Does Nintendo have a competitive advantage? Use the VRIN framework and financial ratio analysis to justify your answer

CASE 20 NINTENDO: COULD THE SWITCH TURN ON GAMERS? The Nintendo Switch is a gaming console that comes with Journal, to meet demand for one year out (ending April a pair of new and innovative controllers called Joy-Con 2018), the company's management decided to manufacture Controllers, a hybrid of an attachable game pad and a con- 16 million Switch consoles-double the yearly quantity of troller that could be used separately for multiplayer game 8 million units, Nintendo's traditional production target. play. When it was introduced in 2017, Nintendo's manage- One of the key topics of discussion in the popular press ment was highly optimistic about the Switch, and Nintendo was whether or not the Switch console defined the "next believed that it could sell about 10 million units of Switch generation of gaming. This echoed similar press concerns consoles within a year after the launch. As of January after the launch of Nintendo's previous console, the Wii U. 2019, Nintendo's latest gaming console Nintendo Switch Prior to the launch of the Switch, its predecessor the had exceeded 32 million units sold, and software sales for Nintendo Wii U console had been on the market for only a the console had reached 163.61 million units. A pair of short while, with the addition of innovative controls and Joy-Cons was included in the $299.99 price tag of the new game titles. Then there had been uncertainty among Switch console. The Joy-Con came in two color options for industry experts, such as Gabrielle Shrager of Ubisoft and customers to choose from, one grey and red/blue and the Mikael Haveri of Frozenbyte, as to whether or not the other grey and black. A more innovative feature in the new improved power and new controller interface justified that gaming console was that it could be transformed into a system's being considered a "new" generation. 6.2-inch high-definition on-the-go gaming screen if a user The Wii U initially was launched with 50 available decided to move away from the TV. games and a new controller interface, termed the The Switch console also marked the release of Nintendo GamePad. While the GamePad offered a new take on the Switch's very first epic game called The Legend of Zelda: Wii's controls, the new console was still compatible with Breadth of the Wild," which could be played both on Switch the same motion-sensing controllers of the original Wii. and Wii U consoles for a price of $59.99. Nintendo of However, the Wii U console was not sold with these con- America's COO and president, Reggie Fils-Aime, said, trollers included. Instead, it came with just one of the Nintendo Switch makes it easy for anyone to enjoy their new GamePads. Incorporating traits from tablet devices, games in the living room and then quickly take them on the the GamePad integrated both traditional input methods go."3 The new gaming console design meant that console- such as buttons, dual analog sticks, and a D-pad (direc- gaming was not only limited to one stationary TV anymore tional pad) and a touchscreen. The touchscreen could be and could be experienced anywhere anytime. used to supplement a game by providing alternative func- The launch of Nintendo's Switch caught the attention of tionality or an alternative view of a scenario in a game. consumers and mostly received a positive response, but With the Off-TV Play function, the screen could also be apparently the news did not impress the investors, leaving used to play a game strictly on the GamePad screen, with- the company's stock tumbling. This may have reflected out the use of a television display at all. With the Wii U concerns regarding the battery life of the portable console, console turned on, the GamePad could be used to display its price, and third-party support. Nevertheless, a flood of the same picture on its screen as would be seen using a customer orders led to stock shortages in stores like Game- TV display. There were also nongaming functions, such Stop and Toys R Us, among others. Addressing the stock as the ability to use the GamePad as a television remote. shortage, Reggie Fils-Aime said, "our focus is making sure While Nintendo was the first of the competitors to re- that the consumer who wants to buy a Nintendo Switch can lease its new gaming console, there was no doubt that buy a Nintendo Switch."4 The initial plan had been to ship both Sony's PlayStation and Microsoft's Xbox would be 2 million consoles. Nintendo decided to double the produc- close behind in releasing their own upgraded systems. tion to deal with the shortage and meet the strong demand. Although Nintendo is slightly behind in comparison to The stocks had surged high by mid-2018, a year after competitors, the company saw a significant improvement in Nintendo Switch's launch. According to The Wall Street its net sales after Nintendo Switch (see Exhibits 1 and 2). * This case was prepared by Professor Alan B. Eisner and graduate students Sushmitha Mudda, Saad Nazir, Eshai J. Gorshein, and Eric S. Engelson of Pace University. This case is based solely on library research and was developed for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 2019 Alan B. Eisner. Background Although Nintendo dated back to 1889 as a playing-card maker, Nintendo's first video-game systems were developed in 1979 and known as TV Game 15 and TV Game 6.7 EXHIBIT 1 Income Statement Year Ended March 31 2018 2019 (Millions of yen) (Millions of yen) (Millions of dollars) Net sales 1,055,682 1,200,560 10,914 Cost of sales 699,370 6,357 652,141 403,540 Gross profit 501,189 251,488 Selling, general and administrative expenses Operating income Non-operating income 225,983 177,557 4,556 2,286 2,270 249,701 Interest income 9,064 13,131 119 5,426 49 10,318 6,949 63 4,126 2,807 25 23,509 28,315 257 766 794 440 4 150 221 2 Foreign Exchange gains Share of profit of entities accounted for using equity method Other Total non-operating income Non-operating expenses Sales discounts Foreign exchange losses Loss on redemption of securities Other Total non-operating expenses Ordinary income Gain on sales of non-current assets Gain on sales of investment securities Reversal of loss on litigation Total extraordinary income Impairment loss Loss on disposal of non-current assets Loss on sales of investment securities 1,710 662 6 199,356 277,355 2,521 821 1 0 490 0 0 1,929 3,240 1 0 4,622 42 366 278 2 2 0 0 Loss on valuation of investment securities 682 6 1,138 - Loss on litigation Total extraordinary losses Profit before income taxes 1,507 5,584 50 201,090 271,772 2,470 Income taxes - current 56,977 88,137 801 Income taxes - deferred 3,167 (99) Total income taxes 60,144 (10,932) 77,204 194,568 701 Profit 1,768 140,945 1,354 558 5 Profit attributable to non-controlling interests Profit attributable to owners of parent 139,590 194,009 1,763 *1 USD = 112.3095 JPY as of March 31, 2019 EXHIBIT 2 Balance Sheet Year Ended March 31 2018 2019 (Millions of yen) (Millions of yen) (Millions of dollars*) Assets Current assets Cash and deposits 744,555 844,550 7,677 Notes and accounts receivable - trade 69,829 78,169 710 Securities 243,431 238,410 2,167 Inventories 141,795 135,470 1,231 Other 66,405 48,453 440 Allowance for doubtful accounts (87) (82) (0) Total current assets 1,265,929 1,344,972 12,227 Non-current assets Property, plant and equipment Buildings and structures, net Machinery, equipment and vehicles, net 36,094 37,592 341 1,450 1,575 14 Tools, furniture and fixtures, net 3,915 4,015 36 Land 41,812 38,223 347 Construction in progress 653 143 1 Total property, plant and equipment 83,926 81,550 741 Intangible assets Software 11,487 11,962 108 Other 2,533 2,128 19 Total intangible assets 14,020 14,090 128 Investments and other assets Investment securities 198,538 167,134 1,519 Deferred tax assets 37,094 