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A deeper look into Nintendo’s bling

posted on September 26th, 2007 by pat

Nintendo’s recent ascension to become the second largest company in Japan has been making news on a few sites which track the business aspect of video games. While it is true that a company’s market capitalization (basically a measure of what the stock market thinks a company is worth) has grown by leaps and bounds of late (as will happen when the price shoots up as much as Nintendo’s has) some of the underlying financial numbers are even more fascinating than the headlines.

By market cap, Nintendo is substantially larger than Sony (Nintendo is worth about $75 billion, to Sony’s $47 billion). In truth, this metric is only one way to judge the size of a company. What’s another, you may ask? How about sales, I answer. Sony’s sales are leaps and bounds higher than Nintendo’s. During fiscal year 2007 Sony recorded over $34 billion in net sales, while Nintendo brought in $7 billion. So in terms of sales, Sony is more than four times the size of Nintendo.

Then why the discrepancy in market cap (which we can refer to colloquially as size)? As far as I can tell, the reason is that Nintendo is staggeringly profitable. On the $34 billion Sony generates by selling their products, they spend almost as much on making them. Remove expenses, taxes etc., and Sony is left with a relatively meager $1.2 billion. At the end of the day, Nintendo gets to take home $1.8 billion. Fiscal year 2007 was not really exceptional, either. In 2006 Sony made $295 million while Nintendo made $791 million. In 2005, Sony made $486 million and Nintendo made $695 million. In 2004 Nintendo made money and Sony lost money.

Nintendo’s operating margin of 23% is the stuff that wet dreams (those of bankers and investors, anyway) are made of. Sony’s is a mere 3.5%. So essentially, if Nintendo and Sony both sell $100 worth of products, Nintendo gets to keep $23 and Sony will make $3.50. Sure, Sony does it a lot more times than Nintendo does, but they remain unable to make up that gap. Maybe it helps to make money on the things you sell, rather than lose it.

And where does Microsoft stand in all of this? For starters, they are located in America so I can stop converting numbers from yen to dollars. For another thing, they are much bigger than either of the Japanese companies, with a market cap of $278 billion. Net sales are $51 billion. Microsoft’s operating margin (and this surprised me) is actually 36%. No wonder Bill Gates gets to retire at the tender age of 51.

So there is it. Nintendo has made headlines recently because it is able to make money more efficiently than Sony is. For the patriotic among us, I guess you can take some pride in the fact that Microsoft dwarfs its overseas competitors.

Before I go, I want to make a few disclaimers. The conversions from yen to dollars were done at a rate of 115 yen to the dollar, which is roughly what it is today. The relative sizes of Sony and Nintendo will not be affected by changes in this rate, but once we throw MSFT into the mix, things get a bit more complicated. And most of these numbers are rounded or approximations anyway, so don’t go off making trades and closing deals based on them. Also, I understand that Nintendo is far more focused on games than either of the others. This is not a post about the profitability or superiority of one company’s games division over another, merely a little texture to flesh out the recent buzz Nintendo has created on the business side of games.

6 Comments

  1. Golden Jew said on September 26, 2007:

    Nice analysis. Nintendo has a distinct advantage in that they are a single product line– video games. Sony has their fingers in movies (and their movie division is not doing great, Pat may have the numbers), music, and electronics.

    It’s very hard for a big company to do many things right, typically companies can only really do one or two things well. Sony, like many other big companies, is trying to find the synergies between their divisions to win on multiple fronts, but clearly that hasn’t been the case so far.

    Microsoft is doing the same, but they have the advantage of a near monopoly to bolster their coffers. Of course so far their “synergy” so far is delaying their game title launches on the 360 to wait for Vista. And for having the first console that can die like a computer!

  2. Golden Jew said on September 26, 2007:

    Hmm, I used so far too many times. No more posting past midnight. Like feeding a gremlin past midnight, only woe can occur.

  3. Matt said on September 26, 2007:

    Nintendo is a financial beast. And yet, their head honcho seems like such a nice guy! The company has the image of an adorable kitten that knows how to take a dump in the litter box.

  4. pat said on September 27, 2007:

    for you, GJ, anything.

    it is tough to say that any segment “is not doing great” since things can change so much year to year. especially in games. sony’s games division was making a ton of money a couple years ago, but then ps2 came near the end of its life and it cost them a lot to launch the ps3 so in FY 2007 the games division took a loss. sony pictures has made money each of the last two years, but less than it did in 2005.

    whats interesting is that we think of sony as an electronics/entertainment company when they actually have a large financial segment (set to go public soon). while the electronics division made sony the most money in 2007, in 2006, the financial services segment made several times more yen than any other segment (games, electronics, pictures, or “other” which must include music).

  5. TrueTallus said on September 27, 2007:

    Financial services? Interesting. What do they do, exactly? Are there Sony banking institutions in Japan? Brokerage firms?

    Also, great rundown. Facts are fun.

  6. pat said on September 27, 2007:

    sony financial is further broken down into a few “operating companies.”:

    sony life provides life insurance in japan.

    sony assurance (non-american companies frequently call insurance “assurance” probably because they are stupid and wrong) provides automobile and medical insurance (they actually split out medical and cancer insurance, im not sure why).

    the third and final OC is…Sony Bank (20 points to TT for the guess)which seems to compete more with ING types (by providing primarily online services) as opposed to wachovia types. sony bank actually seems like a good fit since it enables customers to make cell phone payments, etc and is very much where electronics and banking meet.

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