The Nintendo Switch Has Upended the Video Game Market (Premium)

Thanks to a blockbuster year, Nintendo is upping its estimate for annual Switch console sales to 15 million units. No, that’s not enough to surpass the rate at which Sony sells the PlayStation 4. But it’s close, and this success came out of nowhere.

More to the point, Nintendo’s hybrid approach to video gaming—the Switch works as both a standalone, traditional game console and a portable gaming device—proves that this firm still has a unique and innovative role to play in this market. And its Switch success has upended our understanding of what the video game hardware market can be.

As I’ve done before, I will use a bit of math here to put this success in perspective.

Back in December, Nintendo announced that it had sold 10 million Switch consoles in its first 9 months of availability. At the time, Nintendo was selling the Switch at a rate of 1.11 million units per month. This compared to 1.67 million per month for the PS4.

Of course, there are different ways of looking at these numbers. If you compare the Switch’s first 9 months in the market to the PS4s, you will see that it also took Sony 9 month to sell 10 million PS4 units. (And it’s worth comparing the success of Switch to Nintendo’s previous console, the Wii U, which required 2.5 years to reach 10 million units.)

Today, Nintendo announced its earnings for the quarter ending December 31. And it was a blockbuster: The firm posted an operating profit of $1.05 billion (up 177 percent year-over-year) on revenues of $4.4 billion (up 261 percent). This was Nintendo’s highest quarterly revenues since December 2009 when, yep, you guessed it—the mighty Wii ruled the market.

As part of its earnings announcement, Nintendo revealed that it had sold 7.23 million Switch consoles in the quarter; that’s a rate of 2.41 million units per month, though this was, of course, the holiday period. It also raised its forecast for the Switch to 15 million units; it had previously estimated that it would sell 14 million units in the first year.

That works out to 1.25 million consoles per month. Again, still below the latest Sony figure (1.67 million), but very impressive. This is especially true when you consider that Nintendo doesn’t compete with the graphical power of a standard Xbox One or PS4, let alone the newer 4K consoles. Nintendo, as is usually the case, has carved out a space for itself. And, as is always the case, it’s a unique space.

In fact, if you were to look back at the past several years, or even the past couple of decades, you’d see a related and interesting trend: Nintendo, semi-uniquely among its competitors, has always dominated the sub-market for mobile gaming hardware. That is, aside from the success (or lack thereof) that it saw with various traditional consoles, Nintendo has always seen great success in mobile. This is a market that Microsoft has never really addressed. And its one in which Sony, the current market leader has repeatedly tried—with the PlayStation Portable (PSP) and PS Vita—and failed.

Nintendo’s strength in mobile might be compared to two other initiatives we see in personal technology: The rapid rise of smartphones and tablets that have replaced traditional PCs, and of the technology companies like Qualcomm and Apple that have led that charge. And the subsequent and related rise of 2-in-1 PCs like Microsoft Surface that were designed to adapt traditional PCs to the new normal.

I’ve often argued that the future of video games is in the cloud, and that Microsoft—the current loser—is uniquely positioned to dominate that market. You can check out MSFT + EA? (Premium) for the most recent discussion. But the short version is that video games will be delivered from the cloud to virtually any device, including mobile devices, and that unique video game hardware, consoles especially, will disappear.

But that’s the future.

In the meantime, all of these companies—Sony, Nintendo, and Microsoft—need to chart a path to that future. And it’s interesting, isn’t it, that the path each company is taking maps so closely to their strengths and to their relative positions in the market.

Sony, the market leader, is sitting pretty: There is no version of this story in which it does not win the current generation of video game consoles. Whether you look at unit sales or revenues, they’re winning, and they will win. But that victory is fleeting, and there is nothing to suggest that Sony has any answer for the two forces for changing that are sweeping through the video game world: Cloud and mobile. In video games, Sony is like Microsoft was in personal computing about two years after the iPhone introduction. The world is changing, and they have no answer.

Let’s look at Nintendo. The firm dominates in mobile and it announced today that its 3DS mobile game system just had its best sales month since December 2014, with over 750,000 units sold. And that family of devices has sold almost 70 million units overall. Its predecessors, the Nintendo DS and Gameboy, sold 154 million units and 118 million units, respectively, over their lifetimes. Best of all, the Switch didn’t cannibalize 3DS sales, Nintendo says.

With the Switch, Nintendo has found renewed success in the traditional video game console market by rethinking what a video game console is: When you think about it, the Switch is the 2-in-1, the Surface Pro, if you will, of the console market. They have a found a recipe for success.

And then there’s Microsoft. The software giant is poised for great success in the cloud-based future, as I’ve noted. And it is doing everything it can to create the best-possible ecosystem for gamers.

Except for mobile, that is. Aside from the random fact that some games, including some Xbox Play Anywhere titles can be played on portable PCs, Microsoft doesn’t really have a mobile strategy to speak of. And like Sony, I think it needs to address that.

So how might Microsoft (and Sony) address mobile in the near-term?

Easy. Both companies have already developed interesting solutions for bringing previous-generation games, often from hardware-incompatible previous-generation consoles, to their newest hardware. In Microsoft’s case, I am, of course, referring to Backward Compatibility, which lets the Xbox One run games designed for the original Xbox and the Xbox 360.

These games are ideally suited for mobile today. And much like a lowly Raspberry Pi 3 can be used to emulate an Amiga or multiple video game consoles from the past, a Microsoft (or Sony) mobile gaming device could run Xbox and Xbox 360 games pretty easily, I bet. One might likewise argue that many of these games could equal or surpass the quality of modern Switch games, too.

Fans have long called on Microsoft to make such a device. (And I’d imagine that whatever success the PSP/Vita had was likewise tied to their ability to play classic games from the past.) And I think it makes sense, given Microsoft’s fan-centric video game strategy. And given that this cloud future is still years away.

Whatever happens, this much is clear: The video game industry is better off with a success Nintendo plying its own course. This company’s unique and innovative approach to the market is a joy to watch, and an inspiration for its competitors to follow.