57,992 527 Net defined benefit asset 7,931 7,056 64 Other 15,503 17,536 159 Allowance for doubtful accounts (30) (29) (0) Total investments and other assets 259,037 249,690 2,269 Total non-current assets 356,984 345,331 3,139 Total assets 1,633,748 1,690,304 15,366 Year Ended March 31 2018 2019 (Millions of yen) (Millions of yen) (Millions of dollars*) Liabilities Current liabilities Notes and accounts payable - trade 138,015 59,689 542 Income taxes payable 43,390 62,646 569 Provision for bonuses 3,217 3,891 35 Other 93,452 118,781 1,079 Total current liabilities 278,076 245,009 2,227 Non-current liabilities Net defined benefit liability 16,609 15,068 136 Other 15,487 15,427 140 Total non-current liabilities 32,097 30,496 277 Total liabilities 310,173 275,505 2,504 Net assets Shareholders' equity Capital stock 10,065 10,065 91 Capital surplus 13,742 12,069 109 Retained earnings 1,564,240 1,556,881 14,153 (250,679) (156,755) (1,425) Treasury shares Total shareholders' equity 1,337,369 1,422,260 12,929 Accumulated other comprehensive income Valuation difference on available-for-sale securities 16,402 17,665 160 Foreign currency translation adjustment (34,736) (30,214) (274) Total accumulated other comprehensive income (18,334) (12,548) (114) Non-controlling interests 4,540 5,086 46 Total net assets 1,323,574 1,414,798 12,861 Total liabilities and net assets 1,633,748 1,690,304 15,366 *1 USD = 112.3095 JPY as of March 31, 2019 Source: Nintendo Annual Report 2018. the most compelling reason was that "Wii' sounded like 'we,' which emphasized that the console was for everyone. Wii could be remembered easily by people around the world, no matter what language they spoke. No confusion."12 Initially the system was known by its code name, Revolution, but later the name was changed to Wii. Nintendo stated that it wanted to make the Wii a system that would make anyone who tried it talk to his or her friends and neighbors about it.13 game-Super Mario World. In 1996, Nintendo released Nintendo 64. The Nintendo 64 was the company's third- generation video game console and was named after the 64-bit processor. During its product lifetime, more than 30 million Nintendo 64 units were sold worldwide. The Nintendo 64, like its predecessors, used cartridges to play its games, but at the time the competing Sony and Sega systems were using CDs for game storage. Cartridges could store 64 megabytes of data, while CDs could store around 700 megabytes. Also, CDs were much cheaper to manufacture, distribute, and create; the average cost of pro- ducing a Nintendo 64 cartridge was $25, compared to 10 cents to produce a CD. Game producers passed the higher expense to the consumer, which explained why Nintendo 64 games tended to sell for higher prices than Sony PlayStation games. While most Sony PlayStation games rarely exceeded $50, Nintendo 64 titles could reach $70. To increase profits and to take advantage of the pro- gramming possibilities of the larger storage space, many third-party game developers that had traditionally sup- ported Nintendo platforms began creating games for sys- tems that used a CD platform (such as the PlayStation).10 In 2001, Nintendo released its GameCube, which was part of the sixth-generation era of video game systems. These systems included Sony's PlayStation 2, Microsoft's Xbox, and Sega's Dreamcast. Although the GameCube did not use cartridges, Nintendo began producing its games using a pro- prietary optical-disk technology. This technology, while simi- lar in appearance to CDs, was actually smaller in diameter and could not be played using a standard CD player. When Nintendo released the Wii video game console in 2006, it was already in the midst of a very competitive mar- ket. The previous generation of video game consoles con- sisted of the Sega Dreamcast, Sony PlayStation 2, Nintendo GameCube, and Microsoft Xbox. These systems were all released between 1999 and 2001 in the United States, and although the GameCube sold more systems than did the Sega Dreamcast, it fell into third place behind the PlayStation 2 and the Xbox. The PlayStation 2 sold more than 115 million units worldwide, more than twice the com- bined unit sales of the GameCube and Xbox (21 million and 24 million, respectively). By 2019, Nintendo had gone beyond its Nintendo 3DS and Wii U, and was banking on Nintendo Switch to beat the competition. But it was accompanied by rumors of a PlayStation 5 that was set to release in 2021. In May 2018, Sony Interactive Entertainment CEO John Kodera told re- porters, "We will use the next three years to prepare the next step, to crouch down so that we can jump higher into the future. This came shortly after he remarked that the PS4 was entering the final phase of its life cycle." 11 The Making of the Remote The original Wii was created to establish a new standard in game control, using an innovative and unprecedented inter- face, the Wii Remote. 14 The Wii Remote was what made the Wii unique. The remote acted as the primary controller for the Wii. Its motion-sensor capabilities allowed the user to interact with and manipulate objects on the screen by mov- ing and pointing the remote in various directions. The Wii Remote was the size of a traditional remote control, and it was "limited only by the game designer's imagination."15 For example, in a game of tennis it served as the racket when the user swung his or her arm, while in a shooting game it served as the user's gun. Not only did the remote serve as a controller, but it also had a built-in speaker and a rumble feature for even greater tactile feedback and game involvement. Exhibit 3 shows the Wii and Wii Remote. The second part of the Wii Remote innovation was the Wii Nunchuk. The Nunchuk was designed to perfectly fit the user's hand, and it connected to the remote at its expan- sion port. The Nunchuk had the same motion-sensing capa- bilities that the remote had, but it also had an analog stick to help the user move his or her characters. The ambidex- trous nature of the Wii controllers was something seldom seen in other game controllers; the Wii controllers permit- ted the user to hold the remote and Nunchuk whichever way felt most comfortable.16 In addition to the analog stick, the Nunchuk had two buttons that gave the user quick ac- cess to other game functions. Thus, the Nunchuk offered some of the benefits of a standard game controller coupled EXHIBIT 3 Wii Console and Remote Wii The Term Wii In 2006, Nintendo released its direct successor to the GameCube, the Wii (pronounced "we" ). There were many reasons cited as to why the name Wii was chosen, but perhaps Jill Braaten/McGraw-Hill Education EXHIBIT 4 Wii U GamePad Controller werp lo Stefano Tinti/Shutterstock with the high-technology motion sensors of the remote. Users could hold a Nunchuk in one hand and the Wii Remote in the other while playing the Wii Sports boxing game and be transported into the boxing ring with on-screen opponents. The game controls were intuitive for jabs and punches. (However, a missed block did not hurt as much as if one were really in the boxing ring.) While the Wii U was still compatible with the original Wii controllers, Nintendo revamped the controller usability when designing the Wii U. The new GamePad sold with the Wii U allowed the user to be more in touch with the game and provided more depth by offering multi-perspective ca- pabilities on the Pad's screen. While using the TV display, players could now multitask within a game by using a vari- ety of functions on their controller and could even play us- ing solely the GamePad, with no TV display necessary. With the game console turned on, players had the option of using the GamePad as their main viewing screen, without the need for a TV monitor display (see Exhibit 4). had combined the GamePad controller with the Wii U con- sole to design the Switch. Gamers could play games by