Good Investing Talks - Is Nintendo a multi-bagger? Ryan O'Connor on Todd Wenning deep dive on the japanese stock

Episode Date: January 31, 2021

With Ryan O'Connor of Crossroad Capital and Todd Wenning of Ensemble Capital, I had the pleasure to take a deep dive into Nintendo.

Hello everyone. It's great to have you back. Today we are having two rock stars of investing here to talk about Nintendo. I planned very long for this intro, so I hope it works out. I think we will set the ring on fire today and switch the conversation on. So let's get it going. Welcome to you, Ryan, and Todd. It's great to have you here. I always have to not try. try to ask or try to say toad instead of tot at the moment, especially with this topic. Before we start, I want to show the disclaimer, but I want to also give you a kind of different introduction because I prepared the question that I want to ask, what did you learn from each other about investing and or Nintendo? You can just drop one point here because we've got many questions, but give it a think what you learn from each other about investing and or Nintendo is the question here but before you can answer I want to just briefly show the disclaimer

the disclaimer you can find a link below it says always do your own work this is no investment advice we are making no recommendations please do your own work and do your own research before you invest and be sensible how you invest your money thank you very much So back to our conversation. What did you learn from each other about investing and or Nintendo? Yeah. You know, I had known Ryan on Twitter for a while.

And then I can't remember how I came across his report on Nintendo. But I read it and, you know, I thought and still think that it's one of the best reports on any company I've ever read. It's just so well done and so well thought out. And, you know, being a Nintendo fan as a kid myself, all of a sudden, things just started clicking for me in terms of my own thesis and building my own conviction about Nintendo. So, you know, hats off to Ryan for, you know, a great report. You know, I actually, it took me a while, even after I read it to put the two together.

I think I sent Ryan a message on Twitter and I was like, that was you? That was awesome. And so it was just, it was, Twitter is a small world and, you know, the finance world is a small world. And, you know, so I'm just, you know, thrilled to be connected to, you know, an analyst like Ryan and, you know, learning from him. And, you know, just completely opened up my understanding of Nintendo as a business. I'd always been a fan. I've been playing Nintendo since I was six or seven years old. But, you know, I never put together the pieces of the business as an investment, potential investment before. So, you know, kudos to Ryan. Oh, thank you, man. I'm flattered. You know, it's kind of a similar thing on my end.

You know, I've been following Todd's work and ensemble for years. You know, I think it's been. I think that was the first thing that I responded to him. I can't remember what I particularly noted but, you know, all their work from, you know, portfolio management to how they think about their high-level frameworks and, you know, integrate that into their process. You know, we've talked so much about Nintendo back and forth. I mean, to say, what have I learned? I mean, you know, I don't even know where to begin kind of in our back-and-forth contest. It's, you know, kind of one of those things you talk to someone long enough. It's like, why do you love your mom?

It's 30 reasons, or a million reasons. So, you know, I, when you reached out and, you know, kind of throughout the idea that we should all get together and do a little kind of campfire discussion on my favorite business, it sounded, you know, took me about two seconds to say yes. So it would be happier to be here with you guys and hopefully, you know, something. good comes out of it so it's a lot of fun thank you both we've already built the bridge to the next question because it's the question what if you go back in your younger years and think about the role of gaming in society how has that changed and what's the impact for nintendo in your eyes oh todd i'm going to let you go with this one you already mentioned that you're very player since years. Yeah. You know, I was a certified Nintendo fan like when I was a kid and still am.

My parents, when they were moving out of their house, found a letter that Nintendo had written to me. I used to write Nintendo all the time as a kid saying, you should really do a game like this or here's how you can make a baseball game better. And they probably got annoyed with me and said, you know, just send you a letter and stop sending these letters. You know, we get them. We get them. And so I've been a huge Nintendo fan since I was a kid. And to be honest, I kind of lost my connection with Nintendo, probably after Nintendo 64, maybe GameCube. I think GameCube was my last Nintendo product. And then I hadn't played for a very long time.

And really, it wasn't until Switch that I got back into it. And now sharing it with my son, it all kind of comes back. My son's six. And so we started playing Nintendo together, and it's just incredible to see how well we bond over that. And I think that's a really interesting thing about Nintendo. And I mentioned this in the article that I wrote is that this is the first time where Nintendo can be passed down in generations. So you think about I'm going to be 40 this year, which is hard to believe, but I'll be 40 this year. I turned 40, by the way.

Oh, happy birthday. Happy birthday. Yeah. And so it's interesting that, you know, Ryan and I are kind of in the same age group, right? And so we grew up since with Nintendo our whole lives. I think it came out when I was four here in the U.S. And so we've grown up with it our whole lives. And, you know, now that, you know, we have kids of our own and we're passing that down, it's interesting to see that happen. And before, you know, the age groups maybe five years older than us didn't grow up with Nintendo as long as we did. It wasn't part of their lives and gaming in general. And so I think that's one thing that's really changing versus the past 30 years is, you know, now it's becoming a family entertainment. I think Bernstein had a great chart showing that of their survey where 30, I think it was in 2013, 37% of parents said they played video games with their kids weekly. And by four years later, that jumped up to about 67, 70%.

So it's becoming just this sort of demographic wave where kids that grew up playing Nintendo are now playing it with their own kids and it's becoming a family entertainment. And so it's a completely sort of new arena that we have yet to see how it unfolds. But looking at other businesses where exporting franchises, for example, where things get passed down generation after generation, that's a really positive kind of pattern and analogy to tie Nintendo into is that there's, you know, it's going to build stronger over generations because it's how generations can communicate and connect. Totally. You know, I'd add, you know, there was in my original thesis in, you know, the annual letter, my director of operations forced me to cut it down quite

considerably, which is kind of ridiculous, given it with 70 pages. But, you know, I had a, a section in it that I called weaponized nostalgia and you know that kind of goes back to and I think Todd kind of hits it right on the head I mean I can remember some of my earliest memories you know it was Christmas and it was like 86 or 87 and you know I can

remember all I wanted was a Nintendo and you know I remember amusingly enough my parents or my aunt and uncle they had mismarked the Christmas present. And my cousin Andy ended up getting my Nintendo, which, you know, it looked temporarily broke my heart. But, you know, it was funny. I was with my family at my 40th birthday party.

And one of the, you know, questions was from my fiancé was, you know, what are your favorite memories, you know, each decade, 80s, 90s, you know, and so forth. And, you know, I laughed. But in my, At the 80s, I think my chief achievement was getting the whistle in the original Zelda. I think it was the seventh dungeon, if I remember correctly. But, you know, that kind of stuff, you know, stays with you in kind of like a deep formative way. I mean, you know, I imagine like, you know, my parents' generation. It was like, you know, cars or maybe Disney's the better example where, you know, they grew up with, you know, Cinderella and, you know, Robin Hood. you know, that kind of stuff.

And, you know, the first thing that they kind of reach to do with their kids is recreate those memories with, you know, the touch points that kind of define their own childhood. And so I think, you know, what Todd's speaking to, and, you know, I think this is kind of a long-term Gail Force tailwind is, you know, demographically, I mean, we're all gamers now, essentially. I mean, you look at the demographics, you know, kind of split 50-50 male and female. You know, the average gamer, I think, is in their mid-30s. I used to know it exactly, but, you know, pretty evenly distributed, you know, across age groups and, you know, the implications of video games going from something, you know, considered a childish hobby to kind of a mainstream form of, you know, cheap fun

entertainment. You know, I still think, you know, I have this internal metric, which I call the price to fund ratio, you know, especially in an environment like the pandemic. And, you know, the value add, you know, not just in terms of your own personal fund, but, you know, the ability to use the switch as a tool to interact and build experiences with your own kids, you know, I think is a unique and special thing that I think is going to benefit the business for a long time. The Twitter audience ask us to invert always on Playdevil's Advocat, so I want to take this role as well, even if I'm bullish and full disclosure at this point also own some Nintendo stocks. I want to share a graphic with you from the Visual Capitalist. And this is the whole gaming market.

And as you can see, it was quite dominated by consoles and PC and mobile took over. So the question that came up and often comes up is, did Nintendo lose it in this market? Like, if you see that the console market isn't growing that much, what is your take on this? Yeah, I think, yeah, I'll take a shot at first. Yeah, I think that's the big bear case, right? Is that the world is changing around Nintendo and Nintendo isn't keeping up in that Nintendo is stuck in this boom-bust console cycle. A couple of things about that.

I have also graphics for this. Let me switch to it. I hope no, it doesn't work. Okay, I presented in a second so we can make your argument. Sure, sure. I think the key, and we've discussed this on the team. I mean, you know, we try to take apart the bare case and make it as strong as we can, so we understand it really well.

I think the key for us, and I think this is why Nintendo hasn't aggressively pushed into mobile, is there's something about entering into the Nintendo world before you consume the content. So, you know, if Mario was on Game Pass or something, would it feel? the same? I don't know. It might be different to me. So I think that's where Nintendo is trying to, you know, they're trying to develop an operating system, of course, in which they're doing right now with Switch Online, you know, from which in Nintendo accounts, including their mobile, I think that will help kind of stick these, the user base together going forward. Now, if you look at the Nintendo consoles over the past, you know, 15 years or so, and you see them stacked against each other, you know, you can look at that and say, well, there's like six or seven different consoles. there. Nintendo had to rewin every single one of those customers every time they launched a new console, which they did. But if you think about it different, yeah, we think about it differently. You know, it's more of a constant stream across, you know, so even though they had to reset every time in the past, now their business model going forward should be different, where when you have

new consoles, you're not having to rewin those customers every single time. And I think that's where the bearish argument falls short to me, which is, you know, this impression that Nintendo is going to, you know, destroy the switch, make everybody start over from scratch. It's just, that's not going to happen. You know, Nintendo's management, and you can criticize Nintendo's management, and there's plenty of criticism about there online. But you have to give them credit, I think, for creating this IP that remains incredibly relevant over the past 35 years. That is not easy to do when you think about all the video games from the 80s that no one.

cares about anymore, Nintendo is still relevant to gamers today and to the casual, the casual gamer. So I think you have to give Nintendo's management credit. I don't think that they are going to destroy their business, you know, just to prove a point. You know, I think they are going to, you know, adapt and they're doing so. I think with accounts, you're seeing, I think a key factor for us was seeing how they put Switch online on the Switch home screen is saying. It's saying, that this is going to be a continual part of your experience. We are going to have a direct relationship with you. We want you to get deeper into the Nintendo experience.

And so even if they come out with a Switch Pro or even a completely different console generation, it's going to be linked to your Nintendo account with your Switch online. So you're not going to have to start over. All this data is going to be continued over. It's interesting that you see, like if you complete a level on Mario Odyssey, for example,

they gave you the timestamp, right? And here's like the date and time where you did it. And so I have to think that going forward, they're going to be pulling those memories back, you know, 10, 20 years from now, you're playing another Mario game. They're going to say, remember when you did this and that game,

and it's going to be just nostalgia, going back to that. So I think it's, I think, you know, the bare case that Nintendo is going to go back to the thing they've done for the past 20 years, it falls short to me. Yeah, agree across the board. You know, I think, you know, I think Todd hits it on the head.

