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amiibo, Nintendo's upcoming toy-line that interacts with Nintendo video games seems like a great way to extend the company's brands to the youth market, but CONSULGAMER sees a number of threats to the product line that could make amiibo another costly disaster for Nintendo.

amiibo has a Small Potential Market, and Nintendo is Overestimating Demand

The target market for amiibo is far smaller than the average toy’s. amiibo will only work with Nintendo current hardware platforms, and the company's current home console, Wii U, is only owned by 6.4 million people.

An entire toy-line cannot become a mainstream hit if it launches on a system that very few consumers own.

With only 6.4 million potential customers, amiibo will not get the shelf-space at major retailers needed to make amiibo a mainstream success – and a holiday best seller. When Activision-Blizzard premiered the "toy to game" genre with the Skylanders series, the franchise was playable on any major gaming console. Retailers displayed Skylanders toys in the toy section of retailers, which generated additional interest in the Skylanders video game and accelerated platform adoption. Given the small size of Nintendo’s potential market, retailers will likely only place amiibo toys in the Wii U section of retailers – where only existing customers of Wii U are likely to see the toys. Comparing Nintendo’s potential success to Activision-Blizzard’s Skylanders series is not realