Nintendo has just posted their first operating loss. For a company that’s been chugging along since 1889, that’s rough. But there’s still hope. The Nintendo brand and all the characters that they’ve created over the years are still loved throughout the world. That being said, times have changed, and people don’t buy $50 games for $300 consoles anymore. Instead, they buy games that usually don’t cost more than $5, and they run on smartphones that cost $600 or more, but thanks to operator subsidies that figure is more like $200. So what should Nintendo do? They should bring videogame economics to the smartphone industry. Apple and Samsung captured 95% of the profits that the mobile phone industry created during Q4 2011. How are those two companies similar and how are they different? Apple controls their software, but they depend on companies like Samsung and Qualcomm to supply their components. Samsung lets Google handle their software, but they make their own screens, processors, and memory chips. Both companies sell devices for more than it takes to manufacture them, that’s their business model.
Videogames don’t work like that. Consoles, otherwise known as gaming machines, are typically sold at a loss or are sold for as close to break even as possible. Money is made by charging publishers for developer tools and the rights to publish their titles for the specific gaming machine in question.
With that in mind, here’s a suggestion: Why doesn’t Nintendo jump into the smartphone (and/or tablet?) game, create a device that sells for between $400 to $500, but instead of making money off that single transaction, sell said phone for a loss. And when it comes to the games, or in this case “apps”, offer developers a 50/50 split instead of Apple’s famous 70/30 split. By putting the phone in more people’s handsets by swallowing a bit of a loss in hardware, money can be captured by an incredible volume of software sales.
Back in February I proposed that Sony should do the same thing, though in that article I touched more upon the hardware and how often it should be refreshed. Will either of these companies listen to me? Doubtful, but I hope that companies understand that the only way to throw Apple off their game is to hit ’em where it hurts: hardware margins.