Switch digital revenue nearly doubles, software up 86%

Nintendo's new Switch console continues gaining momentum, and digital sales, one of the company's most important metrics, are skyrocketing.

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When it comes to gaming, hardware is just the beginning. The real money is made from games and services, which churns the $100 billion strong games market every year. Digital is a direct-to-consumer delivery method that reduces company costs, friction, and offers convenience, all while monetizing a core audience. Like its competitors, Nintendo has been quite successful in tapping this market and shows incredible growth throughout its last fiscal year.

Nintendo just reported its Fiscal Year 2019 earnings and they're quite good. Switch adoption rose by 16.95 million units, missing analyst projections and bringing total worldwide shipments to 34.74 million. Digital earnings, a key indicator of long-term sustainability, has nearly doubled over last year. The Switch generated a record 118.8 billion yen in FY2019 and total software sales rose by a massive 86% year-over-year to 118.55 million.

"Sales nearly doubled in the fiscal year ended March 2019 compared to the previous fiscal year, and exceeded 100 billion yen for the first time ever," Nintendo President Shuntaro Furukawa said in a recent earnings report.

"The Nintendo Switch business has expanded over the previous year not only in download versions of packaged software, but also in download-only software and add-on content, plus contributions from Nintendo Switch Online."

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Mr. Furukawa notes that the eShop's massive expansion of games is responsible for this growth, and indies in particularly help supplement its marquee million-sellers like Super Smash Bros. Ultimate and Mario games.

The president also brought up an interesting point on attach rates. Digital is actually disrupting certain figures and the traditional tie-in ratios aren't as relevant any more: no longer can we simply divide software by hardware revenue to see how much Switch owners spend on games. Digital content is the outlier here and isn't calculated in this simple formula, and as Nintendo further embraces subscriptions, DLC, and add-on content like Super Smash Bros.' Fighter Pass, this discrepancy will widen.

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Read more: How Switch stacks up against other Nintendo hardware

The games industry is becoming increasingly more digital-based every year, and the benefits are paying off big time. Platform-holders like Nintendo stand to gain the most from digital sales.

Not only does Nintendo make a cut from every game sold on the eShop, but it also pulls in cash from third-party add-ons, DLC, microtransactions, and subscriptions. Plus Nintendo keeps 100% of all revenues from Switch Online and its own first-party game sales. Digital also alleviates manufacturing costs of retail cartridges and game cases, saving companies millions every year.

This forward momentum should continue as publishers bring more games to the Switch, especially with re-releases that see older catalog games ported to the handheld-console hybrid. Historically, Switch owners have proven to have insatiable appetites for new content and Nintendo is all-too-eager to serve up games for consumers.