy isn’t a problem if you can make it up in third-party licensing fees (i.e. from the sale of games made by others), but per above, this business is marginal for Nintendo. In addition, the cost of developing, marketing, and holding inventory is high.
This approach also limits the sales potential for Nintendo’s games to those who own their hardware. There are over a hundred million PlayStation and Xbox consumers who might happily buy The Legend of Zelda or Super Mario for $60 to play on their PlayStation or Xbox but won’t spend $300 on a Switch just to do so. (And then there are the hundreds of millions of iPads, iPhones and Androids, which I’ll get into later.)
For twenty years, Nintendo has refused this strategy. And to the company’s credit, its dedication to hardware has led to significant innovation in the marketplace. Nintendo created the D-Pad, analog stick, and rumble packs, and was first to distribute VR, motion-based, and fully portable consoles. These hardware innovations resulted in content innovations, too (e.g. Wii Sport, Wii Fit, Brain Age, etc.). It’s also clear that when Nintendo achieves a consumer tech breakthrough, it sees substantial in-generation console success (e.g. Nintendo Wii, Nintendo Switch).
At the same time, the “breakthrough” Nintendo consoles tend to see substantially less success than most assume. And they don’t ever really “break away” from their competitors, either. The Wii “won” the seventh generation with unit shipments of roughly 105MM. But PlayStation 3 did 90MM and Xbox 360 hit 85MM. This isn’t a huge gap, especially given the latter two were $100-150 more. More revealing is the fact that the Wii’s early lead in the seventh generation was substantially larger than its finishing win. The PlayStation 3 and Wii both launched in November 2006, but after a year, Nintendo had nearly 200% greater sales (17MM v 6.5MM). The Wii launched a year after the Xbox 360, at which point the latter had a 5MM unit head start, but a year later it held a 3MM, or 22% net unit lead, meaning its year one sales were 450% higher. But as lifetime sales suggest, this gap compressed rapidly.
Worse still, Wii players stopped playing. Wii software sales peaked in 2009 — the console’s second full year of release. By 2013, twice as many homes had a Wii, but total software sales were down 75% (many people were buying the console just for “Wii Sports,” which came free). Meanwhile, PS3 and Xbox 360’s annual software sales continued to grow through 2014 (they then declined due to the release of PS4 and Xbox One).
Nintendo’s declining software sales represented two challenges. First, the company’s Nintendo pipeline of developed or published exclusives, such as The Legend of Zelda, Super Mario, and Super Smash Bros., had run out by 2011. Second, outside publishers had never embraced the “platform.” This reluctance was foundational. The point of being a third-party developer is, for the most part, to develop games for all platforms. This meant that it couldn’t really develop games for the Wiimote, which only the Wii had. In addition, the Wii hardware was dramatically underpowered compared to Xbox 360 and PlayStation. Accordingly, games could only play across all three platforms if they were all technically “dumbed down” — or if a different, more technically-limited Wii version was produced. And when the latter did happen, it rarely used the motion controls of the Wiimote as the core game had never been designed to use it. As a result, anyone who owned a non-Nintendo console would typically buy the game for that other console, where it played “better.” But for the most part, third-party publishers simply skipped the Wii altogether to focus on the much larger base of all non-Wii players.
Nintendo’s first-party content, of course, faced none of these issues. The Wii was, by definition, sufficient for the company’s needs, and it never had to think about how Zelda would technically perform on a PlayStation, what PlayStation users might want from a Zelda game, or how to design a game that would play well on multiple consoles.
The argument that Nintendo needed to sell its own hardware to make its outstanding games also feels flimsy. Most of Nintendo’s best-selling Wii games, such as The Legend of Zelda or Super Mario Galaxy or Super Smash Bros., didn’t meaningfully use the Wiimote. And those that did were usually free. For example, every Wii shipped with “Wii Sports” bundled at no cost, and many later Wiis shipped with both “Wii Sports” and “Wii Sports Resort,” etc. (This is also why if you look at the Wii’s hardware-to-software sales ratio, it looks comparable to Sony and Microsoft but is misleading.)
All of which is to say that much of what made the Wii a success — unique and low-cost hardware plus incredible first-party titles — also meant that by midway through the seventh generation, it was underpowered, under-supported and light on games. By 2012, the Wii was functionally operating as closed first-party hardware rather than a platform. What’s more, consoles were expanding from just hardware and software sales into online services. By 2014, Xbox Live had also amassed 30MM subscribers paying $6–10 per month. Nintendo had no such revenue streams.
