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.