This article by MOI Global instructor Scott Miller is excerpted from a letter of Greenhaven Road Partners Fund.
Historically, Nintendo has been a “feast or famine” company that has seen its fortunes rise and fall dramatically depending on the release cycle and reception of gaming platform consoles and the attached games. The gaming console business is effectively a razor + razor blade business. Traditionally, consoles have been sold for very low margins with higher margins on games. For the past 30 years, consoles had a life of 5-6 years before the next generation was released. Videogame consoles are a capital- and research-intensive treadmill where success of the next was by no means guaranteed by the success of the current. Each successive console has faced “chicken and egg” challenges since, generally, developers only want to develop for new platforms when its installed base reaches a sufficient scale to make their efforts worthwhile and consumers only want to buy consoles that have the deepest bench of top-quality games. If either the consumers or the game developers don’t show up, the console manufacturer suffers the double whammy: lackluster sales of not just the console but also the games made for it. To put this in context, Nintendo’s sales fell over 75% from 2009 to 2015 as the Wii U flopped due to the company’s historically minimal marketing efforts.
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