Will Nintendo Switch Be a Hit?

By John Ballard Markets Fool.com

IMAGE SOURCE: NINTENDO.

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Early demand for Nintendo's (NASDAQOTH: NTDOY) new game console is looking very strong. Major retailers sold out of preorder stock within hours of the console going on sale in the early morning of Jan. 13. Tonight Show host Jimmy Fallon certainly did his part to create buzz when he debuted the Nintendo Switch on the show in December with fanatical enthusiasm.

Research firm DFC Intelligence has already forecast the Nintendo Switch to sell 40 million units through 2020. This would put Switch on pace with sales performance of Nintendo's Wii console, which sold over 40 million units from its launch in 2006 through March 2009.

Nintendo's roller-coaster ride

It appears that gamers are being won over to Switch for the same reason gamers were won over with Wii -- it offers innovative ways for players to enjoy gaming. Nintendo is continuing its innovative streak with Switch's ability to behave as both a traditional gaming console and a mobile gaming device. The Switch's Joy-Con controllers can be attached to the console's built-in HD display for portable gaming. The appeal of this feature is that players can switch to portable gaming in real time while in the middle of game play, and if they wish, back again to the TV.

However, Nintendo will need to do more than simply introduce innovative new features if it wants to avoid the same financial disaster that started for the company in 2009:

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NTDOY data by YCharts.

Poor planning on the part of management led to the bottom falling out of Nintendo stock as the Wii's sales dramatically slowed after its first few years on the market. The Wii appealed to gamers for its innovative motion-enabled controllers and its sleek design, but the game library didn't feature enough quality games to keep players coming back.

Nintendo answered in 2012 with Wii U, which was received poorly thanks to problems like those plaguing Wii, but without the novelty of a new, innovative technology to impress Nintendo fans. As a consequence, Wii U has only sold about 14 million units since its launch in 2012.

For a console to sell tens of millions and attract a mass audience it has to have two things: 1) developer-friendly hardware, and 2) a consistent flow of high-quality games throughout the year.

Wii U had neither of these. It appears Nintendo management has finally addressed these two critical factors for the Switch. Here's what Nintendo of America president Reggie Fils-Aime had to say about the issue:

What third parties want are a large, growing install base, a development environment that's easy for them to work in, they want the ability to monetize their content -- whether on the initial sale or downloadable content. That's what they want. And we were not able to deliver that fully on the Wii U.

We are going to be able to deliver that fully with Nintendo Switch. With our launch, with our own first-party games, we'll sustain momentum and create that opportunity for third parties.

And third-party developers seem to be on board. In addition to dozens of small developers, every major developer is supporting the Switch, including Activision Blizzard, Ubisoft, Bethesda Softworks, Take-Two Interactive Software, and Electronic Arts.

A few obstacles for Switch

It's important to keep a few things in mind. Announced support doesn't mean those developers will actually make games for a new console. And if those developers do release a game, it doesn't mean those developers will continue to make games. That depends on the size of the opportunity presented by the installed base.

There are also a few other hurdles Nintendo must overcome in the short term to create momentum for the Switch. More gamers are shifting toward downloading full games directly to their consoles, and with only a very small 32GB of hard-drive space, the Switch doesn't appear to offer these gamers enough storage capacity.

Another problem, as fellow Fool writer Keith Noonan explained, is the lack of quality games at launch. Given Reggie Fils-Aime's quote above, Nintendo should be better prepared this time around, and will have some announcements within months after the Switch launches. Nintendo will have a great opportunity at the annual Electronic Entertainment Expo (E3) in June to address this concern, and make some big announcements with respect to new-game development.

The Nintendo Switch launches March 3, so it will be several months before we know whether Switch is on pace to repeat the early success of Wii, or it's doomed to be another Wii U. Reggie Fils-Aime has said there will be 2 million units available through March. Selling through 2 million units during one of the slowest months of the year for the video game industry would be a great start for Nintendo. It would give the company good sales momentum for the spring and summer, and buy it some time to release quality titles in the fall.

Nintendo's future depends on Switch

The Switch definitely offers a new dynamic for players to engage with the console, and it seems to promise quality third-party support -- the essentials for a successful sales cycle. The early signs are pointing to a strong year for Nintendo, and depending on future game announcements, Nintendo Switch should correct the mistakes of the past and return momentum to Nintendo's business.

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John Ballard owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard and Take-Two Interactive. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.