Transcription
All right, everyone, buckle up. This is a bit of a story about perverse incentives and how they can harm you.
So, there's two markets for video game consoles right now. There's you, who's now paying $500 for a Switch, too. Yeah, 500. Or say $650 for a PlayStation 5. Quite a bit more for a 5 Pro. You're probably having a tough enough time right now buying things like that or say PC gaming hardware cuz those prices are going up. Consumer access to some of that hardware is a little bit limited.
But here's the thing. There's another market out there. A great market, a happy market. It doesn't care about any of that gump. And that market is the investors and shareholders who want these companies to make a profit above all else, as is their mandate, I suppose. But that can mean asking you for more and more money, just like Nintendo just has.
But Nintendo is really only the start here. It's becoming abundantly clear as we look ahead to the likes of Xbox's Project Helix that consoles as a whole are changing. Nintendo just announced that, quote, "In light of changes in market conditions and after considering the global business outlook, that they will be raising recommended prices on their hardware."
Here's the damage. In Japan, from May 25th, the Switch 2 and OLED Switch are going up by 10,000 yen. The base Switch is going up by 5,000 yen and the Switch Light by 8,000 yen. The Switch online costs are going to be going up in that region as well. Now, those are being framed as an immediate response to Japanese market conditions. But, uh, well, the rest of the world is also paying because from the 1st of September to buy a Switch, too. The US is going to be going from $450 to $500. The Canadians are going from $630 to $680. The Europeans are going from $469.99 to $499.99. And their reason, well, quote, "The impact of various changes in market conditions is expected to extend over the medium to long term." Cheery stuff.
And hey, maybe we just need to like not buy consoles. How about we just buy and sell console derivatives? Can I just buy Nintendo Switch futures? You know, make a bet on whether we'll get future price hikes or not cuz the world really is getting that ridiculous.
Now, Nintendo are basically acknowledging here that, well, yeah, component prices ain't getting any cheaper, and they're basically trying to get ahead of that. And it's good that at the very least, they're actively apologizing for doing this. So, here's their words on the topic. "We sincerely apologize for the impact these price revisions may have on our customers and other stakeholders, and we deeply appreciate your understanding." There you go, nice and deep.
But there is another telling phrase in there, and that phrase is "other stakeholders." Because basically, look, we all know that the component shortages exist, that international conflict and tariffs are putting the squeeze on all companies. So obviously enough, they want to raise prices so they make the same profit they always have. But where this gets interesting is that it turns out we, the customers, are not the only people that they are worried about.
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Okay, with all that said, here's where things really got interesting and why we decided to do a video on this. So, as captured by Bloomberg before the earnings call, investors were actually unhappy with Nintendo's margins on Switch 2 sales. So, this is the real story. They've been unhappy about this since December, which is when the first signs appeared that hardware sales were slowing over Black Friday. They were slowing for everyone, not just Nintendo, of course. And with that, stock prices have actually trended down ever since. So, because of that, investors have started demanding price hikes in Switch 2 hardware to push up the profit margins. And the analyst Bloomberg spoke to believed that the Switch 2 needed to be $50 to $100 more expensive. So, hey, they got their wish. Happy days. Great for the market.
Of course, for them, making money in aggregate across the entire business is not just enough. From their perspective, Nintendo would basically be leaving money on the table, right? By not increasing the, uh, the price hikes, you know, in line with say, the component cost. Basically, they don't want Nintendo to take any of the brunt. And while some of that sentiment reads almost as if Nintendo are just in a really troublesome place and they need these price hikes to like, you know, be safe as a company, that's absolutely not the case because we do have their financials for the last fiscal year. They're really good, right? Their sales are up nearly 100% year-on-year. Their profit's good. The Switch 2 success has been bloody amazing. They've had nearly 20 million lifetime sales of the thing. Software sales are still strong.
Now, they are expecting next year won't be as good in hardware. Basically, from like 20 million down to 16.5 million. That's even with say, the likes of a, you know, new exclusive Pokémon game, which would probably drive hardware sales. But of course, they think the software sales will still be up 23%. So, Pokémon's doing good work for them there. So, basically, it's looking pretty good. It doesn't seem that they have any long-term huge problem. And the Switch 2, even with like the kind of economic challenges, it's still tracking to outperform the Switch One. And the Switch One was super successful.
Now, there is some cause for caution. As an example, last year, US consumer spending in games for 18 to 24 year olds dropped 13%. So, you could certainly say, you know, for some of the younger crowd where they're probably not flush with cash, yeah, it's probably looking quite rough. But look, overall, I think any normal person would look at Nintendo's performance here and then look outside at the crazy world right now and think they've probably done quite well all things considered.
