What does the Switch 2 do to Nintendo stock, Ryan O’Connor?

Ryan O’Connor of Crossroads Capital joined us to discuss Nintendo’s new Switch 2 console and its impact on the Nintendo stock.

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Easily discover all the topics of this interview transcript by clicking on the table of contents:

Introducing Ryan O’Connor, the $NTDOY expert

[00:00:00] Tilman Versch: Dear viewers of Good Investing Talks, it’s great to have you back and when this guy is back in the podcast, Ryan O’Connor from Crossroad Capital, it’s time to talk about Nintendo because in my eyes he is the most well-known expert on Nintendo from the investor side, I know, and he’s written great reports about Nintendo and we’ve also done great videos and as Nintendo fans may know, the Switch 2 has just been recently released.

The Nintendo Switch 2 announcement

[00:00:30] Tilman Versch: So Ryan, what surprised you about the release of the Switch 2 and what is in line with your expectations?

[00:00:39] Ryan O’Connor: Great question. First, it’s a pleasure to be back. These are always a ton of fun, so definitely an appropriate time to kind of relitigate, re-underwrite the situation, and I think there’s a lot of fun stuff to talk about. So, what surprised me with the direct or just kind of in general with like the recent news flow?

[00:01:07] Tilman Versch: What do you have with the Switch as a system?

[00:01:10] Ryan O’Connor: So the device was honestly everything, I think, we could hope for. It was, the power, it has been, everything I hoped it would be, I think, basically a PS4 Pro, with a lot of kind of more modern bells and whistles that should allow it to have really no trouble at all playing kind of the best and brightest current Gen games.

I thought that the camera, the mic, and the new chat feature were particularly fantastic. I think one of the things that people don’t tend to think about is how, I saw there’s a stat out there that something like 107 million active users across the PlayStation and Xbox ecosystems are on kind of prior-gen hardware. And I think this is kind of borne out in the stats of something incredible like 63%, or I think it’s somewhere approximately in that basis of these prior Gen higher powered hardware console users spend all their time playing games that are like five or six years old. So, think of Fortnite, Call of Duty, EA and FC.

And so, one thing that I’ve noticed over time is that, like, just for an example with Call of Duty, there are a lot of guys I know that the only time they say they talk to their friends from high school is when they all jump online and play together. And so, because of inertia because of that’s the kind of system their friends are on.

And that’s how they stay in touch over time, life can make that hard that there’s a large amount of those kinds of 107 million active users that stay largely because of kind of that chat feature, which has not been available on the original Switch and really historically with Nintendo systems.

I think the bottom line is that it creates a lot of stickiness that now I think kind of goes away, and better than that. And I think it’s kind of a nuanced point, but the fact that Nintendo switched to its new chat system allows gamers to kind of play together, whether it be all playing the same game or all playing different games.

And so I think that extra bit of utility makes it very, very attractive. And I think it’ll be kind of add a lot of stickiness to the ecosystem over time and similarly, I thought that the mouse functionality, I mean that was probably the biggest surprise as far as the total joy factor is because that opens the door not only to converting the 107 million higher Gen Xbox and PlayStation users, but I think it’s 1.6 billion PC gamers around the world and so bringing that mouse functioning functionality into it for whether it’s kind of competitive gameplay with first person shooters or games like Civilization, you know, these massive games with very sticky installed bases provides, along with the power and the ability to play all their kind of favourite graphically intense games that weren’t available on the Switch, the original Switch on a Nintendo system really I think kind of opens the door and unlocks a massive opportunity to expand the Tam and grow their active playing user count above where it is today, which is I think 129 million users for many, many years. And that taken together, I think, is going to be an enormously powerful thing that isn’t really fully appreciated.