at- taching the Nintendo Switch dock with the TV or could convert it into a portable handheld game by attaching the controller straps with the 6.2-inch high-definition screen (720p), which also included a kick-stand to be placed on a flat surface and multi-touch features for various compatible games to enhance the gaming experience. The gamers could also take a screenshot of the game they played using a capture button on the left Joy-Con, which users could then share with their friends or put on social media. Similar to the past Nintendo controllers, both Joy-Cons included the motion controls (see Exhibit 5). Switch supported the Nintendo eShop, an online game store that could be used to download games from different publishers and developers. Switch also supported the games by third-party publishers including Electronic Arts, Activi- sion, and Ubisoft, among others. The user interface of the Switch software was a UI design. The home screen dis- played several different icons, including icons for featured games, settings, controllers, albums eenshots, videos Nintendo eShop, and options. Users could make different player profiles to sign in to maintain exclusive game prog- ress similar to what most people do using their personal com- puters. The top right corner of the screen showed battery status along with the time. Prior to Nintendo Switch, the company had introduced Amiibo figurines that depicted popular Nintendo charac- ters, and each contained a wireless antenna and flash mem- ory. They allowed consumers to include digital versions of their favorite characters in compatible video games. Nintendo's first round of Amiibo characters were Mario, Peach, Yoshi, Donkey Kong, Link, Fox, Samus, Wii Fit Trainer, Villager, Pikachu, Kirby, and Marth. By 2019, the company had introduced a number of new games for Nintendo Switch including The Legend of Zelda: Breadth of the Wild, Super Mario Maker 2, Pokmon Quest, and a few others. In March 2019, it released the updated version of its latest game, Yoshi's Crafted World. EXHIBIT 5 Switch Console and Joy-Con Controller Nintendo Switch Features Nintendo Switch came with a portable game console with a built-in screen, a pair of Joy-Con controllers, Joy-Con Straps, a Joy-Con grip, and a Nintendo Switch dock. The controllers' straps were detachable from the grip to be used with the portable screen to turn the Switch into a portable video game. The 6.2-inch detachable screen console came with a standard USB plug for charging. Along with the tra- ditional method of playing games by using buttons, the Joy-Cons could also be used for motion-sensitive games just like their predecessors. Nintendo also offered an additional controller called Nintendo Switch ProController, which could be bought separately at a price of $69.99; it had the same features as Joy-Con, but looked like a traditional gam- ing controller. This was not the first time Nintendo had sur- prised the market with such a new design. For instance, the company had done it in the past when it introduced motion- sensitive controllers. However, this time, in a way, Nintendo OD NINTENDO SWITCH Dmitry Loshkin/123RF In the past, Nintendo had hoped to penetrate the segment the cloud to all types of devices including the Chrome and boost sales of its Wii U console and 3DS handheld in browser, Chromecast, and pixel devices. the process. However, in 2017, the company combined both Wii U console and 3DS into a single gaming platform that Gaining the Interest of Game Developers was Nintendo Switch. The results for the fiscal year ended As evident from the history of game consoles, game devel- December 31, 2018 show a very positive trend in global hard- opers had tried to make games more and more complex ware sales for Nintendo Switch, which sold a total of 32.27 with each new generation of systems. This meant that more million units during this fiscal year. 17 money was invested in the production of each subsequent generation of games. Because game developers were spend- Demographics ing more money on developing games, they were at great financial risk if games did not succeed. Thus, many devel- According to Nintendo, one of the key differences between opers felt more secure in simply creating sequels to existing the Switch and competitors' systems was the broad audi- games, which restrained innovation. The Switch's innova- ence that the Switch targeted. Many of the Switch games tive controller, the Joy-Cons, now required a rethinking and could be played by people of all ages and experience, and reengineering of the human interface by game developers the Switch's Joy-Cons were easier to use than the compli- cated controllers of the Sony PlayStation 4 or Microsoft's and programmers. Another issue with developing games for the Switch was that its graphics were not quite as good as Xbox One. Nintendo's TV commercials for the Switch those of the PlayStation 4 and Xbox One, and therefore showed people playing the Switch at home by connecting game developers had to be more creative and develop spe- the game console to TV and outdoors by connecting the cial Switch editions of their games. Joy-Cons with the portable screen. According to the com- Many game developers used virtual-machine software in pany, the Switch offered something for both the advanced developing new games. It was believed that game developers gamer and the person who had never played a video game could develop games for the Switch and then make them for before. The advanced gamer would enjoy the remote's unique other platforms on the basis of the same programming, features, whereas the novice gamer could use the remote as thereby reducing production costs. However, while the his or her hand and would not need elaborate instructions on Joy-Con distinguished itself from its competitors, it created a how to play a new game straight out of the box. hurdle for developers. When developers created a game for Although the Nintendo games were easily played by a the PlayStation, they could create the same game for the greater range of ages and featured improved graphics, the Xbox and vice versa. When developers created a game for company's competitors Xbox and Sony were offering 4K resolutions, best in the market at the time. While Nintendo the Switch, however, it required significant rework to deploy the title for the other platforms. Converting a title from the Xbox or hoped to target people of all ages, it had long been seen as PlayStation also required significant work to modify the game a system that made video games for children, as evident to incorporate code for the Joy-Con's special features. from its Mario, Zelda, and Donkey Kong series. However, While this uniqueness had served Nintendo well in the past, despite the limitation of this reputation, the innovation and the Joy-Con's incompatibility with the likes of Microsoft uniqueness of its game play were enough to lure the masses, and Sony limited the selection of games immediately avail- and sales were excellent. able to the Nintendo Switch's audience. The selection of Success, of course, bred competition. Upon seeing games had to be fulfilling enough to keep Nintendo's audi- the success of the movement-sensing Switch, Microsoft and Sony moved quickly to release competing systems. ence happy, without leaving them feeling like they were missing out on games available only on the other platforms. Microsoft released its Kinect for the Xbox, while Sony released the Move for the PlayStation. Both the Move and Kinect used camera systems for their motion detec- The Competition tors, but in different ways. Move's camera sensed the If the launch of Nintendo's Switch was a foray into the fierce movement of the light-up Move controller, whereas competition among such existing models as Xbox One and Microsoft's Kinect sensor tracked skeletal motion, elimi- PS4, Switch's competitors were offering many features