Posted by: seanmalstrom | January 15, 2017

Macroeconomic trends of Generation 9

Nintendo does design their game consoles based on macro-economic trends. In the past, the game console was just better ‘hardware’ that did better graphics and all. After the Gamecube, Nintendo realized it needed to change.

With the Wii and DS, Nintendo saw the macro-economic writing on the wall especially for Japan. Japan had fallen economically from the mid 1990s. The demographics of Japan is an aging population. There are less and less babies. The pipeline of children coming in was shrinking which meant Nintendo’s core market was shrinking. It was THIS that caused Nintendo to look to sell to other markets and to non-gamers. Nintendo wanted to sell to older people because Japan is filling up with older people.

Nintendo’s pattern is that first party games create an install base for the console which third party companies then come in and exploit. For those of you talking about third party game companies and Nintendo consoles, did you know that there has never been heavy third party support for a new Nintendo console? The only one I can think maybe would be the SNES and most of those games were sequels to NES known franchises (e.g. Castlevania 4, Gradius 3, Super Ghosts and Goblins, Contra 3).

It’s a mistake to compare third party output for Nintendo consoles to Microsoft and Sony because both Microsoft and Sony are closer to PCs than consoles. Both Microsoft and Sony, who are not game companies, literally design their system around whatever the third parties want and take the massive financial risk to do so. Nintendo is not willing to risk billions of dollars for third party companies. Likewise, third party companies will not risk putting so much money into an unproven system.

This is why we see the cycle of a few third party games coming out which are very tepid efforts. The third party companies know that they need their staff to know the machine, in case it takes off, and they want to keep good relations with Nintendo. And when the console takes off, then the third party companies double down and make more games for the Nintendo hardware. For what we call ‘very successful’ Nintendo consoles such as the NES, look at the launch line up. It is nearly 100% Nintendo games. Third party games didn’t really get going for the NES until 1988 and 1989, two to three years after the system had been out.

Launch line-up for Gameboy

Super Mario Land

These are all Nintendo games. All of them.

Launch line-up for Gameboy Color

Game & Watch Gallery 2
Pocket Bomberman
Tetris DX

Another release of Tetris, a port of Centipede, ports of ancient Game and Watch games, and some Bomberman?

Launch line-up for Gameboy-Advance

Army Men Advance
Castlevania: Circle of the Moon
ChuChu Rocket!
Earthworm Jim
Fire Pro Wrestling
GT Advance Championship Racing
Iridion 3D
Konami Krazy Racers
Namco Museum
Pinobee: Wings of Adventure
Pitfall: The Mayan Adventure
Rayman Advance
Ready 2 Rumble Boxing: Round 2
Super Dodge Ball Advance
Super Mario Advance
Tony Hawk’s Pro Skater 2

We definitely do have some third party software. But most of this software are ports of older games including Nintendo’s ‘flagship launch title’.

Launch line-up for DS

Asphalt Urban GT
Feel the Magic: XY/XX
Madden NFL 2005
Metroid Prime Hunters – First Hunt (Demo)
Spider-Man 2
Super Mario 64 DS
The Urbz: Sims in the City

The Switch lifecycle is going to be unique to the Switch, but if any console trajectory matches it I think it would be the DS. Look at this pathetic launch line up for DS. There is nothing. Even the flagship Nintendo game is a port. Terrible! And yet, within a year or two, the DS would become an absolute sales juggernaut and outsell nearly every console ever made. (“Are you saying Switch is outsell everything?” No.  DS had solid launch, stagnation, slow increase, than BAM social phenomenon. Switch may not hit those heights, but I expect Switch momentum to grow after a stagnancy period.)

Going back to the Wii, while Nintendo successfully grew the install base for the DS and Wii using non-gamers, third parties didn’t exactly jump in (aside from making games for these non-gamers, the shovelware). I heard stories that if a programmer was supposed to make a Wii game, he would threaten to quit! Internally, there was much developer backlash against developing for a game console selling to non-gamers. Iwata mentioned this in one of the investor faqs.

However, non-gamers are not the only expanded market. Former gamers are another expanded market. This seems to be where Nintendo is aiming for market growth. There are more former Nintendo gamers than current Nintendo gamers (especially after the Wii U!). Majority of game developers also fall into the former Nintendo gamer camp.

Two Major Negative Trends Hitting the Game Industry

One is the economic malaise. People don’t have jobs so people don’t have money to buy games.

Another is that video games keep costing more and more to make. Games are being less and less profitable.

“So where is the flood of Switch games?” I think Nintendo’s First Party games are producing. Zelda, Mario, additions to Mario Kart, Splatoon sequel, plus whatever at E3 we haven’t seen, etc. The result of Nintendo combining their development teams is not to flood the console with software but to save it from droughts because games take too long and are too expensive to make. The positive trend of combining handheld/home console development assets counteracts the negative trend of rising development time and costs… at least for now.

Where are the analysts praising the PlayStation 4 for its ‘victory’ over the Generation 8 market? You don’t hear it because the video game market is shrinking compared to the generation prior. At first, they blamed Nintendo’s poor performance in Generation 8, but they don’t do that anymore. Microsoft looks like it is gearing up to exit the console market as we traditionally known. Future Microsoft hardware will be more like the Steam hardware in that it plays PC games that you can get from many other places. And what exactly will Sony do with the PlayStation 5 especially coming from the PS4 Pro? Game costs keep skyrocketing up.