Nintendo essentially admitted these two problems — not selling enough games and Wii’s motion controller not creating a sufficiently compelling differentiator — in 2012 when it incurred its first-ever annual loss. Specifically, President Satoru Iwata stated that “The Wii was able to reach a large number of new consumers who had never played games before by bringing hands-on experiences with its Wii Sports and Wii Fit. However, we could not adequately create the situation that such new consumers played games frequently or for long, consistent periods. As a result, we could not sustain a good level of profit.” In fact, this move was value destructive. Iwata: “Moreover, regrettably, what we prioritized in order to reach out to the new audience was a bit too far from what we prioritized for those who play games as their hobby. Consequently, we presume some people felt that the Wii was not a game system for them or they were not willing to play with the Wii even though some compelling games had been released.”
Then there’s the Wii successor, the Wii U. Nintendo’s eighth generation console flopped so entirely after its 2012 debut that Nintendo chose to re-enter the eighth generation five years later with 2017’s Nintendo Switch. Notably, this blockbuster-bomb pattern is a recurring one at Nintendo. The Nintendo 64 was a hit, but it was followed by the disappointing GameCube, which was then followed by the hit Wii, which was succeeded by the Wii U flop. And to pattern, the Switch is a hit! But even still, context is needed. The Switch has sold roughly 45% fewer units than PlayStation 4 and 10% more than Xbox One, having beat Sony by 16% and Microsoft by 45% in the last generation.
The Switch also faces another threat of obsolescence. The failure of the Wii U meant that the Switch launched midway in between the eighth and ninth generation of consoles. And because of its portability and target price, it was still less powerful than the PS4 and Xbox One. Later this year, both Sony and Microsoft will release their ninth-generation consoles, which will be even more powerful on a comparative basis. In addition, both companies are investing heavily into their cloud game streaming services. This will allow their customers to replicate the Switch’s portability by playing even the highest end Xbox or PlayStation games on their iPads and iPhones (sometimes at no added cost). And more broadly, gamers can already play console-grade games like Fortnite and Call of Duty Warzone on these devices, often better than they can on the Switch.
In addition, the Switch’s portability has also cannibalized much of Nintendo’s handheld console sales (e.g. the Gameboy/Nintendo DS). Consider, for example, that the Nintendo DS line (which has sold 225MM units since 2004) hasn’t been refreshed since the Switch’s release in 2017. And following the release of the Switch Lite in 2019, the two devices have only a $50 price differential. As a result, the Switch’s sales figures as an “at-home” console are arguably inflated. To point, 94% of Nintendo’s current revenues come from the Switch platform, according to Daniel Ahmad of Niko Partners. Historically, Nintendo’s living room consoles represented roughly half of revenues - with handheld’s like Game Boy and the Nintendo DS driving the remainder.
This history is important to understanding Nintendo. Nintendo deeply loves and wants to be a hardware company. The business case for this approach hasn’t really existed for years, but it makes the company happy, it is often great at it, and it hasn’t needed to change. In addition, hardware inspires the company and, in many instances, is why a sequel or title is greenlit in the first place. I’ll get back to this idea in a bit.
#2: Nintendo’s Content Culture
Nintendo owns much of the most valuable gaming IP in the world. It also has one of the most unique approaches to deploying this IP.
In general, Nintendo releases only one entry in each of its biggest franchises for each of its consoles (which last five to six years). As a result, the company has released only six console entries of its most creatively and financially successful franchises over the past thirty years. Mario is similar. Only one of Nintendo’s last five consoles has received more than one 3D AAA Mario game such as Super Mario 64 or Super Mario Odyssey (though Nintendo does release more adjacent titles here, such as the side-scrolling New Super Mario Bros. or Super Mario Maker content creation game). Since 2002, only three full entries to the “Metroid” franchise have been released — all of which were on the Nintendo GameCube (2001–2006). Only five Super Smash Bros. games have been released since 1999 — one for each console (Only the most recent entry, December 2018’s Ultimate, has seen post-release content updates and, by most estimates, more than 80% of launch quarter players have lapsed).
It is difficult to believe any other gaming (or media) company would take such a judicious approach. If anyone else owned Nintendo’s IP, we would likely see a new The Legend of Zelda console title every two to three years, with a constant barrage of single-player spinoffs starring the Gerudo, Gorons, and the Goombas of Super Mario.
And every time a new gameplay dynamic was discovered, new side franchises would be created. The Nintendo Switch, therefore, would already have “Super Mario 64, Part 8,” a traditional 3D platformer, “Super Mario Sunshine 4,” a waterpack-based 3D Mario platformer, “Super Mario Galaxy 5,” a gravity-based 3D Mario platformer, and “Super Mario Odyssey 2,” a hat-based 3D Mario platformer — plus the 2D roster.