I mean, you know, worrying about hardware, you know, a big part of it was or the difficulty, you know, when you talk about units sold and, you know, the console business, I mean, I think a lot of that has to do with dynamics that are kind of part of an obsolete paradigm, you know, one of the things I've, you know, one of the things I've. we always look for in detail with, you know, kind of in our larger search strategies, our businesses where there's kind of a, you know, a hard delineation between, you know, the past, you know, relative to the future. And, you know, I think that's a big piece of it. I mean, one of the bare arguments, you know, I've often heard, or at least the ones that, you know, you kind of get pushed back on. I mean, I did a piece in Bloomberg, you know, where they kind of go back and forth between the bears and the bulls.

And one of, I think, the comments that you've heard from, you know, I can't remember exactly, it might be misquoting this, but like Matthew Ball, and they talk about how, you know, the iterative hardware platform, you know, kind of sitting at the center of a software-based ecosystem, you know, the doubts related to that, have to do with, you know, Nintendo's love of hardware and, you know, keeping that Apple-like hardware, that software hardware integrated model together. And, you know, I kind of laugh at that because, you know, besides, you know, what kind of for me was originally conjecture and now is kind of objective fact,

you know, the whole point of an iterative, hardware model, you know, that, you know, with a software-centric ecosystem that, you know, that they kind of build on over time is that freeze Nintendo up to iterate on the hardware side forever, you know, in new and creative ways. And so, you know, you see, you know, Mario Kart Live. You've seen Labo. But, you know, the whole point outside of reducing the cyclicality of the business, you know, improving the quality of its earnings, you know, improving the diversity of, you know, it's earning streams, you know, all of that stuff. I think one of, you know, if you are Nintendo and, you know, your goal is to put smiles on people's faces, you know, and bring

people together, you know, as opposed to isolate them, you know, this, you know, call it Nintendo 2.0 this kind of maximizes their creative you know freedom to just you know

use hardware in new and imaginative ways that can be kind of built on top of you know kind of the core hybrid switch so let us dive deeper into the hardware a bit later

because I want to just go back with another graphics on the boom and bust circle that we get also an idea from the stock market perspective because that's what you're interested in as well. So this is the long-term chart of Nintendo. You see this kind of, you also saw it in the other chart with the we sales, this peak, and you see it here again with the switch sales, this is a historical pattern. And also, what is your take on this historical pattern, how it's, still in the heads of the stock market and the investor? Yeah, I mean, I think that the market is pricing as if you're going to have a repeat of the Wii, right?

You're going to get this boom and bust, and Nintendo's got to rewin everybody. And I think what they're missing is, again, going back to the Switch online is having a direct relationship with you as a customer. Imagine, for example, if they were able to during the Wii era, you know, from, you know, the internet has progressed far, you know, and we have mobile technology that we didn't have in 2006, 2007, when we was so strong, imagine if they were able to capture your email and have your direct relationship with Nintendo at that point. And they carried those customers through 3DS and then into Switch. I think that's a better way to think about going forward as they've reinvigorated their installed base with Switch. And now it's about

holding on to those customers. And I think they're doing that. I think you're seeing them slowly roll out a more of a subscription revenue type of model, starting with switch online. I think it's about $3 a month for a family plan, which is just small, right? And I could see them layering on different levels of that experience going forward. Maybe one dream that we have is that they roll out every single, one of their legacy games.

There you go. Every single other legacy games, you know, for the Switch online so that you can go back and you can play the GameCube, you can play the 64, all of this part of, you know, a tiered, maybe subscription revenue model. But I think there's going to be a stickier revenue model going forward. I mean, if you look at, I think the average Nintendo gamer paid the equivalent of about, I think it's about $9 a month last year, last fiscal. year in terms of software. And we think about that compared to other entertainment experiences

that we have right now with Netflix or whatever it might be or Spotify. We're paying $15, $16, you know, no problem for that. And so I think for it won't be every single Nintendo gamer that pays for that. But I think you have an opportunity to, you know, put more of a foundation on software sales going forward than you had in the past where it was all about hit-driven first-party games. Now you have this foundation of revenue that you didn't have in the past, that's high margin. And that's going to completely change the way Nintendo generates cash in their business. And we think the market has not reflected that reality yet. I mean, we think the price earnings multiple currently is

trading as if the stock is going back or the business is going back to what it was before. And I just, we don't believe that's going to happen. That's absurd. That's absurd. I'm just could go out and say it. Yeah, you know, I think the valuation obviously kind of speaks for itself. But, you know, I think there are more than enough tea leaves. I mean, I think that, you know, again, when we put out the original thesis, not only was it kind of crazy, radical relative to, you know, what the street had. And in some sense, that was understanding, you know, the framework that they were using given, you know, the kind of famous opaque nature of intelligence management and, you know, their lack of disclosures. But, you know, initially it was us, you know, spending, you know, quite a bit of time, you know, reading a ton and trying to piece together, you know, kind of the larger mosaic of everything from, you know, managing.

You know, past commentary to, you know, just looking at the nature of the switch, you know, it being, you know, mobile, basically a tablet, a low-powered tablet, and using off-the-shelf generic chips. I mean, you can look at it from a lot of different ways, but, you know, it was kind of like, you know, it was like a giant green sign, you know, at least in my mind that, you know, kind of this is the way forward. Well, you know, what used to be, again, conjecture, I think, is now. kind of cold, hard fact, and you know, you can see it in a lot of different ways.

I mean, when the piece was released, you know, you had kind of, you know, just the OG switch, and, you know, then the switchlight came out. And I think more interesting or more enlightening is not only do they come out with the light and kind of expand the total addressable markets, you know, from a price point perspective and, you know, all that kind of stuff. But, you know, you also had, you know, a annual upgrade. with a, you know, a more efficient, you know, original switch. You know, so, you know, you're starting to see that same pattern with, you know, that you

saw with Apple in a lot of different ways. And I think when I look at that chart, you know, I often wonder and ask myself, you know, what's going to make the street wake up. And a big part of it is, you know, the explosion of digital. you know, I think it might have been, I think it's Taylor Henderson. I, you know, I know you guys have probably seen he's put a couple great tweets lately, and he isolated, you know, the digital component, you know, with the growth pop profile and kind of did a Ben, Ram, Riddle, query, you know, what's this worth?

And I think that is. I think there it is. Yes, yeah. I mean, that's wonderful. That kind of gets to the point of, you know, kind of the, you know, kind of the, the building momentum, you know, across, you know, the digital side. But, you know, ultimately, I think the, you know, what should, now doesn't mean it will.

I mean, you know, I look at Apple, for example, and I can remember just wanting to hit my head against a wall. You know, this is like 2013, 2014. And, you know, the common refrain was, you know, Apple's margins are going to get decimated because, you know, low-cost hardware is going to, you know, come and basically drive down margins. And, you know, it's a complete and total misunderstanding of the intrinsic nature of the ecosystem that Apple had built, you know, and they started, you know, call it 2007, 2008, and, you know,

there we are five years later. And, you know, the common refrain, you know, if it took investors this long, and granted Apple has, you know, that I think investors in general are more familiar with, you know, the nature of the model and kind of what it is. But I can remember thinking just how incredible it was five, six years into, you know, kind of Apple's own transformation that you still had such kind of widespread, just terrible takes. You know, just people being, you know, what felt like at the time and possibly dense. I think that it won't take nearly as long for people to wake up in the street, but I think kind of the key here in a lot of psychologically will be the release of the pro, which I think, you know, early will even come

in March. I'm pretty sure it'll come out. Before we dive into the pro, I want to go back to all the cultures in the world and talk a bit. You mentioned already the total of accessible market Nintendo has about the target groups Nintendo has. Because I also ask you to send me some, in some emojis to display the target group Nintendo has. And I want to present you your results and ask you to comment them as well, what you thought about the target groups Nintendo has and who they can reach out to and who are their core target groups. So there you go.

This is... I love it. I love it. Yeah, I think Ryan's is probably more on target than mine. And I think where I was coming from was, I think, if you look at Nintendo's core market, you know, it is 90% I think male. I could be little off by 5% or 10%, but it's mostly men. And, you know, especially when we were growing up in the 80s, it was primarily the boys that were playing.

And so those are the guys that will be transferring this nostalgia onto their kids. And I think it's increasingly becoming female. is not saying that, you know, female gamers are not part of the target audience. They certainly are. And Nintendo has done a great job with it. I think, you know, their primary focus is, or their primary target audience, though, in my opinion, at least in the United States, is dads and their kids. Because I think, you know, you talk to dads who are playing with their kids and they just, they light up and they talk about Nintendo. So I think that's, you know, it's really the torch bearer, so to say, to pass down, you know, it's like with sporting teams like baseball, football.

soccer, whatever it might be, you know, it's typically the dads who pass that. I'm not always, but it's, it's, it's, it's, you know, it tends to be that sort of process. It binds together, you know, the grandparents with the, with the parents and the kids. And I think, um, you know, it'll, it'll increasingly become more male and female, but right now it's, I think the primary target is dads and kids. And Ryan, you have to explain your emotion as well. Yeah, yeah, yeah. So, um, I, you know, completely agree. Uh, You know, with that sentiment, I think that's actually an interesting point when you think about the torch bears, which was, you know, in the 80s and early 90s, you know, this one, you know, video games was a much more, you know, kid-centric. You know, the, you know, us, you know, the people that grew up with this, you know, and, you know, where it was kind of a deep part. I mean, it's like I had a buddy the other day that I hadn't seen it a while. while and he, you know, we were trying to figure out a way to get together.

