IHS: Nintendo’s Switch will erase the painful memories of the Wii U, but also faces Its own challenges

Following this morning’s Nintendo Switch event, Piers Harding-Rolls, the head of games research at IHS, shares his view on the new machine

Switch’s product positioning and differentiation

Nintendo’s new hybrid console Switch reflects a company that is in cultural flux as it seeks to find a balance of approach between its traditional console games business and to cater for a new population of smart device gamers. The Switch’s form factor literally embodies the tensions at play here as it seeks to satisfy traditional Nintendo console gamers and also engage a new set of consumers that routinely want to use smart devices – and more specifically tablets – for gaming. A hybrid device strategy such as this is unproven in the market – previous gaming tablets that can dock to TVs have found very little sales traction but significantly have not had the backing of a company such as Nintendo.

Is this a device for the mobile gamer that plays on the move? To a segment of the mobile gamer population yes, but the Switch is more naturally a direct challenge to the use of tablets in the home or perhaps on family holidays.

As such, Switch will need to provide a compelling alternative or enhancement to other tablets already used by this audience. Nintendo is seeking to do this in a number of ways. Through its exclusive games IP, through its local multiplayer gaming capabilities over local Wi-Fi and through the sensor technology included in the proprietary Joy-Con controllers which allows it to bring new gaming experiences to the tablet gaming audience.

IHS Markit expects this differentiation to resonate with a broader set of buyers compared to the Wii U, but Nintendo faces the challenge of communicating these relatively complex product features to a more mainstream audience, an area the company has openly agreed it failed with in relation to the Wii U.

Pricing as expected at sub-$300; Paid online service makes complete strategic sense

At $299.99 and 279 in the UK including VAT, the pricing of the Switch is as predicted. This is not an impulse purchase or as cheap as other recent Nintendo consoles and at this price point Nintendo will be competing with existing consoles and tablets. As a result, communicating the unique aspects of the Switch – particularly the capabilities of the Joy-Con controllers – and its exclusive content through marketing spend will be key to gaining market traction. Unlike the Wii, this is not a product that will necessarily sell itself through word of mouth as its proposition is still relatively complex.

And this is where Nintendo’s broader app strategy is expected to help the company. We’ve already seen how the success of Pokemon Go has translated into sales of 3DS hardware and software. Nintendo will be hoping it can build similar momentum for the Switch with its app release strategy – the success of this approach will depend largely on the content and franchises involved.

Nintendo’s decision to offer a paid online service brings it into line with both Microsoft and Sony and makes complete strategic sense. IHS Markit estimates that global consumer spending on Xbox Live Gold and PlayStation Plus reached $2.7 billion in 2016. This revenue stream is essential for supporting the online services of these competitors and has allowed Sony and Microsoft to build a comprehensive lead in online capabilities compared to Nintendo. With this new flow of income, Nintendo investment in its online capabilities will increase significantly.

Outselling the Wii U

IHS Markit expects Switch to comfortably outsell the Wii U but Nintendo faces an uphill task to translate its product vision into mainstream adoption although it will be aided in this ambition through its deep portfolio of games franchises. The Switch is an evolution of the Wii U, but eminently simpler in form factor and broadens the use case for a home and portable console hybrid. As a result Nintendo’s Switch is likely to banish the painful memories of the poorly selling Wii U, which to date has only sold 13.4 million units since its launch in 2012. We currently forecast 4 million Switch sales in 2017 although this may be revised in the coming days based on the earlier than expected launch date and likely stock availability through the year.