that nating the need for a controller.18 While it was inevitable Nintendo did not. The price of $299 for the basic Switch that gamers would have their favorite of the bunch, the included a portable game console with a built-in screen, a relevant point was that it didn't take long for Microsoft pair of Joy-Con controllers, Joy-Con Straps, a Joy-Con grip, and Sony to catch up to Nintendo. They moved forward and a Nintendo Switch dock. The price of the PlayStation 4 to the new generation(s) of gaming quickly, maintaining was also $299 (500 GB edition), and the new Xbox One was an even playing field among competitors for gamer inter- $229. At a base price of $299 the Switch was intended to action and motion detection. compete with the upper echelon of the next generation of In the Game Developers Conference (GDC) 2019, gaming consoles unlike the low-cost position of the original Nintendo, along with its other competitors, witnessed Wii. Apart from pricing, there were many differences among another player in the market-Google. Google unveiled the performance specifications of Switch in comparison to Stadia, a cloud gaming service that streams games from its fiercest competitors (for examples, see Exhibits 6 and 7). C162 CASE 20 :: NINTENDO: COULD THE SWITCH TURN ON GAMERS? EXHIBIT 6 Game Systems Comparison, 2019 Feature Switch Xbox One PS4 CPU: Cores 4x ARM Cortex A57 8x AMD Jaguar 8x AMD Jaguar CPU: Clock speed 1,020MHz 1,750MHZ 1,600MHz CPU: Cores 256 Nvidia CUDA 768X AMD Shaders 1152 AMD shaders CPU: Docked speed 768 MHz 853 MHz 800MHz CPU: Undocked speed 307.2MHz N/A N/A HDR No Yes (One S) Yes Memory 4GB 8GB 8GB 32GB flash (microSD-expandable) 500GB HDD 500GB HDD Storage Physical game formats Game Card Disc Disc USB ports 2x USB2, 1x USB3.0 3x USB 3.0 2x USB 3.1 (gen1) Video output HDMI HDMI HDMI (HDR supported) Audio ports None Optical Optical Networking ports None Gigabit Ethernet Gigabit Ethernet Power consumption Unknown -125W - 140W Source: Passingham, Michael. Nintendo Switch vs Xbox One and PS4 - How do they compare? Trusted Reviews, December 17, 2018. EXHIBIT 7 Game Controllers Comparison, 2019 Feature Joy-Con pair Switch Pro Xbox One PS4 PS4 Move pair Control buttons 18 touchscreen 18 17 17 touch 18 Analogue sticks 2 2 2 2 2 Vibration Yes Yes Yes Yes Yes Wireless Yes Yes Yes Yes Yes Battery capacity 525mAh (each) 1300mAh N/A 1000mAh 1520mAh (each) Battery life 20h (official) 40h (official) Variable -7h - 10h Motion controls Yes Yes No Yes Yes IR camera Yes No No 1...... No No Removable batteries*** No No Yes No No Play and charge Yes* Yes Yes** Yes Yes Headphone jack No No Yes Yes No *With optional Charge Grip ** Play-and-charge kit available ***Without voiding warranty Source: Passingham, Michael. Nintendo Switch vs Xbox One and PS4 - How do they compare? Trusted Reviews, December 17, 2018. crossed the billion-dollar threshold in annual revenues. Al- hubs for families. Now, with the Switch on the market, and though these companies charge little per purchase, the introductions from competitors expected soon, the competi- huge number of worldwide users enables them to collect tion seems to be better positioned to combat Nintendo. As enormous total revenues. The number of smartphone us- motion-sensing gaming the undisputed next best thing to ers has grown dramatically during last decade, which auto- come out of the gaming industry is a capability that all com- matically grows the potential users for mobile gaming petitors now possess, it is a matter of whose system is most companies without having to sell game consoles. Just hav- desirable to the gaming population, and whether or not sales ing a smartphone opens the option of thousands of games volume solely will determine which system comes out on top. for mobile gamers at a single platform for a minimal price. With similar technology being widespread across the indus- The growing trend and popularity of mobile gaming is try, it may prove to be more difficult for Nintendo to set itself definitely posing competition for gaming companies like apart and portray itself as the family favorite, as it did in its Nintendo, among others. early days of the Wii. But the three rivals have another competition-Google. Google Stadia With Stadia, Google has placed itself against the industry's Google Stadia is looming on the gaming horizon, and not largest players: Microsoft, Sony, and Nintendo. While un- just on mobile phones. After its announcement in the veiling the service, Google CEO Sundar Pichai said, We Game Developers Conference 2019, a lot of gamers are an- are starting our next big challenge: building a game plat- ticipating its arrival. Stadia could be great for gamers who form for everyone. I think we can change the game by bring- cannot afford the latest hardware. One of the features of ing together the power and creativity of the entire Stadia is that it will let players view a game clip from the community, people who love to play games, people who creator on YouTube and then hit "play now to instantly love to watch games, and people who love to build games." 27 stream a playable version of the title to any device that can Sony's CEO Kenichiro Yoshida and Xbox boss Phil Spen- run a Chrome browser. Google says it expects to support up cer have said that both companies are working on hardware to 4K at 60 fps at launch over an Internet connection with for the future, which many believe will be released next around 30Mbps of bandwidth, and it is planning to support year. But does Nintendo have to worry about the new com- up to 8K resolutions and 120 fps in the future.25 To power petition yet? all of this cloud streaming, Google is leveraging its global There is some concern for Nintendo with high competi- infrastructure of data centers to ensure servers are as close tion in the market. Nintendo is known to be a unique brand to players around the world as possiblea key part of Sta- with games that are limited to its platform. Its Mario and dia, as lower latency is a necessity to stream games effec- Zelda fans might not be incentivized easily to switch to mul- tively across the Internet.26 If it catches on, Stadia could be tiple devices. In February 2019, Nintendo Switch outsold a significant player in gaming. Xbox One and PS4, and generated its highest February- month hardware dollar sales since February 2011.28 Having The Future of Switch sold up to 32.27 million units by December 2018, Nintendo said that they expect there are still plenty of people who While Sony and Microsoft envision long-term profits on have played Nintendo games in the past but have not yet software sales for PlayStation 4 and Xbox One, both com- purchased Nintendo Switch.29 Will Nintendo be able to panies experience losses producing their consoles. Among communicate the appeal of Nintendo Switch to consum- the three rivals, Nintendo is the only one earning a signifi- ers? or Is Nintendo counting on power of nostalgia to main- cant profit margin on each Switch unit sold. tain its consumer base? Sony's and Microsoft's gaming consoles are commonly thought of as superior to Nintendo's, however, perhaps the ENDNOTES Switch's smaller processing unit and hardware but simplic- 1. Bankhurst, A. 2019. Nintendo Switch sales pass 32 million. IGN, ity and family-friendly appeal have assisted it to become January 31, https://www.ign.com/articles/2019/01/31intendo-switch- profitable. These traits attract not only end users but game sales-pass-32-million. developers as well, allowing the Nintendo to have the larg- 2. Gurwin, G. 2017. Strong early sales reportedly making Nintendo est selection of games compared with its competitors. double its Switch production. Digital trends, March 17, http://www. Although there was not enough data about the number of digitaltrends.com/gamingintendo-reportedly-doubles-switch- games for Switch at the time of writing this case, histori- production/ 3. Nintendo, 2017. Nintendo Switch Ushers in a New Era of Console cally, the number of its games indicated that Switch's prede- Gaming on the Go. Press Release found on Business Wire, March 3, cessor Wii was obviously a successful system one that has https://www.businesswire.comews/home/20170303005199/en/ drawn a good amount of interest from game developers and Nintendo Switch-Ushers-New-Era-Console-Gaming. gamers around the world. 