Latest / Business Strategy Talks with Fexingo: Competitive Advantage, Market Positioning, and Growth Planning / How Nintendo Built a Moat on IP and Game Design
Transcript
- Lucas: So we talk a lot about moats built on technology — CUDA lock-in, lithography monopolies, supply chain scale. But there's one company that has arguably the most durable moat in entertainment, and it has nothing to do with being the fastest or the biggest. Luna: Nintendo. Lucas: Nintendo. And I want to be specific here because the common take is 'Nintendo has great characters.' That's true but it's lazy. The real moat is how they've structured their entire business around intellectual property that they control completely, and how they've refused to compete on the dimensions their competitors chose. Luna: Right — they lost the specs war on purpose. The Switch was using a chipset from 2015 when it launched in 2017. And it's still selling. Lucas: It's now the third best-selling console of all time behind the PlayStation 2 and the Nintendo DS. Over 140 million units. And they did it with hardware that couldn't run Call of Duty at 60 frames per second. That's not a bug — that's the strategy. By not chasing graphical fidelity, they kept their hardware cheap enough to be a mass-market gift item, and they forced themselves to win on software. Luna: And that software is where the moat lives. Lucas: Exactly. Let's talk about The Legend of Zelda: Tears of the Kingdom. May 2023. It sold 10 million copies in its first three days. By the end of the year, it was over 20 million. On a single platform. Those are numbers that most AAA publishers would kill for across PlayStation, Xbox, and PC combined. And Nintendo keeps virtually all of that revenue because they own the IP, they own the platform, and they own the distribution. Luna: Versus a game like Spider-Man 2 from Sony — Sony owns the IP, but they're paying Insomniac, they're paying for marketing, they're paying platform fees to themselves. It's still profitable, but Nintendo's margin structure is different. Lucas: Nintendo's operating margin has been above 30 percent for the last five years. That's higher than Apple. Higher than Microsoft. And it's not because they charge more for hardware — the Switch has never had a price cut, but it's also never been premium-priced. The margin comes from software attach rates. Nintendo users buy an average of 8 to 10 games per console lifecycle, and most of those are first-party titles at full price, $60 or $70, and they almost never go on sale. Luna: Which is the opposite of what Steam or Xbox Game Pass do. Nintendo has never done a subscription service for its back catalog in the way that PlayStation Plus or Game Pass does. Lucas: They have Nintendo Switch Online, but it's a fraction of the price and offers very limited content — mostly NES and SNES games. They deliberately avoid putting their crown jewels into a subscription model because they believe it devalues the IP. And so far, the data backs them up. A Mario game released in 2023, Super Mario Bros. Wonder, sold over 15 million copies at full price. Compare that to a game on Game Pass where the developer gets a lump sum and maybe a boost in DLC sales, but nothing like that per-unit revenue. Luna: The risk, though, is that this model is extremely dependent on the quality of the software. If Nintendo puts out a dud — and they have, like the Wii U — the whole thing wobbles. Lucas: The Wii U sold about 13 million units. That's a failure by Nintendo's standards. But here's the thing — the IP moat meant they didn't collapse. They absorbed the loss, regrouped, and launched the Switch three years later with Breath of the Wild, which was originally a Wii U game. That brand equity gave them a second chance. If Sony had a console flop like the Wii U, they'd have lost third-party support permanently. Nintendo's first-party IP was strong enough to carry them through. Luna: So the moat is really about vertical integration of IP — they own the characters, the game design philosophy, the hardware platform, the publishing, and even the manufacturing partnerships. Lucas: And they've been doing this for over 40 years. Mario debuted in 1981. Zelda in 1986. Pokémon in 1996. These are franchises that have been running for decades, constantly refreshed but never diluted. Compare that to something like Angry Birds, which was huge for three years and then disappeared. Nintendo doesn't just create characters — they create gameplay systems that are tied to those characters. A Mario game is a jumping puzzle platformer. A Zelda game is an exploration and puzzle adventure. A Pokémon game is a creature-collection RPG. The genre and the IP are inseparable. Luna: And they've been very careful about licensing. They don't put Mario on everything. They don't do a Mario movie every year. The Super Mario Movie made over a billion dollars globally in 2023, but Nintendo had been approached for decades and said no until they found the right partner in Illumination. Lucas: That scarcity is a feature. The same way Hermès doesn't flood the market with Birkin bags, Nintendo doesn't flood the market with Mario games. Between 2017 and 2024, there were exactly two mainline 3D Mario games: Odyssey and Wonder. That's it. Seven years, two games. And each one was an event. Luna: Now, the big question as of mid-2026: the Switch is getting old. It's been on the market for nine years. We're expecting a Switch 2 any day now. Can Nintendo repeat the same trick? Lucas: That's the billion-dollar question. The Switch succeeded partly because it was a hybrid — a home console you could take on the go. That was a genuine innovation. The Switch 2, if the rumors are accurate, is more of a refinement — better screen, better chip, maybe 4K output when docked. But it's not a new category. So Nintendo has to win on software again. And they have the IP to do it — a new 3D Mario, a new Zelda, maybe a new Metroid. But the risk is that the hardware is no longer differentiated enough to justify the premium pricing on software. Luna: And competition is fiercer. Microsoft is putting Game Pass on everything, including smart TVs and phones. Sony is porting more games to PC. Nintendo has stubbornly kept its games exclusive to its hardware. If the Switch 2 doesn't sell as well, that exclusivity becomes a liability. Lucas: Still, I'd bet on Nintendo. Because the moat isn't the hardware — it's the fact that there is no other company that can make a Mario game. There is no substitute for the Zelda experience. And as long as they keep delivering that at a high quality, they'll have pricing power. A lot of companies would kill for that kind of brand loyalty. Luna: And it's worth remembering that Nintendo has been counted out before. In the early 2000s, people said they couldn't compete with Sony. In the early 2010s, people said mobile gaming would kill them. They're still here, still profitable, still charging $70 for a game that never goes on sale. Lucas: If these conversations have moved your work forward in some small way, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it makes a real difference. And it keeps the show ad-free. Lucas: Back to Nintendo — the other thing I find remarkable is their approach to mobile. They were late to mobile gaming, and when they finally entered, they didn't just port their classics. They created new experiences like Pokémon GO and Mario Run, but they were very careful not to cannibalize their console business. Mario Run was a one-time purchase, not free-to-play with microtransactions. That was a deliberate choice to protect the brand. Luna: And it didn't work great commercially — Mario Run made about $60 million, which is a fraction of what a mainline Mario game makes. But it didn't dilute the IP. Compare that to what happened to Sega when they went third-party — Sonic games became a dime a dozen and the brand lost its luster. Lucas: Exactly. Nintendo understands that the moat is built on trust. When you buy a Nintendo product, you know exactly what you're getting: polished, family-friendly, innovative gameplay. They don't chase trends, they don't do loot boxes, they don't do early access. That consistency is rare in any industry. Luna: So the lesson for other businesses: IP is only a moat if you treat it like a treasure, not a cash register. Lucas: That's a great way to put it. And it's why Nintendo will probably be around for another 40 years, even if the Switch 2 stumbles. The moat is deeper than any single product cycle.