Do you know who, uh, doesn't agree? Well, uh, the the market because these pretty good finances, I would say, actually sent Nintendo stock tumbling by 10%. Now, that's relevant because Nintendo does kind of end up responding to the stock market, right? Responding to those stakeholders. That's why I called out stakeholders being mentioned, uh, earlier on in this video. So, the belief now, and this is via Bloomberg sources, is that basically more software and more exclusives could sell more consoles. So, it seems that is going to be a future driver. And the market's basically kind of saying, "Hey Nintendo, even though loads of things have went really well and you're outperforming your past self in a crazy, crazy world. Nah, you're not being bold enough. You got to go harder." Basically, they think Nintendo are underestimating what they can do.
And unfortunately, there's another company that's just backed Nintendo's position. They're, uh, they're also from Japan and they're called PlayStation. Not to scramble your brains with loads of facts and figures, but we got to look at another report. It's Circana's 2026 Future of Video Game Survey and it showed that the top reason for playing games on a console was quote, "There are games I want to play that are exclusive to the console." 41% respondents agreed to that. Basically, it means that as long as you can sell more hardware, exclusives will matter to you. So, um, sorry, Xbox.
Now, this is why for the last 18 months, we've pretty much all been saying that the console space needs a mass market PS5 or Xbox Series X exclusive to revitalize it, right? That there's kind of been nothing to just be a game that's so exciting that, you know, boom, consoles actually kind of just pop off. Now, this year it could change cuz we're apparently due two of them. You see, in response to some rumors, Activision confirmed that this year's COD is not in development for the PS4, and that ends a 13-year streak for COD games being put on a PS4. And then, of course, there is GTA. That's going to be console only. Initially, it's expected to sell tens of millions of copies, even in the worst case scenario.
Now, PlayStation are already working on marketing campaigns to get people to upgrade from PS4 to PS5 for GTA 6, but PlayStation don't think either game is going to fundamentally change the console market. You see, in the last fiscal year, Sony sold 16 million PS5s. Pretty good, right? Now, that does include some panic buying in late March after they raised their own prices. Now, that move doubled sales for that week year-on-year, which I guess is kind of funny. Makes sense that a price hike's coming. Everyone's going to try to just buy stuff before it comes into effect. But in total, right, their sales were down from 18.5 million the previous year.
Now, on paper, their forecasts for next year should all be improvements then. And remember when I say year here, talking about fiscal years, not calendar ones, because everyone who wants to play COD or GTA will need a PS5. And let's be real, PlayStation is so dominant that it basically is the de facto console. Asha and her crew, you know, it'll take a little bit for them to kind of get Xbox sort of back and healthy. Now, 38% of respondents to that survey I mentioned cited friends or family being on a platform as a reason to play on a console, which again probably does not bode well for Xbox's share of the market.
But even with them being the front runner and benefiting from all of those network effects, like, you know, your friends being in PSN, PlayStation still just predicted a 6% decrease in sales for next year. And it's mostly driven by, and I quote, "a decrease in sales of hardware due to a decrease in unit sales." That's a really weird quote, right? Anyway, PS5 shipments are also expected to be below where the PS4 was like for like, kind of troublesome. And if you're wondering what the key takeaway from this is, it's basically that they expect to sell fewer consoles even in the year that the new GTA comes out. That's a really, really bad sign.
But Sony are still trying to say that they're not expecting to lose money. So here's what they said on that. "We plan to base our PS5 hardware sales in fiscal year '26 on the volume of memory we can produce at reasonable prices. And we expect hardware profitability to be essentially the same as fiscal year '25."
Now that's interesting cuz PlayStation are also framing all of this stuff around the pressures of the data center crisis, which we've covered a lot on this channel where basically much like with Nintendo they've had to raise their console prices to alleviate pressure on their margins and that basically lets them split the difference between sales and profit and it's why they don't seem to be worried about the bottom line cuz basically as long as they can keep their margin right they can basically keep the balance for their investors and their aging console and you know trundle along fine that's basically what Nintendo are pitching as well but the problem and this is where it comes back to you.
And the problem is that investors are basically looking at Nintendo's brand new console. They're looking at its potential. They're thinking, "Guys, you need to up that price." They're putting pressure on them to do that. We're seeing that happen. The price has actually gone up. But the problem is those investors don't really seem to be looking at the rest of the market. And while it could be good for their portfolios, I'm beginning to be worried about basically what it does for our hobby overall.
I have a little bit of good news. It's that CNBC's report on the Nintendo stock price falling has got a quote in it that just beautifully sums up the blinkers that the analysts and investors are wearing right now. So, uh, it's kind of nice. Does our job for us. Here's the quote. "The year-on-year decline in game shipment guidance risks signaling that Nintendo lacks confidence in its pipeline. However, as user engagement typically accelerates in the second year of a console cycle, we view this as too pessimistic."