How Nintendo mastered the art of leaning into the right thing

[00:05:38] Tilman Versch: What is for you the most unknown topic or the last discussed topic in the Switch to release, where you think, oh, I see this, but not a lot of people talk about this factor that the Switch 2 brings

[00:05:54] Ryan O’Connor: That’s a really good question. So I have a long-running theory that I don’t want to discuss too much about. But I think there’s been kind of a mosaic of bread crumbs over the years when it comes to what Nintendo is planning for their live service, operations, and I’ll give you two kind of data points and just leave it there. But I started playing Mario Kart Tour. I never played a mobile video game before, and for my due diligence, I kind of got into it for a little while and watched them kind of transition away from the kind of lotto, gotcha, mechanic monetisation. Kind of completely towards gas or gaming as a service subscription, in other words.

As the game went on, I played, I played it probably pretty consistently for a year, year and a half. But not only did the game that and just light years better but you could see kind of the model, a subscription model for kind of mobile like games really come into its own and then all of a sudden, I pick up my Switch, I knew that they kind of when they tied in the booster pass into Nintendo Switch online as part of an incentive for their players to upgrade with Nintendo’s higher price subscription tier, I noticed they’ve started integrating, a lot of the tracks from Mario Kart Tour into the actual Mario Kart 8 deluxe game. And so I thought that was super interesting, that they were kind of integrating their mobile and console businesses in that unique way as part of a, I think, a pretty smart way to kind of leverage their most engaged player base in terms of the subscription service with Nintendo Switch online.

Anyhow, fast forward to, I don’t know, six months ago, I picked up my Switch and went to go play Mario Kart for the first time in a long time. And I had noticed that they had integrated all of my suits, skins, and all the data from my Mario Kart Tour account into my Mario Kart 8 game, so that was intriguing.

They basically combined the two into a single thing. The other thing I point out was how Nintendo created a joint venture with DNA, which kind of runs the back end of their live services. If you really think through the incentives there, the reason I think they would do that is to give DNA, part of the upside from fully leaning into and expanding their gaming as a service business, and I think you also have to remember that this is Nintendo.

They’ll lean into things the right way, but it will go very, very slow, and they spend years, kind of mastering the dynamics of kind of the back end. And as far as their game development expertise, live service was something that was relatively new to them. And so it’s kind of not surprising they’ve taken many years to kind of build up their expertise there and alongside their partnership with DNA.

So, third, and I think this is kind of the biggest and most interesting of them, is with the Nintendo Switch online play test that they put out. I don’t know, it’s maybe two months ago, and my thought was that they were probably just doing it to test their dedicated servers because they put all this money into a kind of state-of-the-art networked online infrastructure.

And because that was one of the things with the OG era and Nintendo historically, where they’ve really lagged. And so as they’ve really leaned into building that kind of state-of-the-art back end that this was really just about, seeing it how, seeing how it works. So I think they it was 10,000 test players I unfortunately wasn’t fast enough on the gun, to get involved in it, but what ended up happening really, really surprised me, which, it wasn’t like just them playing Splatoon or some multiplayer, kind of MMO in the background, but it was an entirely new game. The new IP, that essentially based on some of the leaked footage, is a Roblox and Minecraft clone, and it was clear they were using some of the game engines they built with for Tears of the Kingdom.

But I don’t think I need to tell anyone how big of a game Minecraft is worldwide, especially in Japan, and Roblox is obviously another big moneymaker. But within the game that players were testing, there was clear direct evidence of kind of traditional in game monetization, the ethical kind and that really opens the door for, it’s obviously because it’s part of NSO that, it would be the perfect way to kind of draw players in, not only attract kids, via the Minecraft angle.

I mean, I think they’re perfectly suited for this type of game. But to leverage this IP to kind of massively expand their and it’s own memberships. And I think potentially kind of tie in their top franchises over the next five years into the NSO service via a higher price subscription tier that could do wonders for the bottom line, to say the least. But you take this new IP, it’s kind of perfectly suited for Nintendo’s expertise.

It’s great. It’s a great kind of kids’ acquisition funnel. Add Nintendo’s expertise plus the ability to grow subscriptions through NSO and then make it incremental money through various forms of in-game monetization with all their kind of top five, call it best franchises, with the most engaged player bases.

And I think that will probably be involved with a new, higher price subscription tier. So you add all that together. I thought it was notable that there were a few things that they left out that surprised me. I mean, we know because of contractual guarantees. Call of Duty is coming to the systems day and day or to the Switch 2.