4. Kohler, C. 2017. Nintendo's Boss Promises the Switch Won't Have the Microsoft and Sony have started to invade the casual NES Classic's Supply Issues. Wired, January, 13, https://www.wired. com/2017/01/reggie-fils-aime-nintendo-interview/ family-user market, a key market for Nintendo, expanding be- 5. Mochizuki, T. 2017. Nintendo to Double Production of Switch yond their former customer base of mainly hardcore gamers. Console. The Wall Street Journal, March 17, https://www.wsj.com/ The Xbox and PS4 are becoming more like entertainment articlesintendo-to-double-production-of-switch-console-1489728545 CASE 20 NINTENDO: COULD THE SWITCH TURN ON GAMERS? The Nintendo Switch is a gaming console that comes with Journal, to meet demand for one year out (ending April a pair of new and innovative controllers called Joy-Con 2018), the company's management decided to manufacture Controllers, a hybrid of an attachable game pad and a con- 16 million Switch consoles-double the yearly quantity of troller that could be used separately for multiplayer game 8 million units, Nintendo's traditional production target. play. When it was introduced in 2017, Nintendo's manage- One of the key topics of discussion in the popular press ment was highly optimistic about the Switch, and Nintendo was whether or not the Switch console defined the "next believed that it could sell about 10 million units of Switch generation of gaming. This echoed similar press concerns consoles within a year after the launch. As of January after the launch of Nintendo's previous console, the Wii U. 2019, Nintendo's latest gaming console Nintendo Switch Prior to the launch of the Switch, its predecessor the had exceeded 32 million units sold, and software sales for Nintendo Wii U console had been on the market for only a the console had reached 163.61 million units. A pair of short while, with the addition of innovative controls and Joy-Cons was included in the $299.99 price tag of the new game titles. Then there had been uncertainty among Switch console. The Joy-Con came in two color options for industry experts, such as Gabrielle Shrager of Ubisoft and customers to choose from, one grey and red/blue and the Mikael Haveri of Frozenbyte, as to whether or not the other grey and black. A more innovative feature in the new improved power and new controller interface justified that gaming console was that it could be transformed into a system's being considered a "new" generation. 6.2-inch high-definition on-the-go gaming screen if a user The Wii U initially was launched with 50 available decided to move away from the TV. games and a new controller interface, termed the The Switch console also marked the release of Nintendo GamePad. While the GamePad offered a new take on the Switch's very first epic game called The Legend of Zelda: Wii's controls, the new console was still compatible with Breadth of the Wild," which could be played both on Switch the same motion-sensing controllers of the original Wii. and Wii U consoles for a price of $59.99. Nintendo of However, the Wii U console was not sold with these con- America's COO and president, Reggie Fils-Aime, said, trollers included. Instead, it came with just one of the Nintendo Switch makes it easy for anyone to enjoy their new GamePads. Incorporating traits from tablet devices, games in the living room and then quickly take them on the the GamePad integrated both traditional input methods go."3 The new gaming console design meant that console- such as buttons, dual analog sticks, and a D-pad (direc- gaming was not only limited to one stationary TV anymore tional pad) and a touchscreen. The touchscreen could be and could be experienced anywhere anytime. used to supplement a game by providing alternative func- The launch of Nintendo's Switch caught the attention of tionality or an alternative view of a scenario in a game. consumers and mostly received a positive response, but With the Off-TV Play function, the screen could also be apparently the news did not impress the investors, leaving used to play a game strictly on the GamePad screen, with- the company's stock tumbling. This may have reflected out the use of a television display at all. With the Wii U concerns regarding the battery life of the portable console, console turned on, the GamePad could be used to display its price, and third-party support. Nevertheless, a flood of the same picture on its screen as would be seen using a customer orders led to stock shortages in stores like Game- TV display. There were also nongaming functions, such Stop and Toys R Us, among others. Addressing the stock as the ability to use the GamePad as a television remote. shortage, Reggie Fils-Aime said, "our focus is making sure While Nintendo was the first of the competitors to re- that the consumer who wants to buy a Nintendo Switch can lease its new gaming console, there was no doubt that buy a Nintendo Switch."4 The initial plan had been to ship both Sony's PlayStation and Microsoft's Xbox would be 2 million consoles. Nintendo decided to double the produc- close behind in releasing their own upgraded systems. tion to deal with the shortage and meet the strong demand. Although Nintendo is slightly behind in comparison to The stocks had surged high by mid-2018, a year after competitors, the company saw a significant improvement in Nintendo Switch's launch. According to The Wall Street its net sales after Nintendo Switch (see Exhibits 1 and 2). * This case was prepared by Professor Alan B. Eisner and graduate students Sushmitha Mudda, Saad Nazir, Eshai J. Gorshein, and Eric S. Engelson of Pace University. This case is based solely on library research and was developed for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 2019 Alan B. Eisner. Background Although Nintendo dated back to 1889 as a playing-card maker, Nintendo's first video-game systems were developed in 1979 and known as TV Game 15 and TV Game 6.7 EXHIBIT 1 Income Statement Year Ended March 31 2018 2019 (Millions of yen) (Millions of yen) (Millions of dollars) Net sales 1,055,682 1,200,560 10,914 Cost of sales 699,370 6,357 652,141 403,540 Gross profit 501,189 251,488 Selling, general and administrative expenses Operating income Non-operating income 225,983 177,557 4,556 2,286 2,270 249,701 Interest income 9,064 13,131 119 5,426 49 10,318 6,949 63 4,126 2,807 25 23,509 28,315 257 766 794 440 4 150 221 2 Foreign Exchange gains Share of profit of entities accounted for using equity method Other Total non-operating income Non-operating expenses Sales discounts Foreign exchange losses Loss on redemption of securities Other Total non-operating expenses Ordinary income Gain on sales of non-current assets Gain on sales of investment securities Reversal of loss on litigation Total extraordinary income Impairment loss Loss on disposal of non-current assets Loss on sales of investment securities 1,710 662 6 199,356 277,355 2,521 821 1 0 490 0 0 1,929 3,240 1 0 4,622 42 366 278 2 2 0 0 Loss on valuation of investment securities 682 6 1,138 - Loss on litigation Total extraordinary losses Profit before income taxes 1,507 5,584 50 201,090 271,772 2,470 Income taxes - current 56,977 88,137 801 Income taxes - deferred 3,167 (99) Total income taxes 60,144 (10,932) 77,204 194,568 701 Profit 1,768 140,945 1,354 558 5 Profit attributable to non-controlling interests Profit attributable to owners of parent 139,590 194,009 1,763 *1 USD = 112.3095 JPY as of March 31, 2019 EXHIBIT 2 