And that’s before considering remakes! Capcom is already on its second string of remakes of its Resident Evil franchise since the first title premiered in 1999. And it’s not wrong to do so; these remakes continually top the annual sales charts. Square Enix is now releasing a remake of its celebrated 1997 title Final Fantasy VII. What’s more, it’s breaking this game into parts! And to similar chart-topping success. And while Nintendo has released only four sequels to 1998’s Ocarina of Time (which duels with FF7 for the title of “greatest game of all time”), there have been more than ten Final Fantasys. Nintendo has reissued the odd title, but these are typically remasters (e.g. The Wind Waker HD), not remakes. Nintendo’s first real remake came out 2019 and was based on the now 26-year-old The Legend of Zelda: Link’s Awakening. Disney’s Marvel Cinematic Universe began with 1.2 films per year and, come 2022, will have four films and two to three series annually.
Not only does Nintendo not believe in #content, it staunchly refuses the idea and even the need. A game won’t release because hardware depends on it, there won’t be a sequel because it has “been three years,” because shareholders require it or even to keep mindshare among players in a fast-moving industry.
Nintendo only makes games and sequels when they believe there is a sufficiently new and ambitious idea. This is why most AAA releases are tied to consoles — new hardware that unlocks new functionality — and why franchises like Super Mario will go from water-based play on GameCube to space-based play on Wii to hat-based play on the Switch. Lessons are only applied via remix.
The Legend of Zelda series is another great example. Creator Shigeru Miyamoto actively requires development teams to reinvent the franchise. Following the success of the first entry, a top-down action adventure game, Kotaku reports that Miyamoto-san told “the team—not the Zelda 1 team, but an entirely different team—that he wanted to make a side-scrolling action game where the player had to attack with, and defend against, high and low attacks.”
To be clear, this approach is why Nintendo is so spectacular. It’s also why Nintendo’s efforts in mobile are so fascinating, flawed, and thus far, mostly fruitless.
Today, smartphone/tablet-based games represent more than 40% of industry revenues and more than two-thirds of growth. Consoles, including dedicated handheld consoles like the Nintendo DS, represent 30% of the market and are essentially flat in inflation-adjusted revenues over the past decade. Given Nintendo’s decades of success with handheld gaming, appealing to casual gamers, and device experimentation, many have spent years believing that Nintendo will one day embrace, figure out, and dominate in mobile. And when they do, the results will be overwhelming. Many of the biggest mobile titles — and even the simplest ones, such as the match-three game Candy Crush and the puzzle game Disney Tsum Tsum — generate billions in revenue each year.
However, some thirteen years after the iPhone, Nintendo continues to struggle in mobile. 2016’s Super Mario Run is one of the ten most downloaded mobile games of all time, with 700MM+ installs. However, it achieved only $75MM in gross revenue after four years according to SensorTower. These downloads are a testament to the power of Nintendo’s IP, but eleven cents per user and less than $100MM in total topline likely makes Super Mario Run the worst performing game with nine figure installs… by far.
2019’s Mario Kart Tour has fared better with an estimated $90MM to date, but the market has also grown 10% since Super Mario Run. In addition, Nintendo’s other 2019 release, the match-three title Dr. Mario World has failed to cross even $10MM. Two other titles, Dragalia Lost and Animal Crossing: Pocket Camp are under $150MM.
One of Nintendo’s six releases, 2017’s Fire Emblem: Heroes, has done well: $700MM according to SensorTower. This is still short of the mobile “greats,” but it’s encouraging. However, there are caveats. More than half of this revenue is in Japan, for example, twice the share of the average Nintendo title. Nintendo does not have a hit mobile title as much as it has a hit local mobile title. In addition, five of Nintendo’s six mobile games have seen year-over-year revenues decline during COVID-19 — including Fire Emblem: Heroes — even as the entire market experienced enormous lift. But most important is to understand who actually made Fire Emblem: Heroes.
Nintendo has three core approaches to mobile gaming. Under the first model, Nintendo creatively designs, technically builds and develops, and live operates the title. Under the second model, Nintendo either co-produces or designs the high-level creative before handing off actual development and operations to third parties. Under the third model, Nintendo’s participation is limited to overall creative and brand approvals (e.g. signing off on the story, characters, and character designs).
Obviously, Nintendo’s share of the economics declines across each group. This, itself, is not a problem. What’s a problem is that the greater Nintendo’s involvement, the less successful a mobile title seems to be. Nintendo’s mobile creative seems to erode the success of a title more than its IP lifts it. Put another way, Nintendo’s involvement increases margins but decreases revenue by an even greater degree. The performance differential of Super Mario Run (which Nintendo led) and Fire Emblem: Heroes (where Nintendo was passive) is instructive here. However, the best example is likely Pokémon GO, which has generated more than $3B in gross revenue. Neither Nintendo nor The Pokémon Company are listed as the game’s “developers” or “publishers” — only Niantic is. Instead, The Pokémon Company (which Nintendo owns less than a third of and does not creatively manage) holds the ill-defined credit of “collaborator.”
