Nintendo Stock Drop – Learning from Sony’s Struggle
Earlier this week, investors stood by as Nintendo’s stock price declined by nearly 12 percent over a 48-hour trading period. Despite growing third party support and positive expectations for next week’s Electronic Entertainment Expo, analysts are attributing the decline in part to concerns over Nintendo’s upcoming online service, which is scheduled to launch in September 2018. Over the weekend, these concerns appear to be validated as gamers reported connectivity issues when attempting to join online tournaments for Nintendo’s upcoming title Mario Tennis Aces.
Online subscription services continue to be profitable for rivals Sony and Microsoft as the companies’ annual reports stated 34.2 million and 59 million subscribers, respectively. As online multiplayer such as Fortnite become more popular, subscribers continue to renew their annual memberships. Given that subscription services have added billions in annual revenue to their rivals, Nintendo stands to profit considerably by entering this space.
This begs the question: is Nintendo’s infrastructure robust enough to handle increased traffic in the online multiplayer arena? A brief history lesson from Sony’s PlayStation Network could indicate that Nintendo is unaware of the challenges ahead.
Sony launched the PlayStation Plus (PSN) online subscription service on June 29, 2010; however, the service did not grow in popularity until the release of the PlayStation 4 console in late 2013. From October 2014 to January 2015, PSN subscribers increased from 7.9 million to 10.9 million, and Sony’s infrastructure was not prepared to handle this dramatic increase in traffic. As holiday spending drove hardware sales and online subscriptions, the PlayStation Network continued to crash throughout December 2014 despite Sony’s R&D investment of 89 billion yen in 2014 (approximately $8 billion).
Now on to Nintendo. Analysts are predicting that Nintendo’s online service will add approximately $175 million to the company’s fiscal year 2018 revenue. Considering the service will be priced at $20/year and launch midway through the company’s fiscal year, Nintendo is expected to gain approximately 17.5 million subscribers by March 2019. According to the company’s investor relations page, Nintendo has spent just over 120 billion yen in R&D (approximately $11 billion) over the past two fiscal years building its infrastructure. Time will tell if the company’s investment is sufficient to support projected subscribers, but consumer struggles with the Mario Tennis Aces online tournament last weekend paint a dim picture. Considering that Sony struggled to support 10 million subscribers with an $8 billion investment, Nintendo could be positioning itself for a challenging holiday season 2018.