Balance Sheet Year Ended March 31 2018 2019 (Millions of yen) (Millions of yen) (Millions of dollars*) Assets Current assets Cash and deposits 744,555 844,550 7,677 Notes and accounts receivable - trade 69,829 78,169 710 Securities 243,431 238,410 2,167 Inventories 141,795 135,470 1,231 Other 66,405 48,453 440 Allowance for doubtful accounts (87) (82) (0) Total current assets 1,265,929 1,344,972 12,227 Non-current assets Property, plant and equipment Buildings and structures, net Machinery, equipment and vehicles, net 36,094 37,592 341 1,450 1,575 14 Tools, furniture and fixtures, net 3,915 4,015 36 Land 41,812 38,223 347 Construction in progress 653 143 1 Total property, plant and equipment 83,926 81,550 741 Intangible assets Software 11,487 11,962 108 Other 2,533 2,128 19 Total intangible assets 14,020 14,090 128 Investments and other assets Investment securities 198,538 167,134 1,519 Deferred tax assets 37,094 57,992 527 Net defined benefit asset 7,931 7,056 64 Other 15,503 17,536 159 Allowance for doubtful accounts (30) (29) (0) Total investments and other assets 259,037 249,690 2,269 Total non-current assets 356,984 345,331 3,139 Total assets 1,633,748 1,690,304 15,366 Year Ended March 31 2018 2019 (Millions of yen) (Millions of yen) (Millions of dollars*) Liabilities Current liabilities Notes and accounts payable - trade 138,015 59,689 542 Income taxes payable 43,390 62,646 569 Provision for bonuses 3,217 3,891 35 Other 93,452 118,781 1,079 Total current liabilities 278,076 245,009 2,227 Non-current liabilities Net defined benefit liability 16,609 15,068 136 Other 15,487 15,427 140 Total non-current liabilities 32,097 30,496 277 Total liabilities 310,173 275,505 2,504 Net assets Shareholders' equity Capital stock 10,065 10,065 91 Capital surplus 13,742 12,069 109 Retained earnings 1,564,240 1,556,881 14,153 (250,679) (156,755) (1,425) Treasury shares Total shareholders' equity 1,337,369 1,422,260 12,929 Accumulated other comprehensive income Valuation difference on available-for-sale securities 16,402 17,665 160 Foreign currency translation adjustment (34,736) (30,214) (274) Total accumulated other comprehensive income (18,334) (12,548) (114) Non-controlling interests 4,540 5,086 46 Total net assets 1,323,574 1,414,798 12,861 Total liabilities and net assets 1,633,748 1,690,304 15,366 *1 USD = 112.3095 JPY as of March 31, 2019 Source: Nintendo Annual Report 2018. the most compelling reason was that "Wii' sounded like 'we,' which emphasized that the console was for everyone. Wii could be remembered easily by people around the world, no matter what language they spoke. No confusion."12 Initially the system was known by its code name, Revolution, but later the name was changed to Wii. Nintendo stated that it wanted to make the Wii a system that would make anyone who tried it talk to his or her friends and neighbors about it.13 game-Super Mario World. In 1996, Nintendo released Nintendo 64. The Nintendo 64 was the company's third- generation video game console and was named after the 64-bit processor. During its product lifetime, more than 30 million Nintendo 64 units were sold worldwide. The Nintendo 64, like its predecessors, used cartridges to play its games, but at the time the competing Sony and Sega systems were using CDs for game storage. Cartridges could store 64 megabytes of data, while CDs could store around 700 megabytes. Also, CDs were much cheaper to manufacture, distribute, and create; the average cost of pro- ducing a Nintendo 64 cartridge was $25, compared to 10 cents to produce a CD. Game producers passed the higher expense to the consumer, which explained why Nintendo 64 games tended to sell for higher prices than Sony PlayStation games. While most Sony PlayStation games rarely exceeded $50, Nintendo 64 titles could reach $70. To increase profits and to take advantage of the pro- gramming possibilities of the larger storage space, many third-party game developers that had traditionally sup- ported Nintendo platforms began creating games for sys- tems that used a CD platform (such as the PlayStation).10 In 2001, Nintendo released its GameCube, which was part of the sixth-generation era of video game systems. These systems included Sony's PlayStation 2, Microsoft's Xbox, and Sega's Dreamcast. Although the GameCube did not use cartridges, Nintendo began producing its games using a pro- prietary optical-disk technology. This technology, while simi- lar in appearance to CDs, was actually smaller in diameter and could not be played using a standard CD player. When Nintendo released the Wii video game console in 2006, it was already in the midst of a very competitive mar- ket. The previous generation of video game consoles con- sisted of the Sega Dreamcast, Sony PlayStation 2, Nintendo GameCube, and Microsoft Xbox. These systems were all released between 1999 and 2001 in the United States, and although the GameCube sold more systems than did the Sega Dreamcast, it fell into third place behind the PlayStation 2 and the Xbox. The PlayStation 2 sold more than 115 million units worldwide, more than twice the com- bined unit sales of the GameCube and Xbox (21 million and 24 million, respectively). By 2019, Nintendo had gone beyond its Nintendo 3DS and Wii U, and was banking on Nintendo Switch to beat the competition. But it was accompanied by rumors of a PlayStation 5 that was set to release in 2021. In May 2018, Sony Interactive Entertainment CEO John Kodera told re- porters, "We will use the next three years to prepare the next step, to crouch down so that we can jump higher into the future. This came shortly after he remarked that the PS4 was entering the final phase of its life cycle." 11 The Making of the Remote The original Wii was created to establish a new standard in game control, using an innovative and unprecedented inter- face, the Wii Remote. 14 The Wii Remote was what made the Wii unique. The remote acted as the primary controller for the Wii. Its motion-sensor capabilities allowed the user to interact with and manipulate objects on the screen by mov- ing and pointing the remote in various directions. The Wii Remote was the size of a traditional remote control, and it was "limited only by the game designer's imagination."15 For example, in a game of tennis it served as the racket when the user swung his or her arm, while in a shooting game it served as the user's gun. Not only did the remote serve as a controller, but it also had a built-in speaker and a rumble feature for even greater tactile feedback and game involvement. Exhibit 3 shows the Wii and Wii Remote. The second part of the Wii Remote innovation was the Wii Nunchuk. The Nunchuk was designed to perfectly fit the user's hand, and it connected to the remote at its expan- sion port. The Nunchuk had the same motion-sensing capa- bilities that the remote had, but it also had an analog stick to help the user move his or her characters. The ambidex- trous nature of the Wii controllers was something seldom seen in other game controllers; the Wii controllers permit- ted the user to hold the remote and Nunchuk whichever way felt most comfortable.16 In addition to the analog stick, the Nunchuk had two buttons that gave the user quick ac- cess to other game functions. Thus, the Nunchuk offered some of the benefits of a standard game controller coupled EXHIBIT 3 Wii Console and Remote Wii The Term Wii In 2006, Nintendo released its direct successor to the GameCube, the Wii (pronounced "we" ). There were many reasons cited as to why the name Wii was chosen, but perhaps Jill Braaten/McGraw-Hill Education EXHIBIT 4 Wii U GamePad Controller werp lo Stefano Tinti/Shutterstock with the high-technology motion sensors of the remote. Users could hold a Nunchuk in one hand and the Wii Remote in the other while playing the Wii Sports boxing game and be transported into the boxing ring with on-screen opponents. The game controls