He said, yeah, I should come over and we should play TechMobile, and I told him only if I can be the Raiders, you know, and, you know, I play with Bo Jackson as a Kansas City guy for obvious reasons. And I like to win. So, you know, I told him I would do it that way. But I think those are great points. And yeah, I think, you know, we're all gamers now and, you know, in a kind of a different way. But when I think about, you know, who is going to be the real driver of kind of this larger trend towards diversification in terms of male, female, and the rest, you know, it will be dads ginging out over the new Zelda, you know, and trying to introduce it to their son that I think will play a very large part in it. For me personally, this was just my expression of, you know, the fact that, you know, one, I think one of the amazing things about Nintendo and its IP is, you know, it's so rare to have, you know, such kind of, you know, universally beloved, not only mind chair in terms of recognition of characters, but, you know, they're so very, you know, the scarcity of truly global. family-friendly IP that works, you know, kind of cross-culturally and globally, you know,

I think Nintendo fits squarely in that sweet spot of, you know, just incredibly scarce and rare forms of entertainment that will work everywhere. And so, you know, Nintendo's motto is to put smiles on people's faces. And so, you know, the bunch of the smiles at the end is to represent that the rest is kind of to speak to the diversity you know and uh you're just the universally kind of beloved family friendly nature of of their properties um and then the bottom one was uh you know my attempt to poor attempt to be amusing uh from an investor's perspective so uh that's that's kind of that there this collection also fits perfectly if you want to play mario card uh eight on online, you see, in Blade globally, you see just like people represented like this, you see

the flags there from different countries, and you also see different backgrounds. Yes, I mean, that's kind of, it's the network, you know, as Switch Online and, you know, as Nintendo modernizes, you know, maybe at some point we should talk about, you know, cloud and how that relates to Nintendo's future, you know, if you look into their financial statements, I mean, there's, you know, a couple interesting things, but I can't remember exactly if it was, you know, the quarter before last or whatnot, but you saw a massive, you know, in U.S.D, 150 million in incremental spend that, you know, given the size of the investment, couldn't be, I think, individual, you know, it certainly wasn't hardware related, you know, say with the pro. to me, the only thing that makes sense of, you know, a kind of uptake, and it looks even more interesting if you kind of go back the last 20 years, as long as, you know, the financial statements that I have. But, you know, it speaks to a more networked, you know, cloud-centric

global future. And, you know, I think that's what you're kind of getting at. but before we go to cloud maybe let's try to dive deeper that deeper that deeper you got to keep me ringing about i'll go off but i'm nothing to do with the original question you know right you know pull me in to this i want to talk about the hardware software interaction and they prepared something for the viewers that they get an idea and maybe you can also comment like this is the this are the joycons the controllers of the switch and you can easily use them here, if I put it in the right direction, for the ring fit, and use them as a device to play this kind of game and use them to coordinate this tool. You can also, like,

in some games, even like in Mario card, you have the wheels, and you can use them to play with the JoyCon as well. And in other games, you have this. This is the endless iteration when it comes to hardware by the way you're starting to see all the different ways in which you know the the crazy geniuses that nintendo can basically perpetually release new um you know gadgets ways to play ways to have fun um you know with the software um and i i think that's very very cool this is a setup with um like fitness boxing for instance or just dance so you have to sleep that it doesn't fall out of your hand and you can do like moving things or play tennis or something like this you know it from the switch from the we as well we tennis or some kind of sports games so this is the interesting

side on the interaction of hardware and software that i find very interesting in nintendo and also gives me the confidence that there is this hardware needed there's like from often the argument comes why don't you just play it on your mobile phone? And I think there are some ideas you can get why this kind of interaction is needed. You can also take your pulse from this reader here and get an impression and collect data with it so you can do sports with it.

Todd, have you played ring fit by chance? I haven't, but I really should just as due diligence, right? Yeah, it'll kick your ass or I kicked my ass, but you know, I get tired going up to stairs if I'm not careful. Not in 40. But yeah, no, I was actually delighted with ring fit. You know, if there's one complaint we could get into management,

it's that they don't kind of fully press and leverage their, you know, inherited advantages. And, you know, I'd love to see a subscription biz with ring fit. And I remember one of the things Todd reached out for it. And I can't remember the game, but it was the jump rope game, just simple, you know, in so many ways. And this is actually what has kind of driven the explosion in China and kind of the main driver of mind share and, you know, sales has to do with ring fit. I mean, you're kind of seeing this everywhere.

But this is why I think, you know, for Nintendo, while I can see, you know, Nintendo Switch online, you know, for example, partnerships where, you know, maybe Nintendo gives some, you know, for the Xbox game pass, they'll give, you know, a limited number. of kind of marquee software titles that are, you know, so Mario, you know, Breath of the Wild 2 is on the way, you know, about to come out, you know, they can give X-Pass, you know, the original Breath of the Wild and Mario Odyssey, you know, maybe Mario Cardi from, you know, the prior thing, but kind of marquee properties that, you know, will not affect kind of incremental software sales on next generation, you know, when it comes this thing. But at the end of the day, I think, you know, hardware and, and merging the two creates a level of, you know, it can be community. It can be just, you know, personal fun.

But I think it'd be a tragedy if they ever, you know, I don't think it's a both, it's an either or. I think it's a both end. I think, you know, they can continue to build on, you know, the switch family of systems and continue to create new forms of interactivity with, you know, whether it be something like ring fits, you know, circle, or, you know, like it doesn't, it's a both-in. I think they can continue to, like, surprise and delight people with new forms of interactive hardware, but also expand and grow the digital business by, you know, select partnerships. I mean, you know, I mean, that's the beautiful thing about the new model. I mean, there's just so many ways that Nintendo can create, you know,

billions and billions of dollars, you know, out of, you know, what is basically thin air. Well, there are other examples for this kind of creative use of hardware and software that U.S. can also look at these examples to understand the complex of hardware and software. So, Ty, you just got a lot of, right? Yes. Yeah. Okay. So there's probably 30 different.

I mean, there's quite a few different applications with, you know, Lodagh. There's a very kind of weak VR component, but I think that kind of hints at the future, both in terms of VR and AR, you know, of what can be done. You have the Joycons themselves, which I think have, you know, quite a, I mean, there's just tons of embedded optionality of what you can do there. I mean, you know, like the, there's Mario Party and then what was one of the first releases that came out? It was like 21 games or something like that. The clubhouse games? Yeah, yeah, yeah. You can use, you know, just the joycons alone.

I think you give you a wide diversity. The Lavo works in a lot of different ways. I think ring fit, you know, the applications for, you know, other uses. I mean, I don't know if Mario Kart Live is a new form of hardware where you, you know, basically get a live Mario Car controller and you can create tracks. you know, within your house, you know, I think without getting into kind of rumors of potential iterations with, you know, the pro that is coming out. But, you know, I think there's already a substantial suite, if you will, of, you know, relatively low-cost, affordable, you know,

innovations on the hardware side that I think will continue to expand and grow with time, especially as, you know, incremental switches get more powerful and what can be done, you know, with the hardware. The utility kind of expands. I mean, you know, imagine the pro coming out with a camera where you can start to use your actual switch playing something like Pokemon Go on mobile. or, you know, I'm a huge, hopelessly addicted fan of Mario Kart Tour, where, you know, I think I get 10, 15 minutes a day in, you know, in clockwork, if I could play Mario Kart Tour on my Switch, you know, even without, say, an AR or, say, some new form of VR component, I would, you know, I think all this stuff just ultimately increases the use. utilization of the hardware. And, you know, in video games, unlike, say, some, you know, businesses like Netflix where you have a, you know, a subscription business, operating profit isn't going to spike.

I mean, you're going to have, if descriptions, you know, go, you know, have a huge uptick, obviously they're going to make more money from that revenue. But there's no relation, in video games, there's a linear relationship between player engagement, utilization of the system. and profit per user. And something like Netflix, you know, you could watch 50 movies a day and Netflix isn't going to make more money. So I don't know where I was originally at, but we were a hardware software complex.

And I want to ask, do you have something to add for? Are you talking to me or? No, the other guy of the TV. No, I think, I think the hardware is. a special component of the Nintendo experience. And so I mentioned earlier that I don't know that Nintendo IP on another platform feels the same way as it does when you enjoy it through the console or through Nintendo's operating system. So even if you were to eliminate the console itself and it was all cloud, I think Nintendo would still be wise to produce hardware components that are innovative and fun. to interact with.

It's almost like, we've talked about this on the team as being sort of like going to an amusement park, right? Like Nintendo, like when you go to a Nintendo park, you want to see Mario, you want to see Yoshi, you want to see Donkey Kong. Imagine going to like a Disney park and seeing Mario. It wouldn't feel the same, right?

It's just you want to get into that mindset of like, I'm playing Nintendo IP. And I think that's one reason why they haven't, you know, aggressively pushed outside of the walls, the way some bulls have called for to say, hey, go out, do digital, look how much money you can make. I think it dilutes the experience a little bit, and I think that's why they're really cautious about doing it.

Yep, yeah. I mean, I think back, you know, my earlier Nintendo memories are, you know, blowing in my cartridges, you know, to press them in and somehow get them to work again. I think that kind of speaks to, you know, the type of thing, Todd, is talking about.

I mean, uh, it's, uh, it's kind of a genus, a quad's hard to explain, but, you know,

uh, I think most, I think having a dedicated gaming platform, um, especially one is versatile, um, you know, as the switch where,

you know, not only can you play at home, but, you know, you can take it on the go. Um, you know, a cell phone in some ways,

ergonomically, you know, is, can be helpful with certain types of games. But, um, you know, ultimately,

I think the optionality from a gamer's perspective, the types of fun they can have, the types of games that they can experience, you know, the immersiveness of, you know, of that experience in many ways is tied to hardware. And kind of removing that piece of the puzzle, I think, would be, you know,

this is going to win me very much friends because I think, you know, on a short term, stock perspective, if they came out and they did away with hardware, you know, you might see the stock double or triple. But, you know, when I think about, you know, kind of, you know, long-term their moat, building shareholder value, you know, I actually think it's the opposite. I'm glad they've maintained their, you know, when you have hardware, that's a big part of the moat, too. You know, if you look at Apple, you'd had a very different kind of outcome if, you know, they had gone about, you know, things in a different way in terms of ensuring kind of that kind of elegant and beautiful integrated hardware software solution. So I'd be kind of disappointed.

And, you know, the good news is I think there's, you know, Nintendo has a better chance of getting bought out than. giving up, you know, the hardware side of things, given how kind of integral it is to the experience. So that's just my choice. Let's go to the software side. I hope you can see like the Nintendo OS here for the viewers as well that I can get an idea about the Nintendo OS. And also, I hope I hit the right button, the Nintendo e-shop. Maybe let's first start with the OS, what's the power in your eyes of the Nintendo OS? And then let's make a jump to the e-shop, but let's first go with the software architecture they have.

Yeah, I think it's, as I mentioned earlier, I think it's about having that OS and continuing to use that OS to improve it over time. Again, it's like your iPhone or whatever, your iOS or your Android. It just, that's your operating system. Everything that you do connects back to that operating system. So, you know, I think, and I mentioned earlier, we'd love to see them release all their past first-party games and make it part of a higher-priced, you know, switch online product. Right now, you can get, yeah, you can get a few games from Nintendo Legacy and a few Super Nintendo games on legacy.

But, you know, imagine if they unlocked all. of them from GameCube to Nintendo 64. That would be just a huge opportunity. And I think, and this isn't just, you know, me, me guessing. This is, this is, you know, when Nintendo had their emulators, I think the last, and had 30 games on it. It was like you could buy, it was kind of like a replica of the original Nintendo, but it came preloaded with 30 games. And I think they sold, I think the last time they shared was 10 million units. So people were willing to pay to, I think it was 80 bucks or so to buy these old games that you would think that no one would play. And the thing is, there aren't any other games, really, that draw that kind of demand today.

People, you know, going back to nostalgia, this is, this is all that is. You know, when I had a friend over to play, he was kind of one of my son's friends, dads, and we were, it was about a year ago, so before pandemic, but we were, you know, bonding over technical. I mean, that's, because we both played it growing up. I mean, it's, it's, it's a, it's completely unique experience for Nintendo. And I think, tying this back to the OS, I think connecting all those things back to this core experience with Nintendo is so important. Yeah.