It’s common to hear how Nintendo has “struggled to date” with mobile, but it is “learning” and the upside is “enormous.” This is true. However, we are pretty late into mobile gaming already. The learnings are clear, and no billion-dollar gaming company should still be “learning” mobile in the ways Nintendo is. Consider the 2016 struggles of Super Mario Run. Here, Nintendo made the ill-fated decision to offer only two free levels and charge $10 to play the full game. This violated most monetization primitives around free-to-play, engagement-based monetization and gameplay design — and by Nintendo’s own admission, this hampered the game's success.
Three years later, Nintendo released the hotly anticipated mobile title Mario Kart Tour and touted the lessons learned from Super Mario Run. However, this title too showed an enormous disconnect with mobile mechanics and needs. Shockingly, the game launched without multiplayer. It was a Mario Kart where you couldn’t play your friends even if they sat beside you! It was also some six months until multiplayer was available — and ten months until landscape mode launched!
And while players could access most of the game for free, playing races with challenging AI required a $5 per month subscription. This struck most fans and observers as absurd. A new copy of the Switch or Nintendo DS versions of Mario Kart cost $60 new and $20 used. In addition, global hit games like Fortnite were entirely free to play (and the cosmetics-only Season Passes last three to four months and cost $10), and the Apple Arcade subscription had just launched for $5. Furthermore, Mario Kart Tour still deployed extensive microtransactions in the game atop this fee. You could spend $5 a month, not play with your friends, and still need to buy items. Worse still, the game was apparently dreadful. On Metacritic, Mario Kart Tour holds a 58 Metascore and 3.8 user score.
To put this in a macro perspective, Nintendo set a $1B annual revenue goal for mobile in 2017 (it was then at $300MM thanks to its net revenue from Pokémon GO + Fire Emblem: Heroes). This target didn’t seem ambitious, but by January 2020, Nintendo had only hit $1B in lifetime mobile revenues. In February 2018, just before he took over Nintendo, Shuntaro Furukawa said, "From what I can see, smartphone games are the ones I want to expand the most.” He admitted, "I can't say that there are any [games] that are like [Pokémon GO] in development.” This still seems true. It’s insane Disney Tsum Tsum can gross $2B, but an iOS Mario or Mario Kart can’t crack $100MM.
Ultimately, it all starts with what Nintendo is and wants to be. Nintendo makes hardware for their first-party games and first-party games for their hardware. As long as this hardware is successful, Nintendo is unlikely to lean into mobile. The company is, for example, fully capable of making a fully-fledged version of the side-scrolling Super Mario Bros. — or even porting a classic version of the game — to iOS. And millions play the full version of Fortnite on their iPad and iPhone each day. Nintendo simply does not want to. Just as it has not wanted to do this on Sony PlayStation or Microsoft Xbox for years.
The recent breakout success of Animal Crossing: New Horizons on Switch is a perfect example. It could easily play in its entirety on smartphones and tablets — and reach millions more in doing so. However, the success of the title led Nintendo to “chill its mobile ambitions,” according to Bloomberg. Specifically, Nintendo’s President told the outlet, “[Nintendo] is not necessarily looking to continue releasing many new applications for the mobile market.” This is not the signaling of a company that has learned or wants to continue to learn.
In 2020, it should be clear that Nintendo does not find the mobile gaming category interesting. The rationale isn’t hard to understand, even if many investors struggle to confront it. Mobile is, for the most part, less creatively sophisticated than console gaming, and success depends on the extensive cloning/replication of “best practices.” For a company that refuses to remake its own titles and is focused on constantly reinventing existing hits, the idea of cloning games or making “Candy Crush but Zelda” is of little interest. The greatest cultural challenge, though, is in mobile monetization. In 2019, WSJ reported that Nintendo had asked its mobile developers to reign in monetization mechanics so that players “won’t spend too much.” The company feared that stories of players spending hundreds or thousands of dollars would hurt its brand image.
This is not an unreasonable fear. However, “whale” monetization is the core driver of mobile games today. Only 4% of Candy Crush players, for example, spend on the game. And 10% of this 4% (or 0.4% of users) generate 50% of revenue. As a result, even minor adjustments in whale optimization can devastate economics. According to WSJ, CyberAgent, the developer of the Nintendo-based mobile title Dragalia Lost, “slashed its fiscal-year earnings forecast for the first time in 17 years in January due in part to the game’s disappointing performance. While player numbers for the game have grown due to an aggressive advertising campaign, revenue from each player has fallen short of projections.” An anonymous official at CyberAgent told the Journal, “Nintendo is not interested in making a large amount of revenue from a single smartphone game… If we managed the game alone, we would have made a lot more.” Notably, Disney should share Nintendo’s brand concerns in mobile gaming. But this has not stopped the company from releasing basic games that generate billions from whale monetization. Its brand, albeit not one based in games, does not seem to have suffered. Nor has the Pokémon franchise in the years since the ultra-lucrative (and whale-supporting) Pokémon Go.