But I was really surprised on some level that, at least going into it that they didn’t reveal that game. But then, as the Direct went on, it was about an hour. I’m actually glad that they kind of saved that for what I presume will be the summer Direct kind of heading into the all-important holiday season. So that’s the thing that I think no one sees coming and then you add in the fact that, one of the big leaks I think it’s called the Tetra leak with Pokémon was that they are in the process of working on a huge Pokémon MMO that, I suspect, will in some way be tied to this as well.

But so if you take a Mario Kart MMO, my hunch is that the Direct next week will kind of showcase that. It’s certainly they’ve been holding certain things back with what they’ve been allowing players to play at these various in person events going on with as far as the new Mario Kart world game, but I suspect that you’ll have Mario Kart Pokémon, and I could go through a few others that I think are coming, but if you have 5 MMO’s that are all available free to play as part of your Nintendo subscription service with non-casino like monetization in game monetization between the impact to memberships and the incremental dollars that are basically pure margin from in game, purchases I think the upside like over and above what we’ve kind of underwritten and embedded in our models is going to be enormous.

And that’s, that’s the thing I love about Nintendo, it’s dirt cheap on the kind of core-based business, and there are all of these free options that are enormous in themselves. And I think you can kind of see coming if you’re paying attention to all the details and clues that they’ve been dropping for, in this case, a number of years.

AAA games: Where the Switch 2 improves on the base Switch

[00:15:12] Tilman Versch: I hope you can follow me with this comparison when I watch the Direct as a Switch 1 user, let’s call it Switch 1 or the basic Switch, it felt like changing from a low-speed train to a high-speed train, Nintendo announced. Can you follow this comparison?

[00:15:33] Ryan O’Connor: Yes, I follow them perfectly. It is leveraging.

[00:15:38] Tilman Versch: Let me ask, where do you see the high-speed elements in the Switch 2 Nintendo is pulling off?

[00:15:49] Ryan O’Connor: Well, I think. I think it’s going to be everywhere. I think the increased power, you know, is going to, I mean, there are a couple of reasons why I think essentially all third party AAA games will come to the Switch 2 accelerate the growth of I think what is the cheapest ticket to the best ecosystem with the best library of games ever. I think you could probably make that argument just based on the existing Switch 1 library, but the step change increase in third-party games that will be available, kind of in true fidelity. once DLS is included and it’s kind of upscaled, and up mode is set to really kind of blow people away.

I think GTA 6 is coming to the Switch 2, as just one example, it’s kind of like the Mario Kart of non-Nintendo games for the Xbox and the PlayStation. So you’re going to see an acceleration and third-party games because of the device itself embedded power. But I also think that structurally, given the cost of game development for a lot of these third-party developers, the industry is becoming kind of uneconomic, and I think once again Nintendo called this, I think all the way back in 2004 referring to kind of the rat race of chasing photorealistic graphics when in the end I think the only thing that really matters with video games is, the gameplay and are simply are they fun?

And so to kind of break that down a little bit, these big tentpole AAA games can cost upwards of $300, $400 million now. And it’s because, not only do they need an army of engineers and programmers to build the base game, but it’s kind of like a game plus a motion capture movie added to it. So when I say motion capture movie, think like actors of Planet of the Apes would be a good example or Avatar where there’s human actors wearing those suits and their scripts and the point is that the games have gotten just kind of so outrageously expensive to make that the existing installed base of whether it’s Microsoft in particular and Sony, it’s just not big enough to make an adequate return on capital without kind of going multi plat. And you’ve seen kind of Microsoft lean definitively that way and less so with Sony. They still have exclusives.

But they’ve opened up their IP to PC, and they’re kind of moving that way. And I think it’s because they’re being forced to. You need a much more, you need to spread those costs across a much larger installed base of users to really have the upside to make taking all that risk worth it. So obviously this plays very powerfully into Nintendo’s mode because the Switch 2 will be the first console and really history that will basically allow, high-end gamers, casual gamers to buy a system, and by the way, the cheapest system, where they can play all the best games outside of maybe a dozen addon PlayStation, but basically all the games that they could play if they owned an Xbox or PlayStation plus Nintendo games.