Yeah, I'd only add that, you know, if there's, you know, some of my favorite phrases in this business are untapped pricing power. And when you think about, you know, the low-cost nature of, you know, where, you know, switch online is at relative to alternatives. And, you know, there's even some interesting kind of data mining that has taken place with respect to things that, you know, developers have found in the code of the recent software update that I think hint to, you know, there's an emulator in it, for example. And, you know, there could be a lot of, there's a lot of different ways in which that, you know, could be a tell in terms of the future. But one of the, I think, the absolute no-brainers in terms of low-hanging fruit that would not only drive, I think, another explosion in, you know, not only would drive up the attach rate, but I think, you know, the amount of, you know, kind of incremental, you know, X gamers that you can bring into the system. I grew up, you know, with the Nintendo, the S-N-E-S and then the Nintendo 64. I think I played the GameCube a little bit, but, you know, that, those three games, Techno Bowl, you know, link to the past on Super Nintendo or Ocarina Time, you know, when it comes to, like, the real nostalgic crack that would bring me back to kind of experience those old games, you know, if they go back and they can either all at once or on a kind of. a steady schedule, layer in, you know, not just, you know, all of their retro consoles,

but, you know, basically, maybe it's the greatest hits, maybe it's the entire library, or certainly the games they have rights to. You know, I think the intrinsic value prop of Nintendo Switchal Line, which is already quite strong, and especially as they bolster it and make it more modern, you know, more modern network, much like, You see at with Sony and Microsoft in terms of the cloud, you know, like imagine us, you know, in a year from now being able to play kind of networked tech mobile against, you know, all of us get all a fine Twitter and we can see who's the champion. But, you know, there's a tremendous amount of embedded optionality that is simply begging to be unlocked and will be unlocked by layering and not just. the vintage consoles, but, you know, at minimum, the greatest hits, you know, cross each consoles. And in that way, you know, you kind of pull forward, you know, any, you know, older guys,

you know, across the generations that maybe have been on the fence, you know, oh, here, you can go play your favorite game, video game going up. And you get all of this for, I think, a price point that, I mean, you know, they could triple the price. of Nintendo Switch Online was something like that. And I don't think consumers would flinch. And, you know, I think that's part of the future. I think, you know, Nintendo might make you want to rip your hair out and blight yourself on fire

on occasion with, you know, their, you know, quirky contrarianism and they're gonna do what they do. But, you know, on a real level, I always kind of am taken back by the, insistent, just the attitude towards management. I mean, we can get into that in detail, but by and large, when it comes to the things that matter,

foundationally, I think they are killing it, for lack of a better term. I mean, I think they're focused on the right things. I think, you know, they've restructured the business in a way, you know, not only did it change.

I think the core fundamental business model, they've restructured the, you know, their internal operations around that. and, you know, they're working, you know, at their own pace, you know, slow and methodical. But I think the right things are getting done. And, you know, if, you know, assuming the premise is correct, and I think we both, all of us believe it is, that, you know, the switch family of systems is perpetual, you know, i.e., for all intents of purposes, forever. Let's go into one point here. That's quite interesting.

And I also have prepared a chart for this. I want to share it with you there are also coming through the Nintendo OS the Nintendo accounts that are created maybe you want to comment

on this as well because here is 2015 and I think it's from September 2020 so over five years they have over 200 million accounts

maybe could you explain why this accounts are needed yeah I mean I think it all ties back to having this direct relationship with customers. And this chart specifically shows you why this is not a repeat of the week, right? This is, you know, since the Switch launched,

they've gountered, what, almost 200 million accounts registered with Nintendo. Now, for the first time, Nintendo has 200 million plus direct relationships with their customers and their users. So now they can see how long are you playing Zelda? Maybe you'd like this game. And so they have all this information than ever had before. It just shows me that they are really interested in developing these direct-with-to-consumer experiences, similar to the way Disney is doing with Disney Plus. It was the first time that Disney had a grasp on how much Mickey Mouse content are you consuming. And think about the ways that, you know, you can do analysis on the data now.

Nintendo, this will definitely help them not only keep the relationship sticky, but it will help them create better content. And I think that's one thing that if you're a skeptic about Nintendo, you look at that and say, that's amazing that they got that many that quickly, that many accounts that quickly. It tells you that the IP is still extremely relevant and people want to have that relationship with Nintendo.

What are the touch points to get an account and to give Nintendo the email? Is it just Switch games or users on Switch? So mobile's included in that, which I think is fascinating. You know, creating a direct-to-consumer relationship in a digital world and increasingly digital world, I think, is incredibly, you know, it's foundationally important, you know, with respect to maximizing your competitive position in the future.

And, you know, a sense that you get this data-driven feedback loop that, you know, allows you to, you know, incrementally optimize maybe not only your software lineup, but I mean, you know, the, once you have the data, the things that they can learn are, you know, to improve and grow the business, I think, is kind of really unlimited, or maybe a little bit, unlimited is a little bit hyperbolic, but, you know, like you, you can see this site with mobile. You know, you have, you know, one of the things that I wrote about in the original letter that I thought a lot about of is, you know, the monetization models and the experimentation, you know, towards that end with, you know, say Mario Kartour, for example, and, you know, alongside that they came out with a subscription model. And for a variety of reasons, especially given kind of unique beloved nature of Nintendo's IP and their fans, you know, that kind of, in my mind, solves the, you know, the issues in principle with respect to mobile and, you know, Nintendo's brand, you know, gotcha mechanics. I mean, you know, I love Mario Carp Tour, but, you know, when you pull the pipe down,

which kind of releases, you know, gifts. I mean, it's, you can feel the Vegas-like nature of that. And, you know, while I think it's a great way to make a lot of money, I think if you really are long-term and, you know, Nintendo's a business that, you know, it kind of seems ridiculous. But, you know, personally, I kind of love it. I mean, this is a business that is a hundred-year business plan. So I think without getting into all of the benefits that relate to kind of having this data-driven feedback loop that in the, you know, the reoccurring high-margin nature of the revenue associated with mobile, you know, you have a model that I think is fundamentally geared towards the biggest and, you know, most intense Nintendo fans that is a better business.

model that will just create more and more touch points i mean you know the nintendo accounts you know whether it be maybe you know we'll see with super nintendo land maybe they will um integrate you know when you get your power band that you walk through the park with and collect coins and knock you know uh things that fight into the nintendo account but i think i think the nintendo accounts are the central, you know, it's the central place that, you know, all of the elements of the, you know, expanding Nintendo flywheel can come together and having, you know, integration. I talked earlier about, you know, making, being able to play mobile games on the switch, you know, if it has a, if the pro has a camera, you know, being able to play AR that way, imagine using your

switch, you know, in the actual Super Nintendo Land Park. So anyhow, I think that it is foundational to the foundation that they want to build long-term and all the separate touch points that they can use to broaden the Nintendo fan base and drive first time and repeat interactions with their customers directly. Let's go to one repeat interaction that's also quite good measurable. does which online memberships? I've also have a graphic on this and you're invited to comment it.

This shows currently the map 26 million plus members of the paid service, I think it is. And here are some marks where they got an increase through the release of games. One is Super Smash Brothers. Yeah, I think it's

I think it's a similar story with Nintendo accounts. I think it's just, I think it was smart of them to underpriced this product. I mean, almost absurdly underpriced. I mean, I think it's for a family, for family access, it's $3499, and dollars, less than $3.00 a month. Yeah, I mean, so think about that in terms of your other subscriptions. That's nothing, right? And so, you know, I'd be willing to personally be willing to,

pay $999, $14.99 for a deeper experience with more products. And so I think, you know, there's an opportunity here. And I think you're seeing, again, going back to customers wanting to enter into a relationship with Nintendo that they haven't been able to in the past. I think that just supports that. Totally. Yeah, I just add that that just shows the power of, you know, software is where Nintendo shines. And as we're heading to this new year, I think we'll have both the release of the pro, but I think Nintendo is just going to carpet bomb consumers

with world-class kind of AAA IP games this year. I mean, without going into kind of specting what they will be, I think this will be kind of one of the most powerful years in terms of the breadth and depth in quality of their software lineup, and as Breath of the Wild two drops and, you know, Metroid 4, I mean, as these new kind of long-awaited franchise and sequels to marquee franchises drop, I think you're just going to see that trend is going to continue to grow, you know, not only alongside the installed base, but as, you know, with Animal Crossing,

you know, there's a variety of Nintendo franchises that have been waiting for an update and have this kind of embedded natural fan base that are chopping at the bit for their favorite franchise to come out. And, you know, as you've seen here, as that happens, you know, you are just going to, you know, like kind of like how the indexation vortex has sucked up all the money, you know, in terms of driving capital flows in kind of this current regime. I think. think you're going to have a dynamic where, you know, as all of, you know, as the full breadth and depth of Nintendo suite of kind of gold-plated peerless IP, you know, hits, you know, the switch, you're going to have a similar effect where lots of people, lots of, that have sat in the,

you know, been sitting on the fence, both, you know, across demographics and, you know, they're going to be pulled in incrementally at the margin as the, I don't know, the utility of the larger switch ecosystem continues to grow, given the games and all the rest, the new hardware. You know, it's kind of, you know, in this particular way, the Disney flywheel, and I think the network effects are just starting to spin. I mean, I think they're past exit velocity, but, you know, we're on that period where everything is just rapidly gaining momentum. and I think people will be shocked where things balance out, say, two to three years from now

versus what is currently kind of embedded in this, you know, what expectations are embedded in the stock price based on today's valuation. I think the stocks have 150% or something like that since we originally built our core position, but, you know, I still think the stock is kind of mind-bogglingly cheap relative to what I think, you know, investing isn't about telling, you know, being able to perceive the future. I think good investing is about understanding the present, you know, better than, you know, your peers. You know, there's no su-saying in this business. It's just having a better, a lot of people want to, you know, in investing, they want things to be as they wish they were as opposed to the way they are.

and the way things are right now the valuation continues to kind of shock me because I think if you're willing to look a little deeper and peel back the onion what used to be conjecture for me at least is now objective fact so let's peel back another level because I want to walk you

through the way games are bought at Nintendo I was at the store the classical way and did get this so this feels a bit like I was young when I did get the Lego catalogue. Oh, yeah. Could see some of the games that are released and get a certain impression to buy them at the store, bring this at home, and see, like, what games are there and can say, hey, mama, buy

me this. Something like this. I want to know where Contendo Power is, by the way. Like, why they haven't, you know, reissued that maybe digitally. I don't know. But sorry in a row. Yeah. So the classical way of buying a Nintendo game is like going to the store or buying it

online and getting this card sent and there's this digital chip inside can also say something about the special format because it's no SD card it's the format that is like the classical console elements or boxes you have to push in it then the next step of buying games is like even from the store getting something sent but this time with a download code That's on this card. So you get a download code and like you can download your game, get this code and add it to the store and to, you know, Nintendo OS, games library and connected with your email address as well. And the new way, I already showed it a bit is like buying it from the store and they're looking for the games. Yeah, we're all willing investor.

You just look for the games that are on sales and see what's there and just buy it. In my eyes, the ways to buy Nintendo games. And maybe we can talk a bit about the opportunity that lies in these kind of download or digital games. There's always a great chart for showing some sharing knowledge on this.