Now, that is something for us to think about because basically from their perspective, this is just a new console. And as such, it should behave exactly like new consoles always do, where yeah, it's a wee bit slower in the first year, but we should see higher sales in the second year as more people upgrade to the new console, as there's more first-party games to entice people and all of that stuff. And I mean, look, honestly, Switch 2 is such an upgrade over the Switch One. It really does make sense, especially because so many of your Switch One games, like when they play at 60 fps, they just feel so much better. But that's assuming there's been a 60 fps update. And if I was Nintendo, I would be focusing damn hard on that for more and more and more games.
But anyway, what we've just seen is Nintendo lowballing their numbers and investors basically believing that that's because they're not being ambitious enough. But what it probably is is Nintendo recognizing something that those investors are not recognizing. And it's this. The top 10% of US earners, that's people on basically a quarter of a million or more, they make up 50% of consumer spending in America. Now, Nintendo knows the same thing is happening worldwide, right? And that means that raising prices means a smaller and smaller number of people who can even afford a Switch 2 in the first place. It's the same deal with say, PlayStation and Grand Theft Auto, where they're lowering sales predictions because their profitable consoles can right now only reach so much of the audience that's out there. It's basically recognition of what it's actually like from loads of their potential customers.
But going against that, we have investors making demands of these console manufacturers that they make their margins better. But they're making those demands kind of as if none of those factors about like the people who actually buy and play games, as if none of those factors are really true or that relevant. And I think those investors, they could be in for a nasty shock by the end of the year.
This is Matt Piscatella. He's from Circana. They're basically the best in the business when it comes to, uh, like game sales analysis and stuff like that. He was speaking to the games business and he really just, uh, I think knocked it out of the park, right? Cuz he basically painted a picture of how the average person who doesn't follow game news could react to the Grand Theft Auto launch. And that's important because the more that we know about games, the more we essentially have loads of biases that we can make. It's one of those reasons why the wisdom of a crowd can actually beat, in some cases, subject matter experts because sometimes the subject matter experts can fall for very similar biases in thinking. It's worth keeping that in mind with many things and I think especially in this case and like doubly so if you're a spreadsheet-pilled financial analyst from some flipping investment firm.
Here's the quote from Matt. "People show up and they go, GTA is finally out. I'm gonna go pick one up. A thousand dollars for a console." And that's basically the bit that he really emphasizes that for so many people, they're just not tuned into this. And GTA will be when they tune in. That will be when the sticker shock hits them. Now, Matt said $1,000 there. And we're not quite at that for new consoles, but a PS5 Pro is, uh, pretty much there already, right? And Matt went on to basically say that like we've already assumed that there are going to be more price increases. So, you know what? It paints a really dire picture.
Now, PlayStation know that if the price increases keep on happening, it's going to put off the sorts of people who would otherwise wait and just buy a console when a huge game like GTA comes out. And remember, last Black Friday sales performance is the thing that has driven all of this concern over Nintendo's stock price in the investing class. This year could be worse on aggregate where console gaming is basically, I mean, it's an entry point into what is becoming a luxury hobby. I mean, you can buy a console at any store, hook it up to your TV, play Grand Theft Auto or a new Pokémon game, and like that's what your starting point is going to be. And as much as PC gaming is great, it's not approachable to loads of people. So that approachable angle of, get console, get GTA, plug them into TV. Now I'm a gamer. That has got so much more expensive.
And what console manufacturers are being pushed towards with all these price hikes is basically a future where consoles are only accessible to like the top 10%. Now, that could be great for some of your margins, but do you know what? It may not be good for the health of the goddamn games industry and maybe even the longevity of the games industry. And maybe people will be able to pick up a console on a really good sale if there happens to be one. But that's kind of it. It's getting rough. And the reason why is the market they're selling consoles to is not the market that is pushing them to raise prices on those consoles. Often in the past in this industry, we would have talked about loss leaders. It seems less of that is happening. And while in one sense that can be great for a company's like short-term financials when they have like a new bunch of consoles coming out, but in the long term, does it maybe just hurt the spread of games? Does it actually just drag our whole hobby down? And I guess when you look at all those charts that show like console games have just been stagnating for years now. Yeah, I'm beginning to think that it's this type of pressure that's like good for the short-term incentives of the market, but probably bad for the long-term health of the industry. And if you ask me, that's a perfect case of perverse incentives being short-term good, long-term damaging. And if you care about games, that's a goddamn huge problem.
But you know what's also a huge problem? Us. Yeah, we're a problem. And we're a problem for the good folks at Bank of America. If you want to know what I'm even talking about, watch this video next. Bank of America said some crazy about, uh, Grand Theft Auto 6, and I, I think we've slapped them down pretty damn robustly. Go check it out next.