Where will the economy be for Generation 9?

Long ago, I thought Generation 8 would be a period of stark recession (it has) and Generation 9 will be a period of war (noticing a rapid build-up between the West and Russia). Due to recent events, we can change the crystal ball prognosis for Generation 9: peace and rapid economic growth. In America, at least, corporations and investors were sitting on tons of money because of an unstable legal environment. Now, they are ready to invest. This is why the stock market has been booming lately. I do expect an American economic boom in the new few years. Whether or not that extends to other countries is unknown. I do think Mexico will enter a period of distress and revolution.

The correlation of macro-economic trends and game console sales are interesting. The Wii was designed to counter a negative macro-economic trend. It did OK in Japan. In other parts of the world such as America where the economy was good in 2006, it was sold out. The Wii stayed sold out until early 2008. 2008 was when the big recession started.

Nintendo knows that the true reason for game industry growth was due to good macro-economic trends: growing economy, population growth, and gamers having disposable income (gamers getting real jobs and spending it on games).

The Atari 2600 floundered around until Space Invaders came out for it. Atari 2600 really took off in the early 1980s which was around the time the American economy rebounded. The Gaming Crash of 1983 was when the economy was really beginning to roar. The American economy has been solidly growing through the 1980s and 1990s. The NES, SNES, Genesis, PlayStation, Gameboy, Gameboy Advance all rode this economic wave. There was a dip in the early 2000s, but the American economy came back. PS2, Xbox, Gamecube (Gamecube sold best in America), DS, and Wii all took advantage of this.

After 2008, the American economy has been a different story.

One of the reasons why I predict the Switch will have a DS style ‘later rise’ is due to expectation that the American economy will bounce back. Economic rises and declines are cyclical. You can already see the investment money roaring out there as we speak.

Let’s say the American economy begins to roar back in 2018 or 2019. The game console that will likely benefit from that macro-economic trend would be the Switch. The PS4 and Xbox One are already getting old and the idea of a game console having to use a TV will be seen as antiquated by a generation raised on tablets and smart devices. I think long term growth will be on the Switch.

Switch’s profitability

One thing I was way wrong about the Switch was thinking Nintendo would go aggressive on the price. To the contrary, Nintendo is going aggressive on the profit. Nothing about the Switch is cheap. What I mean by that is that in no part of the Switch does Nintendo seem to be cutting out the profit.

From what I can see so far, Nintendo has done an excellent job on the Switch’s game cases and cartridges. People paying $60 for these Switch games just to have them and collect them will happen. This is going to be some serious profit for some game companies. The Switch could be a very profitable haven for game companies especially indie ones who can sell their game on Switch for full price instead of download only. Many Switch users such as myself would pay to have that great indie game on a cartridge instead of a download.

As the economy comes back, I expect investment to go into Switch games especially with a Switch install base carved out. I expect PS4 and Xbox One to largely miss this investment wave due to being at the end of their life cycles.

The Switch also poses an existential threat to the PlayStation. Gamers are going to like having the choice and freedom to play their games on the TV or portable with the Switch. When the PlayStation 5 comes out and is just a larger GPU with a controller connecting to a TV, I think the market will have become adapted to the lifestyle Switch provides and many gamers will not want to be tethered to a TV. Early indications of this market behavior can be found with the excitement behind the port of Skyrim for Switch. Skyrim, already an old game, will be bought yet again because of Switch’s possibility of playing Skyrim on the go. When it comes to multi-platform releases between Switch and other consoles, I expect the Switch one to win because of the portability factor (for me, it would be the cartridge factor).

Sony has shown they cannot compete with a mobile gaming device. I do not believe Sony could make a Switch clone. As the market likes the multi-function the Switch provides as the market trends away from the central television set, what is Sony going to do?

“But Malstrom,” you say, “Nintendo doesn’t design hardware so Sony cannot copy and to hurt Sony.”

Bullshit they do.

I also have a suspicion that the Switch will become a RPG powerhouse that may surpass the DS and rival the SNES. Think about it. The initial install base of Switch will be those who bought Zelda: Breath of the Wild. You already have excitement over Skyrim, a half-decade old RPG. You have excitement over ports of other RPGs that got overlooked on other systems.

And I suspect Arcade Gaming will have a large constituency on the Switch. By Arcade Gaming, I mean games like Bomberman, Mario Kart, Street Fighter 2, etc.

Will the Joy Cons take off?

Nintendo has a habit of pumping in technology into their hardware to use it later on with second year or third year games. DS had wifi capability that was unused until Mario Kart DS came out well after a year the system had launched. I bet Nintendo has software plans for those Joy Cons.

I don’t see ‘party gaming’ taking off the the Switch. Wii wasn’t so much connected to the TV as the Wii was connected to the living room… where there was room for the party to occur. I don’t see Switch dominating the living room. Unless there is some compelling software for it (1, 2, Switch is not it), I think the Joy Cons are going to be largely ignored by consumers.

The ability to switch between portable and big TV is going to be a significant value-booster to A) RPGs (because people will want to level up their character on the go) B) local multiplayer gaming. It’s not well spoken about but the DS was the best local multiplayer experience one could have in gaming surpassing the Wii, the N64, the Gamecube, and any other system. Being able to play multiplayer console games without a TV or using multiple Switches is going to rock.

Does anyone see any other strong constituencies being born on the Switch than the two I mentioned above?



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