And that's your chart, Ryan. So you can start. Todd, you take this because, you know, I think you were the, the first person, I think you caught it immediately, but I don't know if it was all of Europe or Britain, but, you know, the observation was, look, you know, look at them, you know, they're kind of forcing digitalization and the adoption curve of digitalization forward by, you know, what was it, were they were moving the, but, you know, as you had that box, that physical

cartridge, you know, it really is a digital code. So, you know, that was, I think you kind of tip me off to the, you know, the various ways that they are kind of moving towards that. I mean, fingers crossed that the pro does not have a cartridge slip just like, you know, you're seeing with the PS5 and, you know, the new Xbox, you know, they're coming out with models that don't actually have slots or spaces for the physical side of things. But anyhow, you go through that and then I'll kind of add my two cents on digital. You know, one upgrade I would love to see in the switch is a larger hard drive, internal hard drive. Because right now, if you download, I don't know, five or six games, you're pretty much out of space in terms of the internal hard drive. So you have to go out and then buy a separate card to, you know, to put into your switch to store all the digital games you want to download. just an extra step that, you know, may tell people, you know, I maybe I'll just buy the cartridge

instead. And I think Nintendo really should be pushing digital a lot harder because the margins are just so much better. I think Ryan's table ahead of there. But it's, I think it's, you know, at least 85% gross margin if they're downloaded digitally versus, I think, about 60 or 65 off top of my head, for, for, for, in retail. So I think Nintendo is relative to the other game publishers well below trend in terms of the percentage of games that are downloaded. So I would love to see Nintendo be a little bit more aggressive in promoting its digital downloads because the margins are just great. From a user's perspective, especially during the pandemic, I think a lot of people realized, I can just download these games. I don't have to go to the store.

I don't have to wait for it. It's just here in about 20 minutes after it downloads. And then you also have a direct connection to Nintendo and they can update your game as you go along. So I think there's a huge opportunity for Nintendo to push it. I think some of the reservations are that Nintendo being having more kids in their universe than some of the other video game publishers, parents and grandparents like to give the games gifts. And so the best way to do that is physically. I mean, it's kind of, it's a little less ceremony.

to just give a digital download code. It's, you know, you want to say, here's a physical copy and I wrapped it for you, and here's a nice gift. So I think Nintendo has a lot of that going on. And I think they have some good relationships with their distributors in the physical world. So I don't think they want to undercut them. So, you know, during Black Friday sales, you'll see the games, you know, deeply discounted at, you know, Target or Walmart or Amazon.

But, you know, the e-shop will still be at $59.99. And it's very frustrating because, you know, you want to buy that game, too, but you have to, you know, like, should I buy the physical copy or should I, you know, pay up for the digital? And so, you know, Nintendo doesn't compete really with its, with its retailers on price too much. They have their own deals that come out, but usually they aren't concurrent with physical retailers. So I think there's a huge opportunity, and we would love to see Nintendo's software mix go, you know, I think it's about 45% now to about 85%. That's where we think things are heading. I think, you know, the pandemic pulled that demand forward, showing

people who didn't want to go to the store in March, April, May of last year that, hey, I can just download these games. And it's a better experience, in my opinion, versus going to a physical retailer and taking up shelf space with a bunch of cartridges. So to me, it's much easier. And so if I lose my switch or if I lose my game, I can just download it again, and there it is, right? It's a much better experience all around, in my opinion. Yeah, I couldn't agree more. I mean, I think what's interesting, about what, you know, the digital code within the physical cartridge, I think that's kind of an interesting halfway point, by the way. I mean, that's why when you sent me that, I found that

so interesting is that, you know, it's a way to continue to hold on to, you know, the kind of core relationships in terms of distribution while kind of incrementally, I mean, at least you're going to save on, you know, the packaging and, you know, like there's there's costs that will be wrung out there versus, you know, just going straight to the e-shop, that, you know, might be a temporary bridge to, I think, what will eventually be in all digital world. I mean, you know, when you think about physical media in general within the entertainment industry, you know, when was the last time anyone went out and bought a DVD? I mean, I have no idea. It's been a decade. You know, when was the last time I saw a laptop, you know, computer with a disc drive? You know, I could go on

and on and on, but, you know, I think if there's one in, you know, unstoppable trend, you know, is that physical media and physical forms of media are kind of on the way out. And, you know, I would agree in terms of where the mix shifted, you know, the fact that Nintendo was so far behind and now you have this temporary period of kind of catching up, you know, I think within a relatively reasonable time horizon, you're going to see that shift closer towards, you know, call it 80-ish percent. And, you know, one, when you actually go through and you do the math on the impact of its financials, it'll kind of make your eyes bug out. But I think ultimately, you know, you're going to, they'll get to a point where it just

doesn't make sense to, you know, put the money into, you know, physical. And then, you know, at that point, it'll go 100% digital. I mean, this is, it's kind of a similar thing of why Microsoft and Sony have come out with all digital additions at a lower price point. I think, you know, like that cartridge example with the digital code inside, these are kind of smart and creative ways to kind of bridge that gap and kind of push this trend along. But in terms of the impact to the financials, you know, I can remember in the heart of, you know, in March, you know, as everything was, you know, basically imploding. you know, going back and thinking through what the impact would be at trying to pencil out the math of, you know, one thing was clear and I, it was, you know, pretty early, which was that, you know, he looked at what was happening in China and other areas of the world.

And, you know, in some areas it was mobile, but gaming in general in terms of utilization had just absolutely exploded. And, you know, given we are, everyone's kind of a stay-at-home world where everyone's locked in and they can't go anywhere. you know, this dynamic introduced the experience of buying digital to a wide swath of through habit or various other reasons, people that had, you know, kind of grown up going to the store and buying an actual physical copy. And, you know, I think, you know, Todd's discussion on the value proposition to the consumer, you know, with, you know, not even considering the publisher, which was, you know, one of the things that, that chart that you showed. You know, it's a win, win, win for everyone. You know, no longer do you have to go around

and call around to your local game stop and, you know, cross your fingers and have a prayer session that the game you want that's about to drop, you know, that there'll be inventory there. By the time you get there, it won't be gone or, you know, the time and expense, you know, to get in your car and go drive it, you know, versus just simply picking up your switch, you know, you know, going to the e-shop, downloading it, you know, 12-01, you know, after the day it released, it's, you know, you wake up the next morning and it's playable, ready to go on your switch. So, you know, it's like Netflix.

When, you know, the first, as I first started to get used to watching, you know, Netflix, you know, it didn't take very long for me to go back. And when I, to this day, when I watch, you know, linear ad-supported TV, It's like my brain explodes. I want to jump out a window. You know, like it's crazy to me. You know, that and because of the disruption going on there, it's like, you know, the amount of commercials continues to grow.

I mean, it's just got to this point where, you know, the, it's a permanent, you know, I guess what I'm saying here is that, you know, what the payment tampic has brought forward has not only accelerated this, you know, digital mix shift, but I think this demand has largely permanently been pulled forward and accelerated a trend that I think has tremendous implications. But when I went through in March and did the math, you know, assuming given, you know,

the incremental sales, you know, that the platform, I'm trying to think of the average installed base the next year to extrapolate based on a reasonable tie ratio, what the software unit sales would be. And, you know, so given I didn't really assume any additional growth outside of the pandemic, just kind of the natural uptick in software sales as, you know, each year the average installed base gets bigger and bigger and bigger. And, you know, I assume the mix shift was, you know, that digital went to 50, somewhere between 50 and 75%. And in a lockdown world where everything's closed and buying physical has literally been taken away from you, you know, let's just move that needle to 7580. And, you know, it just kind of

hit me in the face, which was basically this, that EPS doubled simply on, you know, the corona-driven, you know, shift towards digital, you know, disavour or don't, you know, don't even include all of the things, you know, going on in the business elsewhere. You know, when you see EPS doubling, I mean, in March, my concern was you might look, you might buy something that looks cheap based on trailing 12-month math. But when, you know, its earnings power gets cut by 90%. you know, who cares if it was trading, you know, at three to, you know, whatever the multiple looked like in the past. So, you know, I spent a lot of time, you know, I wanted the opposite. It's, you know, what are, you know, either what we own or what, you know, we can own, you know,

where are, you know, stocks or, you know, businesses whose valuations have been destroyed as if their earnings power is about to get cut in half when in reality it's about to grow substantially. And, you know, I think Nintendo hit that kind of that perfect, you know, they hit that framework perfectly. And I remember just being, you know, I remember adding, I almost, I got close to bottom ticking it at 37, 38. It was just such a strange feeling because, you know, anyone can do this math. You don't have to be a particularly savvy or gifted analyst to have figured this out. and it was kind of staring you in the face based on what we were seeing everywhere else in the world. So, you know, I think the two biggest elements of this thesis at the end of the day that are, you know,

the only things that need to, you know, as far as premises that need to be true to have kind of a tremendous amount of kind of low risk embedded upside here is the desicilification of the hardware business towards a, you know, an iterative hardware model based around a software, centric ecosystem and then, you know, equally as importantly, I think, the long-term secular transition towards digital. And you add those two things together. And the hearing how is, you know, pretty impressive, you know, relative to the stock price. Let's just put it that one. How shareholder friendly and customer-friendly is this transition? I want to try to figure this out because if you buy this code, you have a problem because

you can't resell it anymore like many people say they want to keep this discs or whatever you call it sticks or cards have the probability to resell it and another question about consumer versus shareholder friendliness with nintendo is the pricing policy they have i also have charts on this so happy to share it it uh price comparison machines like the german idealo this one is it shows the the price of the switch like three years or four years old hardware device and this is the price in the last year it has been steady but you can also say okay that's only the price from the pandemic where a lot of demand happened but this is the comparison from uk from their price buy and it's a surprise going back from to 2017 and you see it's just like some discounts happen

but it's like steady and there's no price decline and yeah what does your take on this and does nintendo earn money if they sell switches or is it a loss-making business they have there well i think i think the the key to those charts just shows you pricing power i mean people are still willing i mean i think some of the top selling games uh for nintendo um over the past year have been games that have been out for more than two years, right? So you think about Breath of the Wild, Mario Kart 8. Yeah, I mean, these are games that they're still pricing at full price and still getting people to come barreling in the door to buy them, right?

There's something special about that, right? If you look at other games, look at some of the hit games that came out over the past year. You know, they spike in popularity, they get played on Twitch, and all of a sudden they kind of fade away. And then they guess they get discounted because that's the only way they're going to move units, value investors, value buyers, right, going, oh, this is on sale, I'm going to buy some. And so I think that just shows you how Nintendo's IP is differentiated. It's timeless.

It's consistent. I don't think it'd be crazy for Nintendo to actively discount their IP, you know, years after, you know, they sell. it's showing that, you know, there's evidence that consumers keep coming back at the original price point and don't care. So I think there's, you know, they start discounting it. It sort of dilutes, you know, the IP, I think. I think it's really important for them to hold price. I think it's a shareholder, you know, that, I'm fine with that. You know, I love pricing power. You know, it's like a Buffett's quote about if they have a prayer session before you raise prices, you don't have a great business.