So obviously this plays very powerfully into Nintendo’s mode because the Switch 2 will be the first console and really history that will basically allow, high-end gamers, casual gamers to buy a system, and by the way, the cheapest system, where they can play all the best games outside of maybe a dozen addon PlayStation, but basically all the games that they could play if they owned an Xbox or PlayStation plus Nintendo games.

And I think that’s the only way you can differentiate a platform in gaming. And so, they need to bring their games to the Switch 2 because they need to survive, and the risks associated with game development are too large now to keep them exclusive to these smaller active user bases of Nintendo’s spheres, but also because they can. Nintendo hasn’t had a system that could play kind of current-gen games and true fidelity day and date, for 25 years, you’ve got to go all the way back to the GameCube. So that’s one way. It’s everything accelerating, or the train is.

I also think it’s a good analogy because this console changeover will be the first time in history that Nintendo’s active user base hasn’t kind of reset to zero day one. And so, they’re really building on everything. They have done before I think this is really the Apple model at work, where they have an iterative device, hardware ecosystem where every few years, you’ll have new form factors and incremental, incrementally better specs which will keep demand steady and Nintendo should want original Switch owners to continue to play for many, many years. And they can just keep on building what has come on what has come before it instead of having to kind of play console roulette every generation. And start again from scratch. And so I think that’s another great way to think about it.

One thing that I also think doesn’t get fully appreciated by people is with some of my surprise was that they didn’t make Mario Kart World Cross Gen, the new Pokémon game will be as well. The new Metroid Prime 4. But when you think about the incentives to upgrade the carrots that they’re putting out there, I think that they’re just amazingly powerful. So, one incentive to upgrade is obviously the ability to play these AAA games that weren’t available on the Switch 1. But I think an equally important element of this kind of the latent demand here which I think is very pricing elastic given the existing the replacement demand from existing kind of upgraders is that, when you buy a Switch 2 basically day one, a big chunk of your library from your Switch 1 games will be automatically upgraded. And what I mean by that is because of AI and Nvidia’s DLSS, you’re going to have, a part of your Switch 1 library that will automatically have better graphics and run at much higher frame rates, and then this was another surprise, I figured that Nintendo would just allow the kind of upgrades to happen for their entire Switch 1 library.

But I think from a shareholder perspective, you’d kind of hope that in certain cases, they would charge for it, and so, I think they did it really elegantly by, there’s like 12 to 15 games that are upgraded automatically for free, then you have games like Breath of the Wild and Tears of the Kingdom which have some incremental functionality that they’ve added, a little bit more polish and that’s going to be either free with a subscription and Nintendo Switch online or $10 for new users to kind of upgrade the original game from the Switch 1, and then you have the $20 charge for like the New Kirby game or the New Mario Kart, where or excuse me, not the new Mario Kart, but the new Kirby Games, an example where they’ve actually built new levels and they put a lot of work into it. It’s kind of like the original game, looking better, running better, but also having new levels and additional content. And for that type of thing, they’re going to charge $20.

So besides it, the impact to the financials being material and how wonderful that is, it really makes the desire as a Switch 1 owner to upgrade to a Switch 2 incredibly large because you’re getting something for free that makes a big difference and call it, the entertainment value of games you’ve already bought, on top of access all the new AAA games day and date and that kind of thing. So I think that you’re going to see just enormous, very pricey and elastic embedded demand for Switch 2s from the active the current active playing user base. And I also think as we touched on earlier that you know hundred million plus at the minimum of people still playing on prior Gen consoles not named Nintendo that are due to upgrade, have this wonderful new opportunity to not give up anything that has kept them on other consoles and kind of adopt the Nintendo system for the first time.

So you add all that up together, and it’s a pretty beautiful thing as far as Nintendo’s future over the next three or four years.

The Switch 2 pricing

[00:25:22] Tilman Versch: To quote a famous New Yorker is the price too damn high or how do you see Nintendo’s pricing strategy?

