Nintendo shares hit 19-month high as Switch goes on sale in China

Nintendo shares hit 19-month high as Switch goes on sale in China
By: WNG CNBC Posted On: December 10, 2019 View: 29

Nintendo shares hit 19-month high as Switch goes on sale in China

People play games on Nintendo Switch during the 2019 China Digital Entertainment Expo & Conference (ChinaJoy) at Shanghai New International Expo Center on August 3, 2019 in Shanghai, China.

VCG | Visual China Group | Getty Images

The Nintendo Switch could become the biggest console in China in the next few years, analysts told CNBC, but it faces challenges in a market that loves free-to-play mobile games and may not move the needle for the company's business in the near term.

The Japanese gaming firm's flagship console officially went on sale in China on Tuesday. Nintendo worked with Chinese gaming giant Tencent to bring the console to that market.

Around 11:30 p.m. China time on Monday, 105,000 people had made a reservation to buy the console on e-commerce site JD.com. Not all people who make a reservation end up buying the console.

A spokesperson for Fenqile, another e-commerce site, told CNBC that the Switch "has been one of the most popular console products ... over the past years."

Shares of Nintendo were up over 2.9% on Tuesday, hitting their highest intraday level since May 9, 2018.

Analysts who spoke to CNBC said they expect Nintendo to sell around 100,000 units of the Switch in China before the year ends. Nintendo has already sold 41.67 million units of the Switch globally since it was released worldwide in March 2017. Wedbush Securities estimates that Nintendo will likely sell no more than 10 million units of the Switch in China over the console's lifetime, but said it's possible it may see sales of 4 million to 5 million in the first year.

China market challenges

For international console makers like Sony, Microsoft and Nintendo, China is a unique market as foreign consoles were banned until 2014. The category remains niche as console software and services are set to account for only 1.3% of total games revenue in China this year, according to market research firm Niko Partners.

While units are typically purchased via official channels in other countries, a so-called grey market has developed in China, where foreign consoles are brought in and sold through unofficial channels. Sales of grey market consoles outstripped legal ones last year.

Often these grey market consoles may not function properly in China because they can't connect to foreign servers required for certain games. That's why console makers need to release China-specific versions of their products, and part of the reason Nintendo is working with Tencent.

While Sony and Microsoft have released their flagship consoles — the PlayStation 4 and XBox One X respectively — in China, success has been limited. This is partly due to high pricing but also because Chinese consumers have grown up on a diet of free-to-play mobile games. That could be a challenge for Nintendo, too.

"Free-to-play games were invented in order to combat Chinese piracy of paid games, so it was necessary to offer free, server-based games in order to keep the Chinese consumer from stealing paid games," Michael Pachter, managing director of equity research at Wedbush Securities, told CNBC.

"The consumers there 'love' free-to-play because that is all they have been offered. Yes, Nintendo is going after an audience that has never paid for games, and yes, that's a challenge."

'Fighting chance'

But analysts are optimistic for the Switch's potential in China for a number of reasons, including pricing and its game catalog.

Nintendo priced its console at 2,099 yuan ($298), cheaper than the PlayStation 4 and Xbox One X when they were released. But it is coming to market with only one launch game, New Super Mario Bros. U Deluxe, fewer than what was available for Sony and Microsoft's consoles at release.

But Serkan Toto, CEO at games consultancy Kantan Games, said Nintendo has a "fighting chance."

"Nintendo's Switch, however, offers something that PCs, other consoles or phones don't have. It boasts a wide range of exclusive software Chinese users can't get anywhere else. It has the most popular IP (intellectual property) in gaming worldwide, especially Mario, Zelda or Pokemon," Toto told CNBC.

One of the Switch's key features is the ability to take the console on the go which could appeal to China's mobile gamers.

"The hybrid nature of the Nintendo Switch is a key selling point of the console and we believe the ability to play games at home and on the go will appeal to Chinese gamers who like to play mobile games both at home and in social environments," Niko Partners said in a recent note.

Nintendo and Tencent expect more games to be approved in the coming year for the Switch. In China, video games need regulatory approval to be sold.

The Tencent effect

A key part of Nintendo's strategy in China is partnering with one of the country's biggest technology and gaming companies. Tencent runs China's popular messaging service WeChat and has cloud computing capabilities. It also has regulatory know-how in China.

"Tencent has increased the appeal of the Nintendo Switch in China by including a one-year warranty with the console, Tencent servers to power online play, WeChat pay support and high-quality localized titles," Niko Partners said in a note. "We believe that Tencent can continue to increase the appeal of Switch in China through the introduction of the cheaper Switch Lite, cloud gaming services, free to play titles and self-developed Tencent titles."

The Switch Lite is a cheaper version of Nintendo's handheld console.

Tencent could also bring Nintendo's mobile games to China, Kantan's Toto notes.

'Marathon'

Niko Partners forecasts the Switch will replace PlayStation 4 as the market leader in China by 2022 when accounting for both legal and grey market sales. But the firm said the Switch is unlikely to change the overall nature of consoles being a small part of video game revenue in China.

Ultimately, the Switch launch in China is unlikely to move the needle for Nintendo in this fiscal year, which ends typically on the last day of March and impact will be limited in the following fiscal year, Toto noted.

"Nintendo and Tencent need time in China to cultivate a local fan base, build up a meaningful game library against regulations, and optimize sales," Toto told CNBC. "It's a marathon. But the launch is a start."

Read this on WNG CNBC
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