Nintendo could raise prices if they wanted to and people will still buy it. So, you know, to me, it's there's not... I think they will, actually. Yeah. What is the new term quadruplea games? I think it was Best CETA. You know, like, it's amazing to me that they, you know,

haven't, I mean, I remember, you know, Nintendo NES games were $60. Right. You know, $50, $60 when we were kids. The fact that, you know, it remains that price, I think, you know, speaks to the untapped pricing power across the gaming industry in general. And so I actually think that's another shift you're seeing is that this, you know, they haven't raised prices in, you know, 30 years, despite the cost of games, you know, all of the

inputs that go into making them, you know, going up, you know, quite a bit. So, you know, I think you're going to see a lot of pure margin incremental revenue. start to drop to the bottom line as Nintendo follows the lead of kind of the industry standard. And, you know, I have my own thought, but did you have any things that you wanted to finish on? Well, I just wanted to briefly add, I think this is a really important point, is that because Nintendo's first-party games are exclusive, you have to buy the console in order to then spend $60 to get the game, right? So it's like if I was going to play another game, another system, you know, I'm less

console and my more console agnostic but if I if I only want to buy or only want to play Zelda there are people who do this who say I only wanted to play Zelda so I bought a switch and then bought the it bought the Zelda you know it to play so right and so the only reason I bought it and that you know thought you'd falling in love with the magic of breath of the wild which has actually got me back into gaming and really immersed into you know I don't think if I would have done that, you know, all of the, you know, the six months of kind of intensive diligence that was kickstarted from that would have happened, you know, but anyhow. Good return off investment. Yeah. Yeah. And, you know, I'd add to this point, I mean,

outside of just the refusal to discount and the, you know, kind of perpetual evergreen nature, you know, of their software, you know, I think it's incredible to me. where, you know, the only real analog and video games, I would say, is like EA sports franchises, where, you know, they can come out with, you know, a new Madden and a new FIFA, you know, year over year, like clockwork, you're going to have kind of an embedded base of people. The tail of these franchises is basically, you know, perpetual, you know, and I think that is what, you know, fundamentally, and I think Nintendo also has a big, you know, where EA and, you know, like Madden or NHL hockey, for example, you know, maybe you can see small incremental improvements

year over year, but, you know, fundamentally, you know, in terms of gameplay and all the, you know, this kind of stuff, it's the same game. Well, Nintendo has that with all of its, I think, core franchises. But, you know, I think what makes unique and special is that they don't rest on their laurels and, you know, kind of reflexively repeat the same gameplay formula, the same experience with, you know, each new, you know, in the past with cyclical, you know, console generations. They totally reinvent and, you know, grow, you know, what, they're always trying to one up themselves, you know, and I think in all of the salient matters that come to making great games. You can see this with Breath of the Wild or Mario Odyssey. You know, these aren't, you know,

you know, just copies of what has come before it. They're a complete reinvention. So, you know, you have this magic money machine where, you know, every year, every time a new Mario comes out, a new Zelda comes out, you know, a new donkey coming. They could go down the list. New Animal Crossing, a new fire emblem, you're going to have, people are going to buy it instinctually no matter what. But, you know, I think the size of the fan base, you know, and the brand, you know, its value in consumers' eyes only grows because these games are, in many ways, works of arts. I don't know how to explain it. Like, I don't know if you ever got to Luigi's Mansion, you know, or things like that.

But it has, I mean, the software lineup, especially in this generation, it just has blown my mind in terms of how creative and original and unique these games are. So you have this best of both worlds, both and thing, where you not only have an evergreen library of timeless IP that can be monetized again and again and again and again in various ways and formats. I mean, think how many Mario titles there are. But, you know, the creative geniuses at Nintendo find ways

to, you know, make these experiences new and delightful again in ways that, you know, you've never experienced. And I think that is a tremendously powerful element. And back to Todd's point where he talks about, you know, Breath of Wild came out four years ago. You know, all of these core titles, as the average installed base grows, everyone wants to have them, you know. So, you know, that's not like, it's not like when you have a PS5,

you know, you want to go out and buy the, you know, you have a PS4 and a Madden, you know, there, it's not like you have to go out and buy, you know, the new Madden on PS5, you know, versus PS4 if it's the same game, you know, with the Switch and with Nintendo, you know, all of these titles truly are evergreen and, you know, has more and more people buy switches and the kind of core evergreen title, you know, expand, you know, I think that has implications with respect to the tie ratio, you know, because every new person, that, you know, new customer that buys a switch, you know, is likely over their lifetime going to buy, you know, the majority of these kind of core, uh, evergreen franchises that,

you know, continue to sell. I mean, Mario Kart, I think, was, I think all of these original, you know, games that came out, you know, in terms of year one of the Switch is life, continue to crush and sell millions of copies four years later. I mean, that is radically unique in the video game industry. Get one question still open and maybe you could just drop a short answer. That's Nintendo and money on the switch and how much in your eyes?

Or is it lost making to sell switches? We don't know, but I believe it is profitable and given the nature of, you know, you have the innovation and kind of cost curve element of the mobile ecosystem. and parts continuously get cheaper and cheaper. And so I think, you know, at the beginning, they made, you know, they certainly weren't lost leaders.

They were profitable in themselves. And, you know, the magnitude of each margin on every hardware unit sold, you know, will only grow in time as the components, the cost of creating them kind of drop rapidly. And there are various ways that Nintendo can pass on that, or, you know, reinvest it, you know, in better things or, you know, kind of drop the price point to expand the user base. But it's like Apple, you know, where I don't think they rip people's eyes out like Apple does in terms of their hardware margins. But I think they're solidly profitable and the profitability is, you know, should continually increase over time as, you know, the cost to create the hardware.

drops because the costs, you know, of the chips and all the rest are driven by a much larger, global ecosystem that will kind of guarantee it. So that's part of the genius of, you know, the switch, you know, the transition to primarily off the shelf parts. It's not only the fact that you can, you know, incrementally, iteratively improve and strengthen making, you know, say like a more efficient, faster chip for the pros and what was in the original one, you know, to make the experience and gameplay better. But you also have this fact that, you know, the profitability of the hardware units scales and expands at a much faster rate than it would if you had a highly technical customized chip, you know, like past console generations. Do you have something to add,

Todd? No, I mean, I think if anything, we would like them to have the hardware be a loss leader, right? You know, we want to have more people in the system and then get the sales coming through at the higher margins for that software present than, you know, trying to make 20, 30 percent gross profit or so on the hardware. We prefer that they just broke even on that and sold more units and got more people. in the door. I mean, I think that's what people want. I mean, I think the ultimate value of Nintendo is going to be how many people want to play its IP and are they willing to pay for it, right? And so I think that's what people are saying, well, they should be doing mobile. And, you know, I would argue they should just make switch ubiquitous, right, to the extent that they can and do so,

you know, financially it makes sense. You know, that's that, I would prefer that. Yeah. Well, I think that's part of the Apple model, right? I mean, you know, One of the things I think with the pro, you're going to have a good, better, best pricing lineup where you might see, you know, the light drop to 150, you know, the OG switch go from, you know, say, 200 to 250, probably closer to 250, and then have the OG switch or the pro, you know, go for 350 or something like that. So, you know, and then as time goes on, you know, you will be able to, I mean, what do they have, like four, three, $400 iPhones now, like, you know, with different components.

I mean, you know, as then that's part of the mobile architecture and how all of this stuff kind of comes together in a way that creates this virtue of a cycle that allows the hardware to get cheaper and cheaper and also the experience to get better and better in a way that will, you know, expand the addressable market because it will draw more and more people in because it becomes increasing and more affordable, you know, at the low end. and then you're also expanding it at the high end by increasing its power and all the rest. So, you know, I think Todd nails it. Like, you know, this business is driven by software.

You know, I would much rather have them sell, you know, hardware at zero margin and triple the installed base, you know, and sell three games to every customer per year in that installed base than try and eke out, you know, a slightly higher incremental margin on, you know, each device they sell. So, you know, they can be dense at times, but I don't think they're that dense. And so I think they get it. And, you know, we're going to see, you know, kind of that Apple-like, you know, explosion of models and various price points, you know, to expand the reach of the integrated hardware software ecosystem.

And that's going to just, you know, drive, I think, a step change increase in the annual amount of software that they sell every year, you know, with profound implications to the bottom line over time. We also had this already had this chart, but I want to bring it back on because it shows also the opportunity you have in the subscriptions and in the West where you can sell in the games. Like I think in Smash Prevarez, it's already like if you want to have certain characters, you have to buy them or you can buy them if you don't want to invest time. It's like a bit of the world of Warcraft model, where people, some people game and others buy the stuff they want to get.

So it might be interesting to see this, which might be also another source for revenue. But maybe also let's go, you already mentioned it a bit in the installed base. This is a comparison that just, I hope you see it already. That's a comparison of the sales of Wii and switches and where you can get another. year of the installed bases also supported by the pandemic. The Wii is the red line and the switch is the blue line. So you see the main chance they have getting an installed base big and then selling software in it?

That's the name of the game. I mean, that's it. I mean, I think you expand the, you know, the installed base. And, you know, you have, you know, a larger and larger kind of direct consumer-embedded customer base that you can, you know, sell increasingly high-margin software into. And, you know, the, again, the kind of the flywheel network effects that come to that, you know, with the pro will bring in, I think, a considerable more volume in terms of AAA or now. I guess quadruple-A games from our AAA because it'll be now previous gen PS4 type things. But, you know, there's lots of incremental demand to be unlocked. And then, you know, once they have, you know, like I, you know, one of the advantages of Apple, for example, in terms of, you know, apps has to do with the fact that they have a non-fractured, you know, user base that perpetually grows that, you know, not only can developers create, you know, apps, but they know that, you know, that the installed base, the amount of people they can sell their app to, you know, through Apple's ecosystem will continually grow.

And therefore, you know, that's one of many incentives that explains why there's so much more, you know, developers and the breadth and depth of apps on Apple's ecosystem is. continually growing and much better than Android because of the hardware is fractured. So I think Nintendo has an opportunity to, you know, create. I mean, it's like mobile with the subscription monetization and how this business can literally create billions and, you know, tens of billions of, you know, implied equity value and billions in incremental, you know, cash flow to the bottom line by, you know, simply creating new services out of thin air. I mean, you know, they haven't disclosed much detail when it comes to Mario Carp Tour. But, you know, given the, you know, installed base, I mean, you can get to

the optionality and mobile with respect to, you know, what the earnings power could be for the subscription business of Mario Carp Tour alone over time can be huge. You know, you go across Fire Emblem and, you know, you continue to make mobile games, you know, maybe just one every other year, but if they're good, you know, you can just stack reoccurring subscription revenues on top of that for, you know, very little cost, you know, incremental cost to Nintendo's. So that's one example of the ways in which the growing installed base and, you know, whether it be third party, you know, video game developers or, you know, just creating new ways for existing Nintendo fans to play the games and the franchises that they love in new ways.