[00:25:34] Ryan O’Connor: I think it is what they’ve always done, I think the whining and complaining is absolutely absurd. Well, I understand on a human level, no one likes to pay more for anything, like, for example, the people whining about Mario Kart World being $80. Well, if you just go back to 2017 dollars and you look at what that is in 2025 dollars, I think it’s $78. So, in real terms, Nintendo has kept its software prices the same going back three or four generations.

Well, I understand on a human level, no one likes to pay more for anything, like, for example, the people whining about Mario Kart World being $80. Well, if you just go back to 2017 dollars and you look at what that is in 2025 dollars, I think it’s $78. So, in real terms, Nintendo has kept its software prices the same going back three or four generations.

And like a kid, I can remember begging my dad. It was probably 1989 to bought me a copy of Double Dragon on the original Nintendo, the NES, and it was $60. So, like in real terms, I think, or in current-day money, that’s something like $160. So, the real cost of games, which have gotten dramatically better, have much longer experiences, and the replayability of them has expanded massively. You’re getting a ton of value. You’re getting a hell of a lot more for less than it used to be, and the same as it’s been in the last 20-plus years.

So I think the kind of complaining about the price increases, quote unquote. Again, in real terms, that’s not the case, and it’s the same with the system as with the games; the kind of walk I just walked through with you, the Mario Kart world is pretty predictable. And I would just note that too, because, this has happened and certainly since I’ve started following Nintendo, for example, when they announced the pricing for the original Switch in 2017, I think the broad expectation was that it’d be 250 or 280 and it came out at 300 and the stock sold off 6% the next day as people, kind of did the same old song and dance.

And it’s I think it’s quadrupled from that point over the last eight years. So I kind of find it annoying and ill-informed, but I think it will have absolutely zero impact on consumer demand for both the system and the games. And you know that the price increases in general have actually compounded less than inflation. If you look at pricing over the years and how much it’s gone up on an annual basis, it’s actually beneath inflation. So no matter what, I think that both the system and the gains are going to sell like hotcakes regardless of the macro, regardless of what you see. The concerns you may have about the general economy, which I think makes Nintendo’s setup today very special, especially given all of the tariff-related aspects that people have been concerned about.

But yeah, I mean, I think all roads lead to snowballing profits irrespective of external factors and that’s exciting. I don’t think it will have any real impact on the business or whether adoption takes off like I expect or whether consumers think they’re getting their money’s worth. And I’ll leave you with this, like when it comes to all forms of entertainment media, internally we have what we kind of a crossroads metric that we call the price-to-fund ratio, which is kind of simply the average hourly cost of various forms of entertainment media kind of ranked. And so with Mario Kart, for example. I think it is extraordinarily reasonable to presume that the average Mario Count fan will probably get 200-plus hours of gameplay out of that game. So, at $80, I mean you’re talking about $0.40 an hour, in terms of the kind of the real cost to the consumer.

Now, compare that to movies or take your pick, the average movie, whether you’re buying it digitally, is what? $12 an hour? Something like that. Depending on where ticket prices are, but I know on all the digital platforms, like Amazon Prime the like, the typical movies, new movies are $20. So call it $10 an hour. But no matter how you slice it, I think pound for pound, Nintendo provides some of the best entertainment at the cheapest cost in the world.

And when you compare that to the cost of cable TV or movies or other forms of modern entertainment media, I think it’s got a lot of incremental share to take given just the value you received. It’s an incredible bargain, and I think that will be the case for a long, long time.

Nintendo will continue to deliver

[00:31:16] Tilman Versch: Are there still people out there who say Nintendo’s a cyclical business?

[00:31:23] Ryan O’Connor: Not if they have a brain. So, it’s funny. I almost fell out of my chair when the analysts at Goldman upgraded the stock and actually laid out the thesis, we’ve been kind of putting out there since we first released it publicly in 2019. So I’d say this, you’ve seen a lot of the sell side and the buy side to kind of come around in full as kind of the obviousness of what we laid out has kind of been proven out year over year over year, for the last six years.
At this point, a fair amount of, kind of buy into the new reality, the structural reality of Nintendo’s business. But on the other hand, there’s still a lot of kind of awakening, I think, to go. And once we see this console change or change over, and it is proven to be a success. I think intellectually speaking, it becomes basically possible to deny, and so whoever is still on the obsolete paradigm side of the boat should kind of run over to the other side. I’d say within the next year, as Nintendo’s revenue and profits continue to build off of, kind of the steady upward trend that you’ve seen since the Switch OG Switch era began.

