Nintendo's $30 Billion Rally Now Depends on Cardboard Pianos
(Bloomberg) -- Nintendo Co. got its start in 1889 as a successful manufacturer of “hanafuda” — Japanese playing cards made out of stiff paper. Now the game maker is embracing the same materials for its next trick.
The Kyoto-based company starts selling on Friday an unusual collection of attachments for its hybrid Switch tablet-console: cardboard add-ons called Nintendo Labo. Priced at $70 and $80, the build-it-yourself cardboard kits, with accompanying software, will let users transform the Switch into a miniature piano, motorcycle handlebars, robot exoskeleton and other objects.
The goal: broadening the Switch’s appeal beyond the core gamers who fueled an estimated 17 million in first-year unit sales. Players younger than 16 accounted for just 10 percent of Switch users last year, according to Nintendo. Tatsumi Kimishima, Nintendo’s president, likes to hint that Switch is on track to meet or surpass the top-selling Wii, a device that also embraced physical gameplay. Labo underscores Nintendo’s desire for the Switch to evolve into a more versatile entertainment device, and will most likely be just the first of many such initiatives.
“Switch was loved by Nintendo’s core users because the company brought out all of its strongest characters in the first year,” said Kazunori Ito, an analyst at Morningstar Investment Services in Tokyo. “But the second year will be getting more people to try it out. That’s the second act for Switch.”
So far, there’s a lot of optimism surrounding Nintendo Labo’s debut. The shares of cardboard maker Ohmura Shigyo Co. jumped more than fourfold in January after several blogs speculated it was the manufacturer behind Labo. Bloomberg reported last week that Osaka-based Rengo Co. is a key supplier for the cardboard gadget, fueling a brief rally in the company’s shares. Still, that optimism hasn’t been reflected in Nintendo’s shares, which have underperformed the Nikkei 225 Index by 10 percent in the past month. Nintendo’s stock was up 2.8 percent during morning trading on Friday.
“Nintendo shares aren’t currently pricing in that Labo will be a huge hit,” said Makoto Kikuchi, chief executive officer of Myojo Asset Management Co. in Tokyo. “If we start to see indications that it’s selling well, we could see the stock move up a level.”
Also at stake: the $30 billion rise in Nintendo since the Switch debuted a year ago. First-year Labo sales are projected to be 3.4 million to 10 million units, according to four estimates compiled by Bloomberg, with adoption rates per console seen at 8 percent to 30 percent. David Gibson, a Tokyo-based analyst for Macquarie Securities, estimates gross profit from Labo at about 4 billion yen ($37 million) for the period.
To achieve its goals, Nintendo is going to have to win over parents like Junko Suzuki, who say that Labo doesn’t seem to offer enough, given the price for what is essentially a collection of highly customized cardboard boxes.
“There’s just a feeling that something’s lacking for the gamers,” said Suzuki, mother of two boys aged 10 and 14. She says her kids regularly play the Switch they own, but haven’t shown any interest in Labo. “Visually there’s just not enough to draw them in.”
Adoption of the Switch among those under 16 has been slow, partly because of its price. At around $300, the hybrid device costs about double Nintendo’s 3DS console. Some analysts have also pointed out the Switch is too big to be comfortably used by children, an issue that Labo may help address. And the software lineup to date has focused more on games such as Super Mario, Zelda and Splatoon 2 — titles that are more popular with die-hard gamers.
Atul Goyal, an analyst at Jefferies, says that Labo should be considered the start of a new sales phase for Nintendo. “This is the beginning of targeting the youth market,” he said. “It’s a turn from the core gamers to the kids. I think it will be a lot like Lego bricks. Kids will enjoy building it.”
Reviews were largely positive, with The Verge praising the Laboi’s educational potential, saying the “creative element is where the real power of Labo lies.” Cnet praised its “incredible cardboard designs.” Anticipating users who might damage their cardboard, Nintendo said on Friday that it will sell replacement parts.
Should Labo prove popular or durable enough, it could open the way for more cardboard products. Nintendo is already developing additional Labo accessories, according to a company spokesman. A product video in January showed iterations that weren’t mentioned on the official website or press releases, including a steering wheel, a gas pedal, a camera and a gun-like controller.
“It’s something the kids will love,” said Myojo’s Kikuchi. “My impression is positive.”
The cardboard approach may also make sense for experimenting with virtual or augmented reality accessories. In 2016, Nintendo filed a patent application for a VR headset that featured a design similar to Google’s own cardboard-based headset, where a Switch-like display screen is slid into a paper visor. Nintendo’s close partner Pokemon Co. sees AR playing a big role in future games, its CEO told Bloomberg in August.
Apart from Labo, it’s clear that Nintendo sees the Switch as the foundation for a variety of gaming experiences. Last week, the company also introduced a program to nurture outside developers who can find new ways to play or use the Switch. In a recent patent application, Nintendo outlined a system that would link the screens of several consoles together to form a single, large playing area, a plan first reported by several gaming websites.
“Nintendo Labo is a product intended to broaden the possibilities of Nintendo Switch,” Kimishima said at a briefing in February. “We hope to develop Nintendo Labo into a product that is not bound by the conventional boundaries of video games, and that endears itself to an even broader range of consumers.”
If he gets it right, the Switch could become Nintendo’s most successful device. In terms of longevity though, it will be hard to beat hanafuda playing cards, which the company still makes to this day.
©2018 Bloomberg L.P.