In truth, Nintendo has been in exactly this place before. Online gaming emerged in the late 1990s on the PC and took off following the release of Xbox Live in 2002 and Steam in 2003. And within a few years, these suites had mostly been matched by the PlayStation Network, which launched in 2006. Since the mid-2010s, the biggest — and certainly the most lucrative games — have been based around online and predominantly multiplayer experiences. Many of these titles monetize mostly, if not exclusively, through online services.
For years, Nintendo openly resisted online services and downplayed their importance. It was years late in supporting basic online service features such as voice chat and friend lists and today it’s on its third online service, having shut down 2005’s Nintendo Wi-Fi connection in 2012 for the Nintendo Network, which was shut down in 2018 for Nintendo Switch Online. Most players will say this third service still lags the offerings of Sony and Microsoft a decade ago — and not just in feature set but also reliability.
Online services, though, are a technical feature set. More important is the games behind them. The biggest games today aren’t just online multiplayer titles, they’re persistent experiences that are in a constant process of revision, expansion, and change. In particular, these “games” typically hand over much — if not all — of the experience to players to create their own stories, trade, share, build, and remix. Here, the role of the developer isn’t to tell a finite story, but to facilitate a virtual world through constant technical updates, marketplaces, and UGC discovery/curation tools.
There are, of course, millions who want to “live” in a virtual Hyrule or Mushroom Kingdom. However, it’s important to recognize what an enormous change this requires from Nintendo. Today, the company doesn’t make a AAA Zelda or Mario title until they have the mix of technology, story, and ideas required to make it stand out from every prior title in the franchise’s history (or that of gaming at large). This results five-to-seven-year gaps between releases, as well as games that have definitive ends (both to the “story” and the user’s playtime). Shifting to a developmental process around indefinite incremental change requires an enormous cultural shift. As a good example, we can consider the 2017 title The Legend of Zelda: Breath of the Wild (which is widely considered one of the best games ever made). Breath of the Wild launched with plans for ongoing DLC updates, with two releases dropping in the first release year (adding four and ten hours of gameplay, respectively). However, Nintendo promptly cancelled these plans, with franchise producer Eiji Aonuma saying, “Initially we were thinking of just DLC ideas, but then we had a lot of ideas and we said, 'This is too many ideas, let's just make one new game and start from scratch.’” Accordingly, the next update to the Zelda franchise will release in 2021 or 2022, four to five years after Breath of the Wild, per usual cycle times. This is telling.
In addition, the “games-as-a-service” approach requires rethinking a game’s design from day one — not just narratively, but technically, too. Nintendo is not built around game engines or building “platform”-like worlds.
#3: The Culture of Ambition
Per Fils-Aime’s point at the top of this essay, there has never been a more commercially active or expansive Nintendo. Later this year, Nintendo’s first-ever theme park land will open in Osaka, Japan, with construction already underway for even larger parks in Orlando, Florida, and Hollywood, California. The first Nintendo movie since 1993 is due in 2022 or 2023 (Super Mario) and many of Nintendo’s newest AAA titles, including The Legend of Zelda and Super Smash Bros., now have DLC expansions and regular patching to sustain and improve ongoing play. And while the DLC program for The Legend of Zelda: Breath of the Wild has been abandoned, it led to the first in-generation sequel to a Zelda title in twenty years and four console generations. Animal Crossing: New Horizon, meanwhile, has an extensive and frequently updated live economy in which Nintendo has gone so far as to slash interest rates!
And this is where we return to the Disney idea. Over the past fifteen years, the company has developed new skill sets, expanded into new markets, and proliferated its IP. In addition, a Nintendo subscription feels inevitable, just as Disney’s once did. Microsoft Xbox and Sony PlayStation already offer these subscriptions (Xbox’s is effectively bundled into its online Xbox Live subscription) and they are growing steadily. And as with Disney+, adoption of a “Nintendo+” subscription is likely to be rapid and financially substantial. This reflects the unique strength of Nintendo’s back catalogue and the associated nostalgia. True, library Nintendo titles like The Legend of Zelda: The Wind Waker and Super Mario Bros. 3 are already available digitally a la carte for $5–15 and generate limited sales. However, a $10 monthly subscription that provides frictionless access to any Nintendo game, including day and date releases (which Xbox’s subscription offers, unlike that of Sony), should be a much easier sell. Millions would pay just for the optionality of on-demand access to their childhood. For many - myself included - this would lead to a doubling in annual “ARPU” per Nintendo household. And at almost no marginal cost.
Yet for all of these similarities, the Disney comparison can easily overextend because it simplifies the critical role of culture.
