Thursday, 12 January 2017

A tough look at the Nintendo Switch

There's a public unveiling of Nintendo Switch later today so here are my quick and dirty predictions and outlook. Spoilers: It's negative. The whole article was from the top of my head so if I need to, I'll make a more serious effort citing sources and everything at another time. Anyhow...


Nintendo officially announced their latest videogaming platform the Nintendo Switch as the successor to the Wii U 3 months ago on October 20th via a 3-minute trailer. The trailer showed that the Switch is a tablet device much like the iPad, but when it is laid to rest on its charging unit, it can output images to your TV enabling it to function as a more traditional home console much like the Wii U. Another of its functions as shown in that announcement trailer is a portable gaming device like the 3DS and the PlayStation Vita.

Nintendo Switch's functions:
1)    Tablet (Not demonstrated or hinted in trailer)
2)    Portable Gaming Device (Shown in trailer)
3)    Home console (Shown in trailer)

What the trailer didn’t show was the Switch being put to use as a tablet device. Something which, despite being its primary function, was rather curiously hidden/obfuscated from the teaser announcement. So multitouch functionality was never shown or hinted at nor was there any mention of what Operating System (OS) the device will be running on.

What does the Switch need to be able to compete as a standalone tablet? It needs the right combination of the following (not exhaustive):
  • OS - A good OS. Easy. Fast. Reliable. Secure.
  • Apps - Lots of apps or access to the app or play store
  • Battery - A good battery life
  • Margins - Competitive price and low margin of profit due to high competition in the segment

For the Switch to be a viable portable device (i.e. 3DS successor) it needs the right combination of the following (not exhaustive):
  • Games - Good games and games that can be played in smaller sessions
  • Pocket - Pocketable form-factor
  • Battery - A good battery life
  • Price - Largely for the younger demographic

For the Switch to have a chance to compete as a home console, it needs the right combination of the following (not exhaustive):
  • Momentum - Consecutive years of constant success
  • Games - Good games in popular genres that consumers want
  • Hardware - Exciting hardware benefiting TV play
  • Business Model - The right business model.

So let’s look at each of these:

OS – Nintendo needs a mature operating system that allows you to easily stream games, Snapchat, Telegram, Twitch, Tweet and Youtube. The easiest way for Nintendo to hit the ground running with its OS is for it to be a fork off of the Android OS. But alas, I don’t expect Nintendo do use a fork of Android, probably because of security or licensing.

Apps – A fork of an Android OS would ideally make it very easy for developers to port existing applications that people already use on their smart devices. Apps like Maps, Fotmob, AccuWeather, Flightradar, DB Navigator if you’re in Germany and so forth. If the Switch’s app store lacks a constant supply of new software, then the tablet functionality will be limited to children only, thus limiting demographic.

Battery – Anything that’s portable needs to have an adequate battery life. Hence it being portable. I couldn’t name a single successful portable device with less than 4 hours of battery life. Battery life - M U S T - last for at least 4 hours during a stress test. Demands of gamers are unique. 3 hours is useless, especially when battery degradation over time is taken into account. And I’m not saying 4 hours is okay. Instead, I’m saying that a battery life of a minimum of 4 hours is dangerously inadequate. So much so that it may or may not impact on the Switch’s usefulness as a portable gaming device to gamers.

Margins – Switch will be competing against a €250 PS4 basic, €200 tablets, and less than €200 smartphones. Due to the level of the competition, profit on hardware is out of the question for Nintendo as the Switch doesn’t come from a position of strength. So any overpricing of the hardware would make it a very risky gamble for them (See case studies of PS3, 3DS and Wii U). A loss on hardware has historically been out of the question for Nintendo as, unlike Sony, its hardware division is small and there are no economies of scale nor opportunities for cross-division synergies. One thing to note however is that Nvidia’s role as Nintendo’s new long-term hardware partner may be a force for good for Nintendo, but at this stage that would be an unknown quantity and purely speculation (although I am very positive about this move personally).

Games – Nintendo is no longer a powerhouse on the big budget and ambitious space of console games. Their previous record of releasing stellar & undisputed industry conquering console games looks like this:

2016: No
2015: No
2014: No
2013: No
2012: No
2011: No
2010: Super Mario Galaxy 2
2009: No
2008: No
2007: Super Mario Galaxy 1
2006: Wii Sports (A casual game)
2005: No
2004: No
2003: No
2002: Metroid Prime
2001: No
2000: No
1999: No
1998: Legend of Zelda: Ocarina of Time
1997: Goldeneye 64
1996: Super Mario 64.

Nintendo hasn’t generated universal, industrywide buzz and excitement with any of their more ambitious home console games since 2010. Their Wii U output, which may be seen as the most refined versions of their most beloved IP’s (Intellectualy Properties such as Mario and Zelda), have failed to make the Wii U an object of envy for many of the Sony and PC gamers. As for their new IP’s such as Splatoon, they've been solid if unspectacular.

