Analysis: How the 3DS XL update could boost Nintendo handheld sales

The new Nintendo 3DS XL is the latest in what has become an annual Nintendo tradition of revising its handheld hardware line. Starting with the Nintendo DSi in late 2008 and early 2009, Nintendo has steadily improved its hardware each year, moving from the primitive, 2006-era Nintendo DS Lite to systems with better networking, added on-board storage, larger 2D screens, and – with the launch of the 3DS last year– a new 3D screen technology. The new 3DS XL is a natural next step in this line of annual updates, and conveniently gives Nintendo an opportunity to attract new consumers who are just now becoming aware of the imminent launch of the Nintendo Wii U console later this year. The initial reaction to the Nintendo 3DS XL appears to be positive, at least in my experience, and I think that it stands a chance of helping the system shed the stigma of last year's dreadful summer sales drought and the stunning 32 percent price cut delivered in early August. I went back and pulled all shipment data from Nintendo's earnings releases, since the launch of the Nintendo DS, and it was a helpful refresher in several ways. First, it brought into focus just how patient (or complacent) Nintendo had been with the Nintendo DS line in the first place. The original Nintendo DS arrived during Christmas 2004 and the successor revision, the DS Lite, did not arrive until about 15 months later, in March 2006 in Japan. Then the Nintendo DS Lite was then the standard system for over 30 months, until November 2008 when the Nintendo DSi was released in Japan. In the U.S., the timeframes were slightly longer: 18 months from launch to the DS Lite and well over 30 months from the DS Lite to the DSi. In over four years on the market, Nintendo's dual screen handheld only got two hardware redesigns. With the advent of the DSi, however, that has all changed. From my perspective here in the U.S. market, it looks like Nintendo has released a new handheld or new redesign in every calendar year since 2009. The second point I got from reviewing Nintendo's shipment data is the relative importance of each hardware redesign to Nintendo's hardware fortunes. The Nintendo DS Lite revision in mid-2006 certainly played a crucial role in turning Nintendo's handheld business around dramatically, but no revision since then has been as successful. Just looking at the four models of the Nintendo DS for the moment, the global picture for shipments looks like the figure below. As I've done previously, I'm showing trailing 12-month (TTM) data which helps smooth out some of the irregularities like seasonal sales differences and temporal differentials between supply and demand. Remember: The height of the graph at any given time represents total shipments in the prior 12-month period. The original Nintendo DS peaked at around 11.4 million systems per year, and it took the introduction of the Nintendo DS Lite redesign to push sales to just above the 30 million system per year level. The launch of the Nintendo DSi, at the crest of the Nintendo DS Lite wave of sales, helped push the sales rate a million units per year higher. At the peak of the system's sales in 2008, Nintendo was shipping its Nintendo DS handhelds out at a rate of 31 million systems per year. The larger-screen Nintendo DSi XL helped smooth out the decline of Nintendo DS sales, and helped the system remain above the 20 million system per year level until late 2010. As of its last earnings release, Nintendo was reporting shipments of a mere 5 million systems per year. Another interesting feature that this graph reveals is that for a significant time the Nintendo DSi XL – the model with the larger screen – was more popular globally than the smaller Nintendo DSi. In calendar year 2010, Nintendo shipped 8.7 million units of the larger DSi XL while only shipping 7.1 million units of the plain DSi. The DSi XL continued to outship the plain DSi for most of 2011. However, the DSi XL was introduced late in the DS lifetime and the successor Nintendo 3DS was shown publicly only four months after the DSi XL came to market. That is important context here, since the difference in timing means that the Nintendo 3DS XL will likely be received differently by the market. Let's take that graph I showed above and add on the TTM shipment data for the Nintendo 3DS. Viewed as a whole like this, the reports of a collapsing Nintendo handheld market are somewhat less dire. It's clear that consumers began substituting the Nintendo 3DS for the Nintendo DS immediately after launch of the former, since shipments of the two systems together have remained roughly constant at around 20-21 million systems per year. However, close inspection of the figure above shows that the 3DS price cut in August of last year precipitated a huge drop in Nintendo DS shipments while maintaining that roughly constant overall sales rate of 20 million units per year across all of Nintendo's handhelds. The real problem for Nintendo now is that it saw its overall handheld shipment figure drop to 18.6 million systems per year by the end of March of this year, and it is likely that that rate will drop again with the announcement of its first quarter results late next month. Relative to the decrease in sales, that makes the July-August 2012 launch of the 3DS XL analogous to the release of the Nintendo DS Lite back in 2006. That is, a revision is arriving just past a crest in sales of the existing model. Moreover, the strong consumer demand for the larger-screen Nintendo DSi XL during 2010 (even at a price premium) suggests that consumers are interested in a handheld with a spacious screen. If consumers find the price acceptable (and $200 is only a $30 premium over the current pricing of the 3DS), then we could see Nintendo's handheld fortunes headed significantly higher in the next few quarters. At a time when many industry observers see Nintendo as a company besieged by competition from tablets and mobile phones, the 3DS XL provides Nintendo with an opportunity keep itself relevant. It will soon be selling a handheld that not only has the very newest Mario games available, but also has a spacious 3D screen and immediate compatibility with Nintendo DS software. It will even have access to select classic titles from previous Nintendo systems as modestly priced downloads. Nintendo's bugbear, Apple, continues to roll out annual hardware revisions to its iPhone and iPad devices each year and successive devices have immediate access to an App Store stuffed with software developed for previous hardware models. Nintendo appears to have taken a page from Apple's book, and is now doing annual hardware revisions of its own, all while maintaining compatibility with a vast library of software and gradually building the means to sell that software direct to consumers through an online store. This isn't a knock against Nintendo: if the market responds positively to something that a company can reasonably do, it would be foolish for them not to pursue it. If nothing else, perhaps a good sense of its own historical weaknesses is helping Nintendo to incorporate some of the strengths of its competitors while retaining its own identity as a video game hardware and software company. That, in itself, should be immensely interesting to watch in the coming months and years.