To start, let’s consider the development similarities of Disney and Nintendo. Each company is a master of its respective medium (blockbuster films and AAA console games), and its multi-generational success, four-quadrant appeal, and creative achievements are roughly equivalent. And as the technologies involved in storytelling evolve, so too do these companies. (Though notably, Nintendo didn’t need a Pixar-like acquisition to save itself, since it reinvented 2D to 3D on its own.)
As part of this, it’s important to identify the source of innovation at the two companies. At Nintendo, hardware investments help to inspire or enable its software teams (think of the Nintendo Labo, which allowed players to use cardboard to make new Switch-powered devices). For decades, the most innovative storytelling parts of Disney have been in its theme parks — it’s here that technologies such as the Circle-Vision 360° camera, Unreal Engine, or virtual reality are developed, tested, applied, and learned. And both consoles and theme parks are capital intensive businesses, and both drive significant revenues (though Disney’s obviously has significantly more profits).
Nintendo is aware of the financial and creative advantages in theme parks — which, prior to COVID, were growing rapidly in attendance, profits, and significance. The opportunities for immersive gaming experiences that span low-cost handhold gaming hardware and multi-billion-dollar infrastructure are obvious.
But there’s a reason Nintendo isn’t buying land, designing, building, and operating its own theme parks. And a reason why it has instead chosen to partner with NBCUniversal, which will manage each of these activities (and in doing so, own both the customer and majority of Nintendo’s park-related profits) as part of its existing Universal Studios parks. This is because building its own effort would be a massive management distraction. And Nintendo has, does, and will continue to actively decline areas of new profit/revenue to remain focused on its core businesses.
Theme parks, which cost tens of billions, shouldn’t be seen as outliers, either. Disney owns and operates more than 200 retail stores globally (in addition to those in the theme park). Nintendo has only two such stores (one of which is based in the headquarters of NBCUniversal). Unlike Nintendo, Disney also designs much of its merchandise — and is fully optimized around this business. This includes extensive backend systems, teams, and processes obsessed with which items to make, where to stock them, at what prices, and which inventory levels. The sophistication of these operations shouldn’t be underestimated. To a related end, one could argue that through its theme parks businesses, Disney has far more experience in microtransactions than Nintendo does.
As another example, consider the hotly anticipated Nintendo–Lego series that launched earlier this year. This includes a Super Mario Set equipped with rich sound effects and digital “power up suits,” and a build-a-NES kit CNN has called the “greatest Lego set of all time.” However, this first suite took over five years to release — as long as a game.
Nintendo’s obsessive focus is also why we haven’t seen a The Legend of Zelda television show sold to Netflix or a Nintendo run Super Smash Bros. esports league. The external demand is there. The holdup is that Nintendo doesn’t want to do these things, doesn’t see the need to do them, and, to date, that’s been fine so far. As with mobile.
#4: Cultural Constraints, Determinism, and Differences
Culture is the critical distinguisher between not just Nintendo and Disney but also Nintendo, its gaming peers, and the consumer digital ecosystem overall.
Many of today’s leading consumer digital brands, including Disney as well as Apple, lead through their strong, founder-like cultures that obsess over quality. This dedication is what drove these companies to vertical integration and, crucially, vertical innovation. And it’s why you can go as far back as the 1950s to see Disney’s expansive IP flywheel, or the 1980s to hear Steve Jobs speak of the benefits of tightly coupling not just hardware and operating systems but also peripherals and software.
Nintendo, too, believes in quality above all else. Though it ensures this not with an expansive vertical empire but a rigorous focus on first-party hardware and a small, irregularly released roster of first-party games. Consider the now-famous adage of Nintendo’s creative maestro Shigeru Miyamoto: “A delayed game is eventually good, a bad game is bad forever.” This quote speaks to the company’s obsession with excellence and the permanence of its art (and from the moment of release) — but what’s critical is what’s missing: “can.” Miyamoto-san does not say a delayed game “can eventually be good” but that “eventually” it will be.
To this end, it’s important to highlight the infamous failures of Nintendo’s early 1990s efforts to license its IP to third parties. This includes the three Zelda games and one Mario game made by Philips for its CD-i console (all of which are widely considered among the worst games in history) and the 1993 Super Mario Bros. film (which lost $45MM, or $75MM in 2020 dollars, on a $35MM production budget and has a 4.1/10 rating on IMDb). Decades later, these titles are still reviled, with the film also widely seen to have set back Hollywood adaptations of video games by a decade or more. And crucially, these sorts of partnerships don’t allow Nintendo to delay a release until it’s eventually “good.”
Related Essay: Why Gaming IP Is Finally Taking Off in Film/TV
However, it’s a mistake to overattribute Nintendo’s tight focus with the failures of past partnerships. This disciplined management style is driven from top down, and by patient Japanese shareholders, and by a Japanese public who expects the best from Nintendo. Not profits but rather quality product. These sorts of cultural expectations are distinct and very deeply set.