It's just a, it's a beautiful business model that, you know, that the installed base and having that become perpetual and non-cyclical is the key. Doesn't Nintendo have the problem in this space? Because like the bestsellers like Animal Crossing, Super Smash Brothers, Mario Card 8 are mainly Nintendo games and other game developers don't have the incentive to build their games for Nintendo and the switch to weak? I think that... Yeah, yeah, yeah.

That is sorry to interject. I think that is the entire reason for the pro and the good, better, best model. You know, they need to be, you know, for most of, call it the main publishers, you know, think Calla Duty or a lot of

the big franchises on, you know, non-Nintendo platforms. you know, the switch, you know, up until now has been limited in, you know, let me put it this way. There was no way that a third party, you know, call of duty, for example, that their publisher, you know, can create a faithful rendition of the game on the switch, where the gameplay, you know, holds up. You know, like its power was too limited. and, you know, this is kind of what will unlock.

I think the pro unlocks a whole new world in terms of third-party developers and allowing third-party developers to not only access, you know, switches massive and growing installed base. But more importantly, and I think this is really the crux of the issue, do so in a way that doesn't, that is faithful, you know, a faithful rendition of the game itself, where they don't have to make sacrifices that either destroy the gameplay or, you know, can diminish the brand at the margin. The pro, I think, solves all that. And, you know, I think because of that and other factors, you know, tangentially related, what you're going to see, you know, in 2021 and beyond is not just, you know, kind of Nintendo using their first party IP and kind of corporate bombing, you know, consumers with, you know, marking franchises throughout the year, I think you're going to start

to see, you know, the EAs and the activisions of the world start to take, you know, to switch platform more seriously, not because they were ever dismissive, but because now they can actually create the games, you know, that, you know, they can create their games faithfully in a way that can be played as they expect them to be not limited. There's been some ports that have been just kind of laugh out loud terrible because of, you know, power issues and whatnot. And I think the pro, just like the light expanded the addressable market towards, you know, a lower cost option, you know, that was, you know, a bit more durable and centered around kids and, you know, what we've seen from the data, for example, females and women, you know, I think that that is kind of. kind of the strategic logic for the pro is in both cases, you know, these new systems, you know, appeal to and should suck up, you know, purchases from, you know, you're not cannibalizing

your existing user base. You are expanding the amount of, the amount, the type of people that are willing to play your games. And I think that's important, again, with big implications. that's an interesting point one point i observed on my on my by my buying habits as i bought the switch i also tended to buy other gear and there's a certain confirmation that you want to be consistent if you confirmed like okay i'd invest 300 euros or whatever i paid for this and i also go for other games and i want to try the whole experience so i think they might be coming back to this charge already locked in if some people tick like me and some more growth in gear and other stuff and if this installed basis is there and even stays flat people

tend to consume more and more Nintendo gear whatever around this this is an interesting thing I think the key is just keeping them engaged I think that's why third party introduction to the network or to the Nintendo world is so important. I mean, previous console generations of Nintendo were kind of walled off to third-party developers. Now they're embracing them more, and I think that's so important. I mean, look at, you know, Fortnite on the switch allows people to utilize the hardware when they're not playing a Nintendo first-party game. I mean, the last thing that Nintendo wants is a switch-gathering dust in a drawer somewhere, right?

They want people interacting with the hardware on a frequent basis that leads you to more sporadic purchases and spontaneous purchases and just creates more profitability for the business. So having those third-party games like Among Us and Fortnite and Minecraft on the Switch before they probably wouldn't have been, but now they are. And I think that helps utilize the hardware in ways that previous consoles of Nintendo just wasn't possible. Yeah, and I would only deal the thing out is that one of the things that change it,

where the dynamic is kind of fundamentally, you know, improved. And I think permanently is not only do you have kind of the arrival of a growing number of, call it hardcore gaming core franchises, you know, the last amongst us, Fortnite, you know, there's, you know, all of that stuff. But then there's the indie game component, which, you know, I think has become, the switch platform has become kind of the core platform that, you know, a talented indie developers want to use and put their game on. So, you know, in the past, where Nintendo was essentially bootstrapping all of its consoles with its own IP,

and, you know, kind of having a prayer session that the installed base, you know, that the, you know, that they could somehow hit exit velocity. You know, they've done it in a way this time where not only do I think they could hit exit velocity on their own IP in general, but when you add in the diversity of kind of fun indie games and now, you know, kind of franchised hardcore gaming IP. I mean, the pro is kind of like the ultimate Trojan horse to start converting, you know, historically hardcore gamers that, you know, love things like, say, Call of Duty. Well, for the first time ever, they'll be able to play Call of Duty like they would at home

on their Xbox, but, you know, they can play a faithful rendition with their friends when they're on the train to work or, you know, I think that's just kind of a genius way to, I don't really look at Sony and Microsoft as competitors. I look at them more as kind of compliments instead of substitutes. But if your goal is to, you know, kind of sneak behind enemy lines and, you know, bring in all of the experiences that make these consoles differentiated unique. and make them playable in a faithful way on the switch, given its hybrid system, I think you have a real opportunity to convert a substantial number

of not just kind of old 3DS customers that haven't jumped on the fence and bought a switch, convert that kind of embedded installed base. You can start peeling away a lot of the hardcore gamers that in the past would never have bought a Nintendo system, but now have a new reason to, you know, consider it and make the plunge. So to keep people engaged, management has to play it good. Maybe let's talk a bit about management at this point.

I think the managers of Nintendo don't hold that much stock. So some could say, yeah, how is the alignment of interest here? is this good practice or is there something you should consider if you're thinking about Japanese companies, how the alignment of interest works there? What does you take on this? I think there are a couple interesting things. I'm far from an expert on Japanese business culture, so I don't want to give that impression. But I think a couple of things I've realized about Nintendo is relative to the other game

makers, especially Activision and EA and Take 2, their executives are. dramatically underpaid, you know, and we've actually had some concerns about that, thinking, you know, if you want to have the best IP development, you need the best developers and the most creative thinkers. And, you know, if they're going to Activision or to EA for a higher price point, well, that's concerning, right? You know, but I think there's, there's also a, you know, a joy of working at Nintendo that allows them to pay perhaps their developers a little bit less. But I think, you know, so our concern is actually the opposite. Like, are they not incentivized enough?

I think in 2014, and correct me if I'm wrong on the date, Ryan, but, you know, the president at the time in Nintendo took a pay cut because they didn't hit their profits, right? And you would never see that in the U.S. or the European market. I mean, maybe, maybe I don't think in Europe, but mostly in the U.S. I mean, you would never see it. You miss a target. You miss your bonus or something, but you don't cut your salary. I think you cut a salary in half. And so I think there's a real, you know, sort of, I guess, you know, they really believe in the legacy of Nintendo.

You know, it's sort of like an aristocratic family. Like, you don't want to be the last guy, right? Like, you want to continue the heritage of what you've inherited. You want to pass it along to the next group, right? And I think it's sort of a same philosophy. at Nintendo that has been my impression at least is they want to be able to preserve this great franchise, this great icon Japanese culture and pass it to future generations. I mean, that's why I don't think they are going to do anything just dramatic to ruin what they've built here

with the switch. I don't think they have another chance, right? I think the video game industry is changing so much that, you know, it's so difficult for them to have to stop now and rebuild. Maybe they could, but it'll be so hard to do. I think it's harder now. than it was after a week. So it's a bit like a family business? Exactly like that, I think. In fact, I think it's in some ways it's, you know, I'm trying to think of a great analogy,

but me back up a bit and go to, you know, kind of town's point. It's like when I first, I were first remember seeing the amount of stock, you know, kind of early in the diligence phase that, you know, management owned and it was kind of, you know, horrifyingly tiny in the sense that, you know, basically no stock at all. But I think as you delve deeper and you understand the culture, you know, Nintendo's place within, you know, Japan, you know, as kind of a, you know, national champion, you know, a global icon. I mean, a representation of Japan and, and, you know, the best and kind of brightest.

You know, I think there's one thing that, you know, you go through this over time and it is, I don't know, it's in some ways it's life. I mean, you know, Miyamoto, who basically owns no stock, I mean, his entire artistic and creative out, you know, like this is, to say it's his baby, you know, in many ways, you know, all of the C-suite and the top of exec, I mean, this is their lives. It is their creative, you know, like they're, it's like a great band coming out with a terrible album. You know, they're never going to do it. They're always going to try and shoot for the stars because it's very much culturally who they are.

You know, I don't think they're motivated by money. Just like the best, you know, hedgeman managers, you know, I've never found one that, you know, that is truly great, that isn't in it, you know, for the love of the game. You know, so another way money really doesn't. matter, you know, they could work at McDonald's and they'd still do the same thing that they do every day because it's what they love to do. And, you know, in some ways, the art is an extension of themselves. And I think that that is very much the way it is at Nintendo from top to bottom. You know, the other thing I would add, and let's see if I can remember the full point when Todd was saying was, what was it was an important and a good one um

uh maybe talk can add something here and you will you know i just got it so so here's here's the thing it's like you know ea's executives and you know or a lot of the other people in the industry that make um you know uh not you know arguably i'm i'm sure it's market rate but you know obscene amounts of money you know in terms of salary wise uh you know there you know you they're so focused on the profit motive, you know, and maximizing profit that I think, you know, there are real dangers that they, you know, have destroyed or, you know, will destroy at some point kind of marquee franchises.

You look at the sports games, like never really kind of improving and being the same thing. You've kind of hit a law of diminishing returns in a lot of ways where, you know, now they've started to introduce gotcha and loot box mechanics and all these things that not only I think upset the fan, but are, you know, questionable actions, you know, when it comes to, you know, focusing on the long run and protecting the moat and building the moat, you know, where they'll, you know, there's short-term myopia, you know, that they make dumb decisions that might juice the bottom line more in the short term, but, you know, ultimately put at risk their most valuable franchises and, you know, kind of the love that they've built over the years, you know,

just being short-sighted, you know, I think that's kind of a nice thing about, you know, Nintendo's executives and, you know, the people that, you know, represent, you know, the company is that, you know, it's not about, you know, they could give a shit. I mean, if it's not obvious that they give two shits, you know, what other people think, you know, they're going to be Nintendo and that's that, I don't think, you know, you've been paying attention to this company, you know, like, and I love. that. I love that they know who they are. You know, they are kind of artists on a mission and, you know, they're going to do what, you know, they do irrespective of external pressures,

you know, because they love the game. I mean, a lot of the kind of practices and ways I've built the culture of crossroads from the bottom up, you know, you talk to a marketing guy, they think I'm insane. But, you know, I understand, you know, long term why this, these things are critical. to not only establishing but maintaining our competitive advantages. I think in kind of a roundabout way, looking at their low salaries, speaks to an element about Nintendo

that gives me more comfort that, you know, never changed Nintendo, never change, is one of the things that I always kind of chuckle about when I see them do something stupid or not kind of just really profit-maximized. But, you know, I've learned, you know, again and again, you know, what I initially thought was stupid, you know, has come back to me in a way that, you know, now I view as wise. And, you know, I just have a, you know, they've

