Sunday, December 06, 2015

20 million Nintendo NX in 2016

A much-maligned Digitimes report is actually far from crazy; Nintendo's historical data suggests that a 20 million target for NX is plausible
Nintendo

The hefty pinch of salt required alongside any article from Taiwanese news site Digitimes is fairly well known - and has been regularly mentioned in articles covering the site's apparent 'scoop' of manufacturing numbers for the Nintendo NX console this week. The site does have great sources within Taiwan and China's extensive manufacturing industries, and has on occasion released major scoops regarding products from Apple, among others - but it buries those gems in a torrent of articles that are far more dubious, and its misses are easily as numerous as its hits.

Thanks to this reputation, the Nintendo story has been greeted with outright skepticism - but some of that skepticism is unfounded, and in reality, Digitimes' numbers are probably reasonably accurate. The 20 million target for first-year sales of NX has come in for particular criticism, with many commentators claiming that this is ludicrously high - but in fact, a look at Nintendo's historic sales figures suggests that this is almost certainly the right ballpark for the high end of the company's internal sales targets.

"With the NX, it stands to reason that Nintendo would be targeting the kind of sales achieved by the Wii, not the sales of the disappointing Wii U; if you're not even going to try to match or exceed the sales of your best-selling products, why bother at all?"

For a start, let's bear in mind that Nintendo, like most companies, thinks in terms of financial years - so if we assume a 2016 launch for the NX, as has been widely reported elsewhere, the company's first-year projections would include everything up to March 31st, 2017. If the console launches in early 2016, as we've seen historically with the 3DS and the Game Boy Advance - both of which were spring or early summer launches - then the "year one" prediction will map nicely on to the 2017 financial year; if it launches late in 2016 (as is far more likely, of course), then the "year one" prediction will include a chunk of FY2017 and the lion's share of FY2018.

It's important to think about this in terms of financial years for two reasons - because that's how Nintendo thinks (and any internal projections Digitimes may have seen will be done in terms of quarters and financial years, not calendar years), and because it allows us to go back through the company's financial records and see how that 20 million figure might stack up with sales of previous consoles. In short - is, as some commentators are claiming, 20 million a ludicrous target for a Nintendo console after its first full financial year on the market?

Let's look at home consoles first, as the NX is hypothetically positioned as the successor to the company's failing Wii U. There's no doubt that Nintendo has had its struggles in this sector; the Wii U only managed 6.2 million sales by the end of its first full financial year, fewer even than the GameCube, which sold 9.6 million consoles in that timeframe. However, in between those two consoles we find the all-conquering Wii, which sold a jaw-dropping 24.5 million consoles by the end of its first full financial year. With the NX, it stands to reason that Nintendo would be targeting the kind of sales achieved by the Wii, not the sales of the disappointing Wii U; if you're not even going to try to match or exceed the sales of your best-selling products, why bother at all?

Besides, the Wii may look like an aberration among the company's home console sales figures, but when you look at Nintendo's comparable handheld sales, things start to line up far more nicely. By the end of a full financial year on the market, the GameBoy Advance had racked up 18.2 million unit sales; the Nintendo DS was on 16.7 million units; and the 3DS, despite a rocky start, hit 17.1 million unit sales by the end of FY2012 (and actually had less time to reach that figure than its predecessors, thanks to its March launch window).

In other words, while 20 million is on the high side (and again, this is a target figure), it's within the ballpark of four out of the past six Nintendo console launches. If the company is seeking to recapture its past success, it's almost exactly the figure you'd expect it to pick - and it also, incidentally, looks interesting in the context of the much-vaunted idea that NX will bridge the firm's handheld and home console efforts. 20 million is a tough figure for a Nintendo home console to hit, but apparently no sweat for a well-received Nintendo handheld device; if NX is both, and has a better launch (and more realistic pricing) than the 3DS did, 20 million in the first full fiscal year is totally credible.

What, then, of the other claim in the Digitimes article - that the company's suppliers are basing their estimates on 10 to 12 million units instead? Well, that makes sense too, given the company's recent struggles and the particularly negative press around the Wii U. The contracts between Nintendo and its suppliers will be flexible and include a significant element of risk on the supply side; Nintendo doesn't want to end up with the parts for 20 million consoles sitting in a warehouse if it only manages to sell half that number. Thus, Nintendo will tell suppliers their targets, and suppliers will come up with their own estimates based on those targets and their own analysis of the market in order to balance their supply chains. One downside of this, incidentally, is that if the NX does have Wii-like levels of demand, it may also face Wii-like supply shortages, since Nintendo's suppliers (in the scenario outlined by Digitimes) could end up scrambling to meet their component commitments.

In short, while I'm perfectly happy to take my pinch of salt along with this article (in fact, I set out researching it with a high degree of skepticism, and was only convinced of its reasonability by the data itself), I think it passes the face validity test. Assuming, and this is of course the big "if", that Nintendo is ramping up towards a launch some time in the latter half of 2016, then the targets, projections and timelines Digitimes has outlined are absolutely in line with what you'd reasonably expect from a company in this position.

"The core appeal of NX must be 'buy this as well as a PS4', not 'buy this instead of a PS4'"

One interesting thing to take away from this, however, is to think about the potential relative position of NX against its competition should it meet the targets being laid out. By the time the NX reaches Nintendo's ambitious 20 million target, or its suppliers' more conservative 10 to 12 million target, one would expect PS4 to be comfortably above 50 million (and perhaps closer to 60), and on the current trajectory, the Xbox One should be in or around 40 million. Those figures could change dramatically - there are signs of Xbox One starting to challenge the PS4 more seriously in some markets now - but the ballpark is reasonable; there'll be somewhere around 100 million "current-gen" devices from Microsoft and Sony in the market.

I've argued before that Nintendo could benefit hugely from a "mid-cycle" launch for the NX; if the console is different enough from the Xbox and PlayStation offerings, it would be positioned to be the "second console" of a massive market of existing console owners who have had their system for a few years and are keen to try something else. It wouldn't become their primary gaming device, most likely, but would be valued for its unusual features and its exclusive software, especially if that software included experiences that simply couldn't be accomplished on other consoles. These figures, I think, drive home the core of that message; Nintendo will be launching into a market with a two extremely powerful players, and while some people will of course prefer a Nintendo console to anything else on the market (my rough back of the envelope based on prior sales figures says this is a market of about 3 million people), the core appeal of NX must be "buy this as well as a PS4", not "buy this instead of a PS4".

This also, incidentally, all but shuts down the conversation regarding third-party, cross-platform support. If it hits its targets, the NX will be a great market for third parties who want to develop something original and uniquely suited to the platform - just as the DS, 3DS and Wii have been - but it's going to be a barren wasteland for people who just want to do a cheap port and add another SKU to their upcoming mega-release. It may well rival the technical prowess of Sony and Microsoft's consoles, but it doesn't matter; the installed base, the friends networks and all the rest of it will still be on PlayStation and Xbox, and the cost of porting and releasing on NX will be simply unjustifiable for most games.

Nintendo won't lose much sleep over that. If they can come close to that 20 million target, they'll have exactly what they want - a system that's on a healthy sales trajectory and that provides a solid, high-spending market for the company's exclusive first-party releases, with occasional third-party games filling in the gaps. It won't trouble Sony's market share or leave Microsoft fearing for their second-place position, at least not for a good while, but these numbers would put Nintendo back on a sure footing in the home console market - and that would be good news not just for the House of Mario, but for the industry as a whole.

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