To put this in context, think of how few Japanese corporations have the level of expansion in different areas that’s common with Western giants such as AT&T, Disney, Comcast, Google, and Amazon — or Chinese giants Alibaba and Tencent. The lessons of Sony’s failures in vertical integration — which extend not just from the Walkman but to OTT video and OTT music, and extend even today in virtual concerts and transmedia gaming experiences — have been particularly well learned by Japanese companies. To this end, it should be noted that Sony’s successes in music and TV/film both come from acquisition (namely Columbia, which it bought from Coca-Cola, and struggled throughout the 1990s through mismanagement). The PlayStation division was homegrown, but it comes from a single vision (Ken Kutaragi), and the model hasn’t been replicated in the twenty-six years since.
Related Essay: Disney, IP, and “Returns to Marginal Affinity”
This is important because the enormous power in IP today stems from the creation of an internally owned and operated “IP flywheel” that is financially reinforcing, scales customers, data and extensions, and is competitively overwhelming. Not only is this not of interest to Nintendo, in contrast, each of Nintendo’s growth areas involves disintermediation from the customer. Today, almost every Nintendo customer is known directly, individually, and operates on Nintendo hardware. However, Nintendo’s theme park lands are operated by and transacted through Universal (which intermingles its IP alongside Nintendo’s). Nintendo’s films are produced and distributed by a third party (again, Universal) and then watched through another (e.g. AMC Theaters or HBO). Even the Lego Mario app uses the Lego account system.
Note, too, that the great hope among many investors is that cloud gaming will force Nintendo, by definition, into being multi/cross-platform. Or that its subscription might be available off Nintendo consoles. But this would result in the disintermediation of Nintendo’s core business (and cost it 20–30% of revenue, too). Disney, in contrast, is reducing disintermediation through Disney+. For the first time ever, it knows each of its customers individually, and which characters and franchises they like (and how much). In addition, it is able to cut out retailer fees (e.g. Target’s share of a DVD) and be the end distributor of its own content.
#5: The Future of the House of Mario
The above doesn’t mean there isn’t change or evolution underway at Nintendo. There is a new generation coming in that doesn’t necessarily see things the same way and likely has a more expansive vision in mind. TV series are likely, as are more DLC programs and live services games. A Nintendo subscription, too, would be transformative; the catalogue strength alone would allow Nintendo to thrive despite its restrained output.
At the same time, we shouldn’t overvalue these changes.
A famous 1990 survey found that more American children recognized Mario than Mickey Mouse. This is probably not true today. In addition, many characters, such the Minions or Harry Potter or Elsa, have likely surpassed him. The generational frailty of IP is part of the reason why Nintendo’s expansion into movies, TV, merchandise, and theme parks is important. But irrespective of the success of these extensions, the majority of kids today are growing up with Fortnite, Minecraft, and Roblox.
2011’s Minecraft is now the best-selling game of all time (supplanting Super Mario and Tetris), with more than 150MM copies sold, followed by 2013’s Grand Theft Auto: V, with 125MM (GTA: V also has more than $7B in lifetime revenue, making it the single highest grossing media title in history). In addition, these games are likely more played than every game in Nintendo’s history combined. Each month, they amass 2–3B hours in playtime.
In fact, Nintendo has actually become niche over the past decade — not because it’s less popular, per se, but because it hasn’t grown. Consider Nintendo’s two biggest hits of the past five years: The Legend of Zelda: Breath of the Wild and Super Mario Odyssey. Each title has achieved 17MM in unit sales. They probably have fewer than 1MM active monthly users today. This is a tiny portion of the 250–300MM console/PC gamers and 2B mobile players. To this end, Fortnite regularly has more than 10MM active users at a given moment; Roblox recently peaked at 4MM. Disney is making the most popular films and TV shows the world has ever seen. (Pokémon has far greater reach, but again, it is owned and independently operated by The Pokémon Company, which Nintendo a minority stake in via various holdings).
There is still a demand for high quality, packaged games like The Legend of Zelda, of course. But the biggest titles are built on creation and simulation, supported by marketplaces, mods and live services. There is nothing structurally preventing Nintendo from thriving here — again, millions would love to live in the worlds of Hyrule or Mushroom Kingdom — but the difficulty of transitioning to this new world can’t be downplayed.
Earlier, I told the story of how Nintendo’s reluctance toward the shift to online services was a precursor to the same issues with mobile. In fact, they’re the same thing. Mobile is simply an access point. Whether it's PC, console, or mobile, the concept of developing a network/service-oriented title requires a shift in technologies, game design, and business model. And underpinning all of this is the fact that gaming is moving on from hardware-based innovation to server-side innovation.
This doesn’t mean cloud gaming per se, but Fortnite, as an example, has shown that most of the “value” in gaming is in the network. The biggest games are now free to play not because there’s more money in ads but because of the strength of Metcalfe's Law. The more of your friends that play Fortnite, the more likely you are to buy outfits and keep playing. Being hardware agnostic does, to some extent, hinder what’s technically possible in a game. However, it massively unlocks the network.
