Latest / Business Strategy Talks with Fexingo: Competitive Advantage, Market Positioning, and Growth Planning / How Nintendo Turned IP into a Decades-Long Moat
Transcript
- Lucas: There's a number that's been rattling around in my head since Nintendo reported its fiscal 2025 results back in May. The company's top five franchises — Mario, Zelda, Pokemon, Animal Crossing, and Splatoon — generated over four billion dollars in software revenue last year alone. Luna: That's more than the entire annual revenue of publishers like Take-Two or Ubisoft, just from five series. Lucas: Exactly. And it's not just software. Nintendo's IP extends into mobile games, theme parks, movies, merchandise. The Super Mario Movie grossed over one point three billion worldwide. But what's interesting to me is how Nintendo has built this moat not by being the most technologically advanced, but by being the most disciplined steward of its characters. Luna: Discipline is the right word. They've resisted the temptation to license Mario to every free-to-play mobile developer or flood the App Store with low-quality games. Compare that to, say, how Disney licensed its characters for years before pulling back. Lucas: Right. And that restraint is actually the core of the moat. Nintendo understands that its IP is a finite resource. Every time you put Mario in a bad game, you chip away at the brand equity that took decades to build. So they control the entire experience — hardware, software, even the theme park attractions are designed by Nintendo's own teams, not outsourced. Luna: It's vertical integration of the imagination, almost. They make the console, they make the games, they make the movies, they design the rides. No one else in gaming does that. Lucas: Not at that scale. Sony has great first-party studios, but they don't own a movie studio or a theme park division inside the same company. Microsoft has Game Pass, but they license their IP to other media. Nintendo is unique in that every touchpoint feeds back into the core franchise value. Luna: And that creates a virtuous cycle. A new Zelda game drives interest in the franchise, which boosts merchandise sales, which makes the next Zelda game more anticipated, which sells more hardware. It compounds. Lucas: Compounds is exactly the right framework. Let's look at the numbers. The Legend of Zelda: Tears of the Kingdom sold over twenty million copies in its first year. That's not just a great game — that's a franchise event that moves hardware units. The Switch itself has sold over one hundred forty million units, and Nintendo's operating margin in fiscal 2025 was around thirty percent. That's higher than almost any other hardware manufacturer. Luna: So the moat is really a combination of brand trust and ecosystem lock-in. If you buy a Switch, you know you're getting Mario, Zelda, Pokemon. Those are exclusives you can't get anywhere else. Lucas: And the hardware is deliberately underpowered compared to PlayStation or Xbox. That's not a bug — it's a feature. Nintendo doesn't compete on teraflops. They compete on having the best games. And because their games don't require cutting-edge graphics, they can keep development costs lower and still deliver experiences that feel magical. Luna: I remember reading that Tears of the Kingdom was developed by about three hundred people over six years, with a budget reportedly under one hundred twenty million. That's a fraction of what a big-budget PlayStation game costs, and it sold over twenty million copies. Lucas: The return on investment is staggering. And that's the financial logic behind the moat. Nintendo can take risks on weird new IP because the core franchises are so reliable. Splatoon, for example, launched in 2015 and has become a billion-dollar franchise. That's rare in an industry where most new IP fails. Luna: But there is a risk. Nintendo is heavily reliant on those top five franchises. If one of them starts to decline, or if a new generation of gamers doesn't connect with Mario the way their parents did, the whole model wobbles. Lucas: That's the flip side of the moat. Overdependence on legacy IP. But Nintendo has shown an ability to evolve its franchises. Breath of the Wild reinvented Zelda for a new generation. Super Mario Odyssey did the same for Mario. And they've been careful not to oversaturate — you get one mainline Mario game per console generation, maybe two. Luna: Scarcity as a strategy. That's very different from, say, Activision, which releases Call of Duty every year. Lucas: And that annual release model can fatigue the brand. Nintendo's approach is more like a premium event. You wait years for a new Zelda, and when it arrives, it's an event. That's part of why Tears of the Kingdom was the fastest-selling Zelda game ever. Luna: So how does this play into the upcoming Switch 2? We're expecting it to launch later this year or early next. Does the moat hold if the