Early Switch 2 sales indicators

[00:33:42] Tilman Versch: What are the early sales indicators you’re tracking, and what kind of sign do they give of how much boom the Switch tool will make?

[00:33:54] Ryan O’Connor: Yeah, a lot. I think it’s telling. So, I’ll give you one example from Europe. But so the UK and I believe France as well, they did their pre-orders across all of Nintendo’s retail partners and a couple of things that are important to keep in mind. One of which is, Nintendo is famously candid about their plans to basically churn out as much Switch to inventory as they possibly can for a number of reasons, one of which was to combat all the scalpers and to try and get a new Switch 2 in as many people’s hands as they possibly could. So, these retail partners to begin with, we’re sitting on kind of record allocations of a system relative to any launch day with any prior console in history.

And so, from the get-go, they open up pre-orders and they basically sell out completely across all retailers and minutes, and then they have to restock and then, as far as I understand, they sold out in minutes. I think the longest period where they didn’t sell out of the restocks again was with something like 30 minutes, so they have record launch inventory. They open it up, and it sells out in minutes. Then Nintendo gives them more, and then it sells out in minutes again. If you look at Japan, the anticipation and demand have been so high that the My Nintendo Store in Japan has literally been malfunctioning to the point where Nintendo has had to send out emails to everyone and apologise for the website being down. Even more amusing, the S micro-SD supply in Japan has basically sold out across the country. Again, in anticipation of the new system coming out. So and all of this is happening, this is the second point, in the midst of a global stock market implosion, and it’s been affected not at all.

In fact, it’s been every bit as strong as I would have expected it to be. I mean, if you just kind of do the math on the embedded replacement demand from the 129 million active users, that suggests that before we even get into market share gains from Sony and Xbox and PC players coming over to the Switch 2. Year one demand today of north of 30 million units. So, I think that even with Nintendo for various data points suggest they’ve been in active production building out inventory since late last year. That I mean, I think Wall Street has a consensus for year one in terms of sales. That’s something like 17 or 18 million, which is, I think, kind of ludicrous because I think they did more than that in their sixth year, or the Switch 1 did.

But just based off of day one buyers, people who have been waiting to buy their new Switch and have been pushing it off, until the Switch 2 comes out, they could do almost double that. So I think 30 million plus, I think they’ll sell everything that they can produce. It’s just a function of how much they can produce. So I think every leading indicator and channel check that we have been very closely watching has borne out exactly like what we would have expected it to given everything we know, kind of heading into.

The 5-year perspective for the Nintendo Switch

[00:37:56] Tilman Versch: So we have at the moment over close to 150 million Switches out there. What is your estimate on what this ratio will look like with Switch 1 to Switch 2 in like five years?

[00:38:13] Ryan O’Connor: Well, right. So I think, I assume. I don’t have my model in front of me, but if you assume 10% churn, which I think is very reasonable. I think Nintendo, maybe this is the way to answer. I think Nintendo will continue to support Switch 1 with cross-gen. And in some cases, exclusive games for the next two years at an absolute minimum. But I think the act of playing user base, which is 129 million last reported, should have a fair amount of room to continue to grow, even with what I think are unrealistically high churn rates. And I think in a lot of families, for example, they might buy the Switch 2, but they’ll the kids will each have their own Switch 1, and that’s how they’ll remain active and engaged. But I think it’ll be much like iPhones where eventually Switch 1s are going to go away, but they should be utilised, at a pretty decent rate for the next several years and the uptake in the Switch 2 from existing Switch ecosystem consumers and new consumers, casuals and high end that come into the system, will more than make up for it. I mean, long story short, I think it should grow consistently for quite some time, active Switch users, not Switch 1 users.

[00:40:02] Tilman Versch: And how much do you estimate? How many active paying users will they have in five years?