given me more respect for not only the integrity of their culture, but of what long term really means, you know, and, you know, what, you know, in some ways, because they're not thinking about getting rich, you know, it's like Howie Buffett being on Berkshire's board, you know, how he doesn't need money, you know, but he cares about the franchise, he cares about, you know, what his father's built. You know, Miyamoto doesn't need money. You know, he'd probably rather, you know, you know, jump off a building, you know, than, you know, in any way denigrate or disgrace, you know, the kind of the arcs that he's built over his entire life. And in some sense, I think that protects the moat and gives me more strength that 10 years from now,

and beyond, Nintendo will continually be doing, you know, what they've always done, which is make incredibly immersive unique games that, you know, everyone loves. And that's, I think, kind of a beautiful thing. Do you have something to add? No. No, I think, you know, Ryan, Ryan nailed it. I've got another chart for you. It's the, I would call it, kind of flywheel of Nintendo. And I would love your comments on this for the end of our very long and very good interview this is the chance we haven't discussed but that's also coming up at our two charts this shows the chance they have to build merchandise mobile visual content like movies theme park and this is also the other side of it showing that um that you

you get the IP they have bringing it to the more people. What is your take on this chart and the strategy of Nintendo? Yeah, I think, you know, I remember from growing up, Nintendo was kind of overheated in terms of its merchandise. I mean, it was everywhere. You had the Mario Brothers cartoon. You had the movie, which was just a terrible representation of the Mario brand. And I think that really set Nintendo back on this process for,

a long time because they thought, you know, we did this once, we got burned. Let's not do it again. They became kind of insular. And now they're starting to kind of emerge, but even kind of more beautifully. It's like we have this theme park. And we're going to do a movie that with a, with a studio that's going to, you know, maintain the integrity of the IP. Now, I don't know if you've seen other illumination movies like The Grinch or Minions, but I mean, it's just brilliant. And I think it will work very well with Mario. Being capital efficient. What's that, sorry?

I said aim capital efficient. Yes. Their profitability is a step change higher than almost all other animated studios. Right. And so it's great. And so I think this is just a way for Nintendo to have more touch points in your lives

and your kids' lives because your kids are almost as big of fans as you are, probably more so. And so I think it's, you know, like my son's birthday was Nintendo theme, right? And, you know, I have to believe it was because he and I enjoy playing that together. And I can imagine when Mario World opens in theme park opens in California, Florida, you know, we're going to go, right? It's going to be just a part of that experience constantly interacting with Nintendo. You know, just an interesting aside, you know, I got Mario Odyssey game for the first time.

It's the first Nintendo game, or Mario game I've played since Mario 64. And I was never really interested in Mario content for the past 20 years, but all of a sudden, I jumped on it and it was just like, oh my gosh, this is just like, you know, the old days, right? Just the joy of playing. And so I think, you know, it's a way for, you know, Nintendo just to, you know, touch your life with that joy in different ways, theme parks, merchandise. But I think they're going to be careful this time not to go. overboard and become ubiquitous, but I think that they are trying to have more interactions with you than they currently have. Ryan, do you have an idea how much revenue in the future could create it by all this endeavors? So I think, you know, the short answer is, you know, if you can like the farthest, certainly not a precise one.

You know, I think you can kind of. future so yeah yeah i think you can back into uh what the earnings power um to nintendo will be you know once the kind of existing plans as far as expansion florida uh you know los angeles you know i think that you know they have talked about and at least based on you know their current parks you know you would expect a super nintendo land to be in i don't know six to seven, you know, I can see six to seven Super Nintendo lands over time. And, you know, much like Harry Potter, where you have, like, you know, wizarding world and different things at different, you know, places, you know,

fingers crossed, they do a Zelda one in Florida. There's reasonable reasons to believe that you might have a giant high rule there. But I think, you know, that can be a meaningful business that will move the needle. I think, you know, in terms of movies and TV, I think, you know, the upside there is kind of mind-boggling. I think it's interesting that they didn't just license, you know, the upcoming Super Mario Brothers movie to Illumination. You know, they spent a considerable amount, you know, they shared the CAPEX, you know, they will retain the IP that they can monetize through various, you know, streaming services, you know, in a digital world. you know, kind of starving a family-friendly IP that, you know, works globally, cross-culturally across the world, you know, that's, you know, a big potential lever as long as they get,

you know, the quality right. You know, if they make great stuff, I think, you know, the potential implications to the bottom line are incredible. I mean, you know, and this is, again, you know, the way that, you know, kind of treasure trove underutilized libraries of kind of peerless IP, you know, are so powerful is, you know, like with the mobile subscription biz, you know, that's a way to create, you know, I think not only delight your fans, but create billions in high margin, incremental reoccurring revenue, you know, you have something like, you know, what they're doing here with Super Mario Brothers. I mean, imagine if they sold the Legend of Zelda or Metroid to Netflix or Amazon. You know, I mean, that would, you know, I wouldn't be surprised if, you know, they made, you know, half a billion to a billion dollars simply by selling a few seasons of rights to, you know, some of their marquee franchises globally. So, you know, I think that, you know, those two levers alone have the ability to materially move the needle.

you know, merchandise, I think, you know, less so, but I think it's not immaterial. It's not on that slide, but I think, you know, continued expansion of the Nintendo retail stores, I mean, all you got to do is, again, is look at Apple and see the potential uplift to earnings power by kind of, you know, stepping on the gas with their billions in excess capital to build out more retail stores. I mean, when the retail store that opened to Japan, I think it's been a little over a year now, but, you know, until Corona, there were lined, literally like four-hour lines to get in months after the release. You know, I think that speaks to, you know, the potential to continue to replicate that at high returns. You know, without, you know, at the end of the day, I think, you know, they are, you know, expanding the diversity and sources of their earnings power by better utilizing their IP.

this is going to create a lot more touch points and help not only maintain but grow mind share amongst consumers globally that will help them stay relevant and help them become a materially more capital efficient, better business over time. But when I look at all those, I just think kind of the same thing I think about

Nintendo writ large. I mean, it's like a giant bag. You know, friends that I will be like, okay, this is free option number two. 2,464, you know, it's like, it's nothing but, you know, these massive, you know, largely free call options, you know, outside of just the core dedicated council segment, which I think you can get a multi-bagger on the stock simply from that business segment alone, you know, if a few of these shots on goals, you know, hit net, you know, I think these other call options

could land profoundly in the money and be worth kind of, you know, the EV and then, over time. I mean, Pokemon is arguably the most valuable IP in the world, you know, creating ring fit into a, call it a low-cost palaton, you know, with an already established base. I mean, you know, where I get pained when I think about, you know, the downsides of management is in them not fully pressing, you know, the, all the different ways they could, you know, you know not just make a ton of money but I think improve you know the Nintendo flywheel larger ecosystem and I wish they would kind of move faster

but I love it I think it's going to work bridge to the last question so I came up with this at the beginning so what could happen that the switch goes off and the ring has no fire anymore so what could go wrong with Nintendo Yeah, I think, you know, our biggest concern is really what's what you're seeing, particularly around, you know, the entertainment world is, is converging in a way, right? So you're seeing, and really they're converging towards video games. So this is good, you know, it's like the whole metaverse concept where you've seen, you know, concerts being done on.

Fortnite, for example. So I think they have a home field advantage of sorts. But you think about, you know, especially kids, because let's face it, Nintendo does have a large kid base in its gameplay. There's only so many hours in a day, right, to consume entertainment, especially if you're a kid in sort of Nintendo's core demographic. Let's say you're like an eight-year-old, you go to school, and then you have a natural school activity, and maybe you have an hour to play. Well, if your friends are all playing Roblox, right? You're not going to spend as much time engaged with Nintendo's IP during that time. And so, you know, that's one of our concerns is kind of keeping an eye on how are kids spending their time. And what we're currently seeing is that they're doing both,

right? They're doing their Roblox, but they're also doing Nintendo, right? And so that's key to the continuation of the franchise. You think about, you know, sports franchises, you know, kids grew up with baseball. Now, baseball is not as exciting because they were playing lacrosse as kids or they're playing a different sport. So it's important for us to see that Nintendo's IP remains relevant to all generations as time progressed because that just increases the flywheel over time, right? So when they become parents, they'll share with their kids and so on and so forth. And it creates this enduring franchise. So if I was going to be a bear on Nintendo, I wouldn't focus at all on the console, I'd be more focused on looking at the hours spent engaging with

Nintendo IP versus emerging forms of entertainment. Do you have something to add, Ryan? I think that's dead on. A lot of the risk people talk about, you know, I think are not risks at all. I mean, in our increasingly attention-based economy, you know, there's only a finite, amount of time, you know, people have to devote towards, you know, various sources of entertainment and, you know, call it, you know, escapism. And, you know, when I think about what could erode and, you know, kind of permanently chip away at the moat, it is, you know, some transformation in terms of the way people spend their time, not only within video games, but, you know, outside of it, outside of, you know, traditional video games.

So I think that's really the big worry, you know, when I think about kind of more traditional things, you know, I guess it's, you know, in my opinion, I think it is a near certainty that the business transition, the business model transformation is what, you know, I think we initially hoped it would be, you know, you add that to, you know, the digital. mix shift that will, you know, continue to be ongoing. And then you dig into their, you know, balance sheet and the value of these incredible kind of hidden assets. You know, I don't think there is much of a risk, at least looking out 24 to 36 months, regardless of what the future holds. I think the business is going to continue to fire on cylinders. On all cylinders, I think the operating momentum will continue. I think that, you know, where normalized earnings power balances out, you know, call it three plus years from now, will be, you know, substantially higher than what I think most, certainly most people on the street imagine.

But so it's hard for me to kill this idea no matter how I approach it, you know, given, you know, the value of its assets and, you know, the positioning of where they stand competitively. that said, long-term, if I'm thinking out 10 years, I think Todd nails it. I think that's the thing that ultimately would keep me up at night. And, you know, I think one thing that gives me comfort, and this speaks to, you know, why the changing of the guard around 2015 in terms of entering mobile, you know, it was important to me that, you know, I don't know if I would have invested if it wasn't clear to me, you know, in terms of management and the board that they were aware of, you know, this exact

issue. And this is part of the theme part. I mean, you know, you're seeing them rev up their grossly underutilized, you know, IP library into various new mediums, specifically because they realize kind of the existential threat of exactly what, you know, kind of taught laid out. And as long as they continue to execute, I think they're doing all the right things, as if they you need to execute towards that goal. I'd be really surprised, you know, if there is, you know, some world, you know, five, ten years from now where that kind of existential threat exists,

but, you know, you never know. So that's kind of where I'd focus. Thank you very much for all the great insights and all the time you've taken to do this interview. So if people want to do more due diligence on Nintendo, feel free to send me a message. Maybe you should start a clan together and call it Longs in the name or Finchwit. We will see how we will play it out.

If there are any more questions, drop them in the comments. Maybe we can do another session one day. And thank you very much to the audience for listening to our talk. I hope at least some people stay till this point. Thank you very much. Thank you, guys. Thank you. Appreciate it.