were intuitive for jabs and punches. (However, a missed block did not hurt as much as if one were really in the boxing ring.) While the Wii U was still compatible with the original Wii controllers, Nintendo revamped the controller usability when designing the Wii U. The new GamePad sold with the Wii U allowed the user to be more in touch with the game and provided more depth by offering multi-perspective ca- pabilities on the Pad's screen. While using the TV display, players could now multitask within a game by using a vari- ety of functions on their controller and could even play us- ing solely the GamePad, with no TV display necessary. With the game console turned on, players had the option of using the GamePad as their main viewing screen, without the need for a TV monitor display (see Exhibit 4). had combined the GamePad controller with the Wii U con- sole to design the Switch. Gamers could play games by at- taching the Nintendo Switch dock with the TV or could convert it into a portable handheld game by attaching the controller straps with the 6.2-inch high-definition screen (720p), which also included a kick-stand to be placed on a flat surface and multi-touch features for various compatible games to enhance the gaming experience. The gamers could also take a screenshot of the game they played using a capture button on the left Joy-Con, which users could then share with their friends or put on social media. Similar to the past Nintendo controllers, both Joy-Cons included the motion controls (see Exhibit 5). Switch supported the Nintendo eShop, an online game store that could be used to download games from different publishers and developers. Switch also supported the games by third-party publishers including Electronic Arts, Activi- sion, and Ubisoft, among others. The user interface of the Switch software was a UI design. The home screen dis- played several different icons, including icons for featured games, settings, controllers, albums eenshots, videos Nintendo eShop, and options. Users could make different player profiles to sign in to maintain exclusive game prog- ress similar to what most people do using their personal com- puters. The top right corner of the screen showed battery status along with the time. Prior to Nintendo Switch, the company had introduced Amiibo figurines that depicted popular Nintendo charac- ters, and each contained a wireless antenna and flash mem- ory. They allowed consumers to include digital versions of their favorite characters in compatible video games. Nintendo's first round of Amiibo characters were Mario, Peach, Yoshi, Donkey Kong, Link, Fox, Samus, Wii Fit Trainer, Villager, Pikachu, Kirby, and Marth. By 2019, the company had introduced a number of new games for Nintendo Switch including The Legend of Zelda: Breadth of the Wild, Super Mario Maker 2, Pokmon Quest, and a few others. In March 2019, it released the updated version of its latest game, Yoshi's Crafted World. EXHIBIT 5 Switch Console and Joy-Con Controller Nintendo Switch Features Nintendo Switch came with a portable game console with a built-in screen, a pair of Joy-Con controllers, Joy-Con Straps, a Joy-Con grip, and a Nintendo Switch dock. The controllers' straps were detachable from the grip to be used with the portable screen to turn the Switch into a portable video game. The 6.2-inch detachable screen console came with a standard USB plug for charging. Along with the tra- ditional method of playing games by using buttons, the Joy-Cons could also be used for motion-sensitive games just like their predecessors. Nintendo also offered an additional controller called Nintendo Switch ProController, which could be bought separately at a price of $69.99; it had the same features as Joy-Con, but looked like a traditional gam- ing controller. This was not the first time Nintendo had sur- prised the market with such a new design. For instance, the company had done it in the past when it introduced motion- sensitive controllers. However, this time, in a way, Nintendo OD NINTENDO SWITCH Dmitry Loshkin/123RF In the past, Nintendo had hoped to penetrate the segment the cloud to all types of devices including the Chrome and boost sales of its Wii U console and 3DS handheld in browser, Chromecast, and pixel devices. the process. However, in 2017, the company combined both Wii U console and 3DS into a single gaming platform that Gaining the Interest of Game Developers was Nintendo Switch. The results for the fiscal year ended As evident from the history of game consoles, game devel- December 31, 2018 show a very positive trend in global hard- opers had tried to make games more and more complex ware sales for Nintendo Switch, which sold a total of 32.27 with each new generation of systems. This meant that more million units during this fiscal year. 17 money was invested in the production of each subsequent generation of games. Because game developers were spend- Demographics ing more money on developing games, they were at great financial risk if games did not succeed. Thus, many devel- According to Nintendo, one of the key differences between opers felt more secure in simply creating sequels to existing the Switch and competitors' systems was the broad audi- games, which restrained innovation. The Switch's innova- ence that the Switch targeted. Many of the Switch games tive controller, the Joy-Cons, now required a rethinking and could be played by people of all ages and experience, and reengineering of the human interface by game developers the Switch's Joy-Cons were easier to use than the compli- cated controllers of the Sony PlayStation 4 or Microsoft's and programmers. Another issue with developing games for the Switch was that its graphics were not quite as good as Xbox One. Nintendo's TV commercials for the Switch those of the PlayStation 4 and Xbox One, and therefore showed people playing the Switch at home by connecting game developers had to be more creative and develop spe- the game console to TV and outdoors by connecting the cial Switch editions of their games. Joy-Cons with the portable screen. According to the com- Many game developers used virtual-machine software in pany, the Switch offered something for both the advanced developing new games. It was believed that game developers gamer and the person who had never played a video game could develop games for the Switch and then make them for before. The advanced gamer would enjoy the remote's unique other platforms on the basis of the same programming, features, whereas the novice gamer could use the remote as thereby reducing production costs. However, while the his or her hand and would not need elaborate instructions on Joy-Con distinguished itself from its competitors, it created a how to play a new game straight out of the box. hurdle for developers. When developers created a game for Although the Nintendo games were easily played by a the PlayStation, they could create the same game for the greater range of ages and featured improved graphics, the Xbox and vice versa. When developers created a game for company's competitors Xbox and Sony were offering 4K resolutions, best in the market at the time. While Nintendo the Switch, however, it required significant rework to deploy the title for the other platforms. Converting a title from the Xbox or hoped to target people of all ages, it had long been seen as PlayStation also required significant work to modify the game a system that made video games for children, as evident to incorporate code for the Joy-Con's special features. from its Mario, Zelda, and Donkey Kong series. However, While this uniqueness had served Nintendo well in the past, despite the limitation of this reputation, the innovation and the Joy-Con's incompatibility with the likes of Microsoft uniqueness of its game play were enough to lure the masses, and Sony limited the selection of games immediately avail- and