3 Signs Nintendo Is Not Out of the Game

By John Ballard Markets Fool.com

Nintendo (NASDAQOTH: NTDOY) launched its new Switch console on March 3, 2017, and the customer response has overwhelmed retailers with demand. Nintendo of America President Reggie Fils-Aime has stated that Switch is "setting sales records every day."

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This is great news for Nintendo, which desperately needed a successful launch to gain some momentum after several years of poor sales performance.

One game driving early sales

Switch's performance is even more impressive considering The Legend of Zelda: Breath of the Wild is the only quality game available for the console and spring is typically a slow season for the video game industry.

The Legend of Zelda: Breath of the Wild is helping Nintendo drive strong sales of Switch. Image source: Nintendo.

The Wall Street Journal recently reported Nintendo is planning to double production of the new console to 16 million units, putting Switch on a similar sales track in its first year as Wii -- the top-selling console in Nintendo's history -- which was released in 2006 and sold more than 100 million units over its life cycle.

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One reason for Switch's early success is the new Zelda game. The Legend of Zelda: Breath of the Wild is one of the top-rated games of all time, according to Metacritic.Although many gamers and analysts were skeptical about Switch's sales prospects given a light game slate at launch, reports suggest most customers are buying Switch and Zelda together. Nintendo is known for its exclusive franchise library like Mario, Donkey Kong, and Zelda among many others. However, Switch will be a success or failure depending on its third-party publisher support. The early strong demand for Switch means gamers are either finding Zelda compelling enough to buy a Switch console or they feel confident in Nintendo's commitment to release more quality games down the road. It seems crazy to spend $300 or more to play only one game, so my bet is on the latter.

The new Zelda is game design at its finest

The new Zelda game marks an ambitious effort for Nintendo. Breath of the Wild is no doubt drawing high review scores based on the masterful creation of a deeply immersive, open-world gaming experience allowing the player to explore and play through the story as they wish. This is the first time a Zelda game has been made in a true, open-world form, which has become quite common in the video game industry. Nintendo proves it has mastered the art of game design with Breath of the Wild.

Given strong attach rates between Switch sales and Zelda, it seems the company's strategy to stagger game releases in order to build maximum awareness leading up to the holidays may pay off.

Nintendo's classic brands still have value

The strong start for Switch and the new Zelda game is quite an achievement for Nintendo given that the Zelda brand is thirty years old. Mario is another popular Nintendo brand that will make its debut later in the year when Super Mario Odyssey releases in time for the holidays. This seems like clever timing on Nintendo's part to drive Switch interest early with a great Zelda game and then unleash Mario to drive console sales during the all-important holiday quarter.

Nintendo's recently released Mario franchise on mobile devices is a sign that management is exploring new ways of monetizing its intellectual property. Super Mario Run was released on Apple'siOS in December 2016 and was just released on Alphabet's Android platform in March. As of January, the mobile game had been downloaded 78 million times and generated $53 million in revenue for players who decided to pay $10 to unlock the full game.

Nintendo also released the Classic NES edition in fall 2016, but the company badly underestimated the demand from nostalgic older Nintendo fans who grew up playing the original console in the 1980s. The classic edition was priced at a relatively low price of $60 and came pre-loaded with 30 classic Nintendo games. The combination of nostalgia and affordable price caused mass shortages of the console everywhere and took Nintendo management by surprise. Nintendo is working on meeting the demand, but the console is still hard to find after several months.

Switch could be a great opportunity for Nintendo to further monetize classic games with the upcoming Virtual Console service expected to be available later this year on Switch. Virtual Console will allow players to access classic Nintendo content on Switch, and reports suggest the service will support games from the original NES all the way up to GameCube, which would create even more demand for Switch going into the holidays.

Nintendo planning on a big E3 in June

To satisfy those prospective Switch buyers who might be sitting on the sidelines, Nintendo will have a big opportunity to showcase new games and content at E3 this summer. Fils-Aime hinted that Nintendo is planning on some big announcements at the event in June 2017: "We're going to be showcasing a variety of games...E3 is going to be a major opportunity for us to showcase not only Nintendo Switch but also content coming for the Nintendo 3DS."

E3 will be very important for Nintendo to convince skeptics there will be compelling third-party games coming in the future.

Given the strong interest in Switch and classic brands, it is clear Nintendo's brand is alive and well. Strong sales of Switch seem to indicate that management learned some lessons from the failure of Wii U and have made the right adjustments. It makes you wonder where Nintendo would be today if Switch had been released in place of Wii U.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Ballard owns shares in Nintendo. The Motley Fool owns shares of and recommends GOOGL, GOOG, and AAPL. The Motley Fool has the following options: long January 2018 $90 calls on AAPL and short January 2018 $95 calls on AAPL. The Motley Fool has a disclosure policy.