[00:40:14] Ryan O’Connor: I have to pull up my model. I think about it in terms of the top and bottom line, typically, but let’s put it this way if we underwrite, I think very conservative assumptions, and we assume they stay flat. I think the stock, even with a bunch of nonsensical in terms of the conservatism in terms of what the business should earn. I think the stock should easily double if active users never grow.

Game selection through the historic lens

[00:40:49] Tilman Versch: And how do you see the game selection and the game offer changing in the next five years? Are we also going high speed there?

[00:41:00] Ryan O’Connor: So that’s a great question. I think if you look at Nintendo’s history with, specifically, their portable system, where they’ve been doing kind of iterative upgrades for many, many years, with the 2DS and the 3DS, you could go back through all their families of portables and kind of see this dynamic. But historically, when they’ve launched a new upgrade like the Switch 2, they have released kind of three or four exclusives to that new iteration. And then the rest of the games have been what would generally be called Cross-Gen.

So I suspect it will be something like that. You see this with the new Pokémon AZ and Metroid Prime 4, where you’re going to have additions released for both, and you also see this has been the general way for the PlayStation and the Xbox, where new AAA games will have a game released for both. In this case, the PS5 and the Xbox Series consoles, and then they’ll also release a copy for the PS. More and I think it’s the Xbox One, so that, and you’re going to want to be able to monetise this massive installed base of users as a publisher, whether it’s Nintendo or a third party. And so, all the incentive in the world for that to continue to happen. So when you think about what the kind of normalised tie ratio will be going forward, I think on the total active base Switch 1 and Switch 2, you should actually see I think the average over the last eight years is 2.5 and then you look at credit card data, there’s a variety of ways you can triangulate this, but PlayStation and Xbox users spend, on average is something like 30% more.

Then Nintendo fans have historically, so I think you should see the tie ratio kind of expand on a steady-state basis from two and a half average over the last eight years to something closer to three. And that has a tremendous impact as it flows through the financials and then the price increases on Switch 2 games and all of that kind of thing. But I think Nintendo will continue to support the Switch 1 for a number of years until the Switch 2 base starts to get, let’s call it 100 million plus, which I think could be sooner than a lot of people expect. But called over the next four or five years, it should get there. And then, like, with the iPhone, if you tried to start up, say you kept your iPhone 6, and you tried to start it and update it with the current software. I mean the phone would break, and it wouldn’t run. This is kind of that planned obsolescence dynamic where over years as devices are iteratively improved and upgraded, the older models continue to work just fine for several years, but eventually, as both the software and hardware improve, the older stuff stops working, so it’ll be very much Apple like I think in that way.

Integrating third-party games into the Nintendo ecosystem

[00:44:40] Tilman Versch: Does the Switch tool also solve the bottleneck for 3rd party games?

[00:44:45] Ryan O’Connor: 100%. These people were concerned about power, and one thing people don’t really take into consideration is that game optimization is the very last part of the development process. And so, like, I’ll give you an example. When the Switch 1 was revealed, Mario Odyssey, the first trailer, if you will direct the gameplay. They were showing what running was like 780P. And when the was eventually released, it was at, I think, 980 and looked materially better. And so that’s just a way to say that when you’re looking at what we saw on the April 2nd directs on your screen. You should kind of expect that all of these games are going to look a lot better than what you’re kind of seeing today. So that kind of ties into the next point, which is, if the footage for, I think it’s Cyberpunk. This was a game that was so graphically intensive that they didn’t even release it on the PS4, and it was basically running terribly on the PS5. The footage that they have shown, and there was similar footage, you could say similar things about Street Fighter 6.

And some of the other stuff that they put out there, but for Cyberpunk in particular, this was a game so big and massive that they didn’t even attempt to release it on the PS4. Yet here it’s coming to the Switch 2. It looks as good, for all intensive purposes and every way, as the PS5 version. It is running at a frame rate that is every bit as comparable. It’s just a really super impressive thing, and when you consider the fact that we’ve heard since the Direct that the version they showed on the commercial was it had started basically from scratch, this port. Seven weeks prior to when that footage was taken. So I really think it’s going to blow people’s minds. People are out there talking about how, oh, it’s PS4-like. I think on the facts, that’s absurd. And I could give you 10 different reasons why. But all indications are these games are running just as well, current Gen, PS5, Xbox Series games just as well, if not better, in that mode.