hardware changes? Lucas: The moat is in the software, not the hardware. The Switch 2 is rumored to be backward-compatible and more powerful, but the real question is what exclusive games ship with it. If Nintendo launches with a new 3D Mario and a new Splatoon, that's a compelling proposition regardless of whether it matches the graphical fidelity of the PlayStation 5. Luna: And if they also have a new Zelda in the pipeline for year two, that's basically a guaranteed hardware cycle. Lucas: Exactly. But there's another threat on the horizon: the shift to subscription and cloud gaming. If consumers stop buying individual games and just subscribe to Game Pass or a cloud service, Nintendo's premium game model could be disrupted. Luna: Nintendo has been cautious about putting its full library on subscription. Their online service gives you access to old NES and SNES games, but not the big modern titles. Lucas: And that's deliberate. They don't want to devalue their IP by making it available for a monthly fee. A Mario game that costs sixty dollars is a statement of value. If it's part of a ten-dollar subscription, it becomes a commodity. Nintendo is protecting the luxury-good nature of its franchises. Luna: That ties back to the discipline we talked about at the top. They're willing to leave money on the table in the short term to preserve long-term brand strength. Lucas: And that's a hard decision for public companies under quarterly earnings pressure. But Nintendo has historically been willing to accept lower revenue in exchange for higher margins and brand equity. Their market cap in mid-2026 is roughly seventy billion dollars, which is higher than Sony's gaming division is valued on its own. Luna: If today's conversation has given you a new way to think about how intellectual property can function as a competitive moat, that's exactly the kind of insight we try to deliver here. And if these conversations have moved your work forward in some small way, the way these stay ad-free is listener support. Lucas: Yeah, it's a simple thing but it makes a real difference. You can find us at buy me a coffee dot com slash fexingo. No pressure, genuinely — just a way to keep the show going for people who find it useful. Luna: And we really do appreciate it. Now, back to Nintendo. Lucas, you mentioned the theme parks — how do those fit into the moat strategy? Lucas: They're a brand amplifier. When you walk into Super Nintendo World at Universal Studios, you are inside the game world. It's not just a ride — it's an immersive experience that deepens your emotional connection to the characters. And Nintendo designed it themselves, so every detail is consistent with the games. Luna: So it's not just licensing — it's controlling the narrative across every medium. Lucas: Exactly. That's the moat. No one else in gaming has that level of cross-media integration. Disney is the closest parallel, but Disney's core business is media, not games. Nintendo's core is games, and the other media are extensions. Luna: So what could break the moat? What keeps you up at night if you're Nintendo's CEO? Luna: And Roblox alone has over seventy million daily active users — many of them under thirteen. That's a lot of attention that isn't going to Nintendo. Lucas: Right. So Nintendo needs to find a way to make its IP relevant in that world without diluting it. The Super Mario Movie was a step in that direction — it introduced Mario to a new generation. But the question is whether the games can compete with the endless, free-to-play worlds that kids are spending time in. Luna: Nintendo has also been slow to embrace mobile gaming in a meaningful way. Their biggest mobile hit, Fire Emblem Heroes, still generates decent revenue, but it's a fraction of what a franchise like that could earn if they were more aggressive. Lucas: But again, that's the discipline. They don't want to train players to expect Nintendo games for free on their phone. They want you to buy a Switch. It's a deliberate trade-off. Luna: So the moat is real, but it requires constant maintenance. It's not a static asset. Lucas: No moat is. But Nintendo's is deeper than most because it's built on decades of consistent quality and brand management. The question is whether that's enough in a market that's shifting toward services, subscriptions, and user-generated content. Luna: And whether the Switch 2 can recapture the magic of the original Switch launch in 2017, which was a genuine cultural moment. Lucas: That's the challenge. The Switch succeeded because it was a hybrid console that let you play Breath of the Wild anywhere. The Switch 2 needs a similar 'only Nintendo could do this' moment. If it's just a more powerful Switch, the moat might start to erode. Luna: So the IP is the moat, but innovation in how you deliver that IP is what keeps the moat deep. Lucas: Exactly. And that's the story to watch as we head into 2027.