Another good example here is Grand Theft Auto: V, which has since been transformed to GTA Online. The game was built for the seventh generation of consoles (i.e. the PlayStation 3 and Xbox 360 generation), for which it was the best-selling title. It was also the best-selling title of the eighth generation (PS4 and Xbox One). And Sony kicked off its PS5 unveiling with a trailer of GTA:V on its ninth-generation console.
(Incidentally, Microsoft has taken this hardware-to-server transition as its logical next step. Every game the company makes over the next two years will play not just on its ninth-generation Xbox Series X, but also the eight- generation Xbox One. In addition, it will launch two ninth-generation consoles with different processing/graphical powers. And if you buy its game subscription service, its cloud gaming service comes free. The unmistakable point is that consumers can choose the access point of their financial and graphic preference; what matters is the gameplay.)
Accordingly, even if Nintendo were to produce GAAS titles, platform exclusivity and upfront fees would be an impediment. There’s a reason why Super Mario Maker 2 on Switch sold only 5MM copies. There’s little point creating content your friends can’t enjoy, especially if your entire network can play Roblox together (again, Roblox, which is free, peaks at 4MM concurrent users, or 80% of SMM2’s lifetime sales).
The transformation taking place in the market over the next decade is a difficult one for Nintendo. What makes the company so valuable today are its approach to content/IP and investment in hardware. Changes to either mean disrupting Nintendo’s creative and sources of innovation. In addition, we know that Nintendo doesn’t yet want to make these changes. That’s why when a mobile-like title, such as Animal Crossing, or hardware such as the Switch, starts to take off, the company returns to its historical priorities. Note that Nintendo’s mobile program was started during the Wii U’s failure and was renewed not long after the Switch’s release — at a time in which the device was a late entrant to the eighth generation of consoles (due to the failure of the Wii U) and long before the device was a success.
To this end, I’ll return to Disney and Apple. In the 1990s, both companies nearly died as they struggled to adapt to creative atrophy, technological change, and emergent user behaviors. Nintendo does not face these challenges. However, both Disney and Apple reinvented themselves primarily through M&A and ambitious products. Disney bought Pixar to solve for 3D animation (and to renew creative at Disney Animation Studios). Marvel reflected an admission that Disney needed both new IP and outside storytellers. Apple continually launched new products, built new capabilities (e.g. chip production), and expanded into software, content, and services (highest growth category, though still not a strong point). To do this, the company spent $3B on Beats to build up its music subscription service, $300MM on Quattro for mobile advertising, and $300MM on P.A. Semi for semiconductors, among billions more (to say nothing of NeXT). During this period, many foundational assumptions were revised. Apple’s approach to software on the Mac ecosystem and iOS are fundamentally different, as are its internal operations to support the software ecosystem.
This boldness was driven by an obsession over vertically integrated quality and a recognized need for change. And this has persisted. Today, Disney+ is the inarguable core of The Walt Disney company, not its feature films - which now reside there and increasingly premiere there, too (notably, Disney’s over-the-top technology arm, Disney Streaming Services, comes from a $3B+ acquisition of BAMTech.) In 2007, Steve Jobs announced “The Mac, iPod, Apple TV and iPhone. Only one of those is a computer. So we’re changing the name.” And thus Apple Computer was renamed Apple Inc.
Nintendo does not face the near or even medium-term challenges that Disney or Apple did in the 1990s. Unlike these two companies, its internal creative output and talent remains strong. Nintendo’s IP may have been eclipsed in recent years, but it still reaches tens of millions a year. Its hardware, too, continues to soar. And there will be substantial lift from a Nintendo subscription — even if it doesn’t launch for several more years. This means that innovation, profits, and outstanding games will continue.
However, Nintendo cannot indefinitely ignore the shift to mobile, cross-platform gaming, and server-side experiences. This is where almost all of the growth, innovation, players, playtime, and revenues reside. And today, Nintendo is not developing this expertise and not interested in doing so. If organic investment isn’t made, the solution must be inorganic growth: M&A. This is particularly common in gaming. Activision Blizzard bought Candy Crush publisher and mobile gaming giant King Digital for $6B. Epic Games bought the game developer Chair Entertainment to build out its content arm (Chair founder Donald Mustard is now worldwide creative director at Epic and runs Fortnite). Microsoft has been on an “acquisition spree” buying studios to power its server-side expansions.
Nintendo is unlikely to take such an approach. It doesn’t want to be Disney, or Tencent, or Activision Blizzard. It wants to keep being Nintendo. And it’s important to recognize that some are driven by perfecting their specific process. Not scaling it.
Matthew Ball (@ballmatthew)