And will continue to be relative to the kind of PS4, I mean it’s closer towards a series X or excuse me, a series S in terms of its capabilities, but I actually think very quickly it’ll be evident that it’s actually, basically neck and neck with current Gen consoles. And when you consider that, this is on a home and portable console and one that has these dramatically reduced power estimates. It is quite the feat. I think it’s incredible. It’s going to blow people away, and as these devs learned and master the hardware, as is true in every kind of generation, they’re going to keep making their games better and better. Now, maybe five years down the road, when the PS6 comes out and in the light there, there may be less approximate parity where you might be able to notice more of a difference, but for various reasons, I actually think they’ll be fine. I mean, we know for a fact that the Switch 2 was originally scheduled to be released in 2022, and so kind of a different way of saying that I think you’ll have continuous upgrades every two to three years, where the new system is called the Switch 3, the Switch 4. The Switch 2 light, like we’ve seen with the OG Switch era, will make it; they’ll easily be able to keep up with current Gen offerings on other consoles. And I think that’s really exciting.

Closing thoughts on the Nintendo Switch 2

[00:49:19] Tilman Versch: For the end of our interview, is there anything you would like to put a spotlight on that we haven’t discussed?

[00:49:28] Ryan O’Connor: I mean, they could talk about Nintendo all day. I think we, maybe, I just say that, Nintendo and fears with respect to the impact that tariffs whether it’s everything’s dead, you know, focused on China, since we’ve had the reprieve with Vietnam, and Cambodia, that’s where the vast majority of Nintendo’s production comes from. So I’d say if you run the math and you assume the prior math is relevant, they take the entire hit from the 46% tariff in Vietnam, where most of their production is. They are still profitable on a consolidated basis on hardware.

I mean, Nintendo has never sold their hardware or lost kind of much as Apple. But even if you fully load the worst-case tariff, which is now kind of irrelevant, they’re still going to more than break even consolidated across the entire call, it in. Installed based on their hardware sales in the US and the rest of the world. So of course, that’s important because as everyone knows, I mean Sony and Microsoft sold their consoles at a loss for most of history, and they’re absolutely fine with that because all the money is made on the software side and so even in the absolute most draconian worst case, that’s no longer relevant.

It is essentially a non-issue when it comes to Nintendo, and there’s they have actually moved most of their production out of China. This time, I think in part of being proactive. I think they learned their lesson in the pandemic. And so, feeling the tariff issue, they kind of have basically already moved most of their production capacity to Vietnam and Cambodia, some in Japan too. And obviously, I don’t think anyone could have first seen the 46% tariff on Japan or on Vietnam. But now that that’s gone, the point is, is that they are very savvy in this way. They are flexible and nimble. They have already kind of navigated this by moving away from China ahead of time, and you know, it wouldn’t be difficult. I mean, we’re talking about assembling Switches. They could move to Mexico. They have a ton of flexibility to kind of restructure and flexibly adapt their supply chain, given how they kind of got flat-footed with the pandemic. And I think they learned the most important lesson. So, for those reasons and a lot of what we’ve discussed earlier, I think all roads lead to higher revenue and profits and a much higher stock price, irrespective of the kind of macro issues and all the hysteria with the tariff issue. So maybe I would just touch on that. In the end, they can flexibly adapt in a way that won’t really change the end game for their business and for shareholders at the end of the day.

Thank you

[00:52:59] Tilman Versch: Thank you very much, Ryan, for these great insights on the Switch 2 and the changes for Nintendo. And thank you very much to the audience for listening here. Bye-bye.

[00:53:12] Ryan O’Connor: Thanks, bye. It’s been a pleasure.

[00:53:13] Tilman Versch: I really hope you enjoyed this conversation. If you did, please leave a like and a comment, and for sure, subscribe to my channel.

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