sales were excellent. able to the Nintendo Switch's audience. The selection of Success, of course, bred competition. Upon seeing games had to be fulfilling enough to keep Nintendo's audi- the success of the movement-sensing Switch, Microsoft and Sony moved quickly to release competing systems. ence happy, without leaving them feeling like they were missing out on games available only on the other platforms. Microsoft released its Kinect for the Xbox, while Sony released the Move for the PlayStation. Both the Move and Kinect used camera systems for their motion detec- The Competition tors, but in different ways. Move's camera sensed the If the launch of Nintendo's Switch was a foray into the fierce movement of the light-up Move controller, whereas competition among such existing models as Xbox One and Microsoft's Kinect sensor tracked skeletal motion, elimi- PS4, Switch's competitors were offering many features that nating the need for a controller.18 While it was inevitable Nintendo did not. The price of $299 for the basic Switch that gamers would have their favorite of the bunch, the included a portable game console with a built-in screen, a relevant point was that it didn't take long for Microsoft pair of Joy-Con controllers, Joy-Con Straps, a Joy-Con grip, and Sony to catch up to Nintendo. They moved forward and a Nintendo Switch dock. The price of the PlayStation 4 to the new generation(s) of gaming quickly, maintaining was also $299 (500 GB edition), and the new Xbox One was an even playing field among competitors for gamer inter- $229. At a base price of $299 the Switch was intended to action and motion detection. compete with the upper echelon of the next generation of In the Game Developers Conference (GDC) 2019, gaming consoles unlike the low-cost position of the original Nintendo, along with its other competitors, witnessed Wii. Apart from pricing, there were many differences among another player in the market-Google. Google unveiled the performance specifications of Switch in comparison to Stadia, a cloud gaming service that streams games from its fiercest competitors (for examples, see Exhibits 6 and 7). C162 CASE 20 :: NINTENDO: COULD THE SWITCH TURN ON GAMERS? EXHIBIT 6 Game Systems Comparison, 2019 Feature Switch Xbox One PS4 CPU: Cores 4x ARM Cortex A57 8x AMD Jaguar 8x AMD Jaguar CPU: Clock speed 1,020MHz 1,750MHZ 1,600MHz CPU: Cores 256 Nvidia CUDA 768X AMD Shaders 1152 AMD shaders CPU: Docked speed 768 MHz 853 MHz 800MHz CPU: Undocked speed 307.2MHz N/A N/A HDR No Yes (One S) Yes Memory 4GB 8GB 8GB 32GB flash (microSD-expandable) 500GB HDD 500GB HDD Storage Physical game formats Game Card Disc Disc USB ports 2x USB2, 1x USB3.0 3x USB 3.0 2x USB 3.1 (gen1) Video output HDMI HDMI HDMI (HDR supported) Audio ports None Optical Optical Networking ports None Gigabit Ethernet Gigabit Ethernet Power consumption Unknown -125W - 140W Source: Passingham, Michael. Nintendo Switch vs Xbox One and PS4 - How do they compare? Trusted Reviews, December 17, 2018. EXHIBIT 7 Game Controllers Comparison, 2019 Feature Joy-Con pair Switch Pro Xbox One PS4 PS4 Move pair Control buttons 18 touchscreen 18 17 17 touch 18 Analogue sticks 2 2 2 2 2 Vibration Yes Yes Yes Yes Yes Wireless Yes Yes Yes Yes Yes Battery capacity 525mAh (each) 1300mAh N/A 1000mAh 1520mAh (each) Battery life 20h (official) 40h (official) Variable -7h - 10h Motion controls Yes Yes No Yes Yes IR camera Yes No No 1...... No No Removable batteries*** No No Yes No No Play and charge Yes* Yes Yes** Yes Yes Headphone jack No No Yes Yes No *With optional Charge Grip ** Play-and-charge kit available ***Without voiding warranty Source: Passingham, Michael. Nintendo Switch vs Xbox One and PS4 - How do they compare? Trusted Reviews, December 17, 2018. crossed the billion-dollar threshold in annual revenues. Al- hubs for families. Now, with the Switch on the market, and though these companies charge little per purchase, the introductions from competitors expected soon, the competi- huge number of worldwide users enables them to collect tion seems to be better positioned to combat Nintendo. As enormous total revenues. The number of smartphone us- motion-sensing gaming the undisputed next best thing to ers has grown dramatically during last decade, which auto- come out of the gaming industry is a capability that all com- matically grows the potential users for mobile gaming petitors now possess, it is a matter of whose system is most companies without having to sell game consoles. Just hav- desirable to the gaming population, and whether or not sales ing a smartphone opens the option of thousands of games volume solely will determine which system comes out on top. for mobile gamers at a single platform for a minimal price. With similar technology being widespread across the indus- The growing trend and popularity of mobile gaming is try, it may prove to be more difficult for Nintendo to set itself definitely posing competition for gaming companies like apart and portray itself as the family favorite, as it did in its Nintendo, among others. early days of the Wii. But the three rivals have another competition-Google. Google Stadia With Stadia, Google has placed itself against the industry's Google Stadia is looming on the gaming horizon, and not largest players: Microsoft, Sony, and Nintendo. While un- just on mobile phones. After its announcement in the veiling the service, Google CEO Sundar Pichai said, We Game Developers Conference 2019, a lot of gamers are an- are starting our next big challenge: building a game plat- ticipating its arrival. Stadia could be great for gamers who form for everyone. I think we can change the game by bring- cannot afford the latest hardware. One of the features of ing together the power and creativity of the entire Stadia is that it will let players view a game clip from the community, people who love to play games, people who creator on YouTube and then hit "play now to instantly love to watch games, and people who love to build games." 27 stream a playable version of the title to any device that can Sony's CEO Kenichiro Yoshida and Xbox boss Phil Spen- run a Chrome browser. Google says it expects to support up cer have said that both companies are working on hardware to 4K at 60 fps at launch over an Internet connection with for the future, which many believe will be released next around 30Mbps of bandwidth, and it is planning to support year. But does Nintendo have to worry about the new com- up to 8K resolutions and 120 fps in the future.25 To power petition yet? all of this cloud streaming, Google is leveraging its global There is some concern for Nintendo with high competi- infrastructure of data centers to ensure servers are as close tion in the market. Nintendo is known to be a unique brand to players around the world as possiblea key part of Sta- with games that are limited to its platform. Its Mario and dia, as lower latency is a necessity to stream games effec- Zelda fans might not be incentivized easily to switch to mul- tively across the Internet.26 If it catches on, Stadia could be tiple devices. In February 2019, Nintendo Switch outsold a significant player in gaming. Xbox One and PS4, and generated its highest February- month hardware dollar sales since February 2011.28 Having The Future of Switch sold up to 32.27 million units by December 2018, Nintendo said that they expect there are still plenty of people who While Sony and Microsoft envision long-term profits on have played Nintendo games in the past but have not yet software sales for PlayStation 4 and Xbox One, both com- purchased Nintendo Switch.29 Will Nintendo be able to panies experience losses producing their consoles. Among communicate the appeal of Nintendo Switch to consum- the three rivals, Nintendo is the only one earning a signifi- ers? or Is Nintendo counting on power of nostalgia to main- cant profit margin on each Swit