Pocket – The less pocketable a device is, the less mobile it is. Nintendo’s past handhelds have all been pocketable. A device carrying a 6.2 inched screen (rumoured size) will be less mobile than, say, a 3DS. Remember how the original DS’s sales didn’t catch on fire until the DS Lite? Simple math: the bigger it is, the less it will be carried around especially with the primary demographic being the younger audience. Larger sizes also bring with it more wear and tear and make it more cumbersome to run around while having it in your pocket, harder to conceal, and generally heavier to lug around. I love and prefer large phones and phablets myself, but the comparison between the two industries is invalid. Different demographics and markets = different size consideration.

Momentum – Mismanagement is cumulative and builds up over time.

[Handheld] In 2016, Sales of Nintendo’s existing flagship handheld device, the 3DS, declined for the 3rd year in a row. Meanwhile, even at its peak, sales of the 3DS were down over its predecessor, the DS. However I don’t want to get too gloomy on the subject as the 3DS is a success, but one that is quickly reaching the end of its life, and it’s uncertain how many of these existing Nintendo consumers will buy into a new generation of Nintendo hardware over just sticking to smartphone gaming.

[Home Console] That's for the handheld, but what about momentum on the console front? Well, it’s a wasteland. The Wii U has been a total disaster regarding units sold in the historical context. So less said the better.

The house of Nintendo hasn’t been in order for many years now, meaning that the Switch has no momentum to benefit from for itself (except for 23 million views of the Switch announcement teaser trailer). Nintendo is hoping that the Switch may become the device that will once again kickstart momentum for them. I think broad success for this machine (over 50million units + a high software attach rate) is unfeasible, and unless Nintendo realises that as well, they’re in trouble.

Hardware – Gaming falls inside the technology world requiring electricity and silicon boards to run (note to people from the future, we haven’t switched to carbon nanotubes or graphene chips yet). And in the technology world - and whether we’re talking about things like the Wii motion controller, lots of teraFLOPS, precision input sticks and so on - hardware is exciting. Especially hardware which makes things possible in entertainment that wasn’t possible previously. With everything that we’ve been told about the Nintendo Switch so far, it appears that the Switch hardware enables nothing new or exciting for gamers sitting on their couch in front of their TV’s. I don’t see an ace in the bag from Nintendo on this front tonight.

Some may disagree with that assessment, as it appears that are people who are excited about the possibilities that the Nintendo Switch brings. My feeling on it is that the fever pitch excitement in certain communities online is likely to be limited, unsustained and unlikely translate to widespread sales.

Business Model – Over the years it appears that two business models have gained dominance in the videogame world:
A) Manufacturer subsidised hardware leading to expensive software for profit (All home consoles, 3DS, Vita)
B) Expensive hardware sold at profit leading to free or cheap software (High-end PC’s, iPad, Smartphones)
C) Lightning strikes twice (Wii)

The Nintendo faithful will not want to hear this, but Nintendo software is no longer as high a value proposition in the eyes of most gamers, regardless of how well their games retain their prices over time. Nintendo games are not worth €70 to the mass market, and they’re hardly ever priced that way by Nintendo. And with a few exceptions here and there, Nintendo hasn’t pursued ambitious big budget gaming for over a decade.

Assuming I’m right, this would mean that business model “A” is no longer suitable for them unless their games start to show once again large-scale ambition, created with unique and sometimes non-reusable assets (textures, animation, voice acting), and in a diverse range of highly relevant genres. From realistic sports and racing games to games which touch on more sombre themes of loss, pain, heartbreak and love but without the trademark Japanese colourful look and feel.

Furthermore, Nintendo has exceptional Intellectual Properties carrying wide appeal with the young and old. And they need to leverage their existing iconic brands in order to find a business model that will better suit them and their customers. Although business model “A” will not work for Nintendo, neither will business model “B”. Since over a decade of mismanagement by key Nintendo figures has put Nintendo in an unenviable position of needing to claw back market share with blunted or no claws. Every company wants to make a large day 1 profit on hardware while being beneficiaries of software royalties as a risk-free method of generating ever more profit. There is a reason why Apple share is so expensive.

For business model “C”, lightning will not strike twice with the Nintendo Switch as the hardware is not up to par. Nintendo needs to find a solution that broadly resembles business plan A (subsidised hardware with premium or even freemium software), but due to their mismanagement, they have two very difficult options. Either go with high quality hardware with heavy subsidy and sold at a loss even at a high price, or go very cheap (high quality low margin, low price), and do the same with software pricing too (€30 or below). It’s likely that Nintendo will not be so aggressive and will follow neither plan. They will just do the minimum required in order to subsist, at least for this round.

Summary

Based on speculation of the little they’ve shown so far and prior to today’s proper unveiling of the machine, I think that the Nintendo Switch is a deeply flawed device that is unlikely to revive Nintendo's fortunes massively. I also think that Nintendo knows this and won't be too surprised if the machine doesn't light the charts on fire. But they must treat the Switch with extreme care so as not to burn those loyal fans who’ll buy into it come launch day (Wii U and 3DS Ambassador Program). Based on the summary of my thoughts and intuition, it is in my opinion HIGHLY unlikely that the machine will sell over 40 million units lifetime (for comparison the Wii U has sold around 15 million). Predictions which I will revise should I be impressed with what Nintendo have to show later today (tomorrow).

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