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These are notes from August 2013, but I thought I would publish them for my own use and people who read this.  Here they are:

The Bottom Line Idea

An interesting business idea has been mentioned by Satawa Iwata, the current CEO of Nintendo.  He mentioned that Nintendo has to try harder then other game companies in the video game industry.  His reasoning is simple and straightforward:  If Nintendo fails in the video game industry (entertainment as Satawa defines it) Nintendo as a company is more likely to fail.  In economic terms, Nintendo has more incentive to create better products than its competitors.

If we compare Nintendo to the other large competitors in the industry, Sony and Microsoft, we can observe exactly what he is talking about.  These companies have a more diverse range of products then Nintendo (more diversification within the company itself).  This means that when one product fails or does not achieve sales, Sony and Microsoft don’t have to worry about it as much because they offer a wide range of products.  If one product fails another successful product will average out the losses on the failed product.  This also works the opposite way.  If a product does really well it gets averaged out by all the poor performing products.  So a brilliant product might get watered down by poor products.  Microsoft itself is a conglomerate in the computer industry.  They have a very strong hold on software and operating systems.  This will provide Microsoft with consistent sales no matter the market conditions.  Microsoft does this by continually offering the same software year after year, with minor changes (updates, Windows 7 to Windows 8, Microsoft office products have yearly editions).  Nintendo on the other hand does not enjoy this diversification because their main business is in software and hardware products.  Not only that, but Nintendo’s main products are symbiotically linked.  Software (video game titles such as Mario and Zelda) sales are dependent upon hardware sales and vice versa.

What this means is that Nintendo has more potential to fail and also more potential to succeed (a riskier investment).  Their theoretical bottom line (the point of no return) is higher than both Microsoft and Sony, because as stated earlier, Nintendo does not have as much internal diversification.  This means if one of Nintendo’s primary products fail, their entire business may be in jeopardy.

This is one of the reasons why I believe Nintendo has a perfect niche in the industry.  They have to deliver both good software and hardware to be successful.  The incentive is their to succeed. Nintendo just happens to be sitting on a very, very large amount of cash and not having any negative financial obligations (debts).  Nintendo has very strong intellectual products that sell very, very well.  They are a company that believes innovation is integral to the success of their business.  This drives the company to want to innovate and create new and exciting technologies (think power glove, virtual boy, 3D effects without glasses, rumble packs, motion controls, dual screens [tablet gameplay], virtual heart sensor, etc…).  While some may view this as hit or miss, I view it as a good business strategy.  Sooner or later extraordinary gains are possible for both Nintendo and its shareholders.  If we also examine how much Nintendo has been putting towards research and development, we will notice a steady increase year after year.  This is a healthy sign that affirms they are continually trying to innovate.

(this last paragraph is a bit old — we now know NTDOY is trading quite high compared to 2013 due to the eventual software release for phones)

I believe the company was undervalued when I purchased it.  In the past 30 years, Nintendo has only had two years when it didn’t profit (economic downturn and cyclical industry in my opinion).  The company is bound to make a turn around eventually in their industry, which will be reflected the stock market.  If we were to average out the two bad years with the last 10 years or even 30 years of financial stock market performance, Nintendo performs quite well.  It is important to look into the long term strategies Nintendo is pursuing.  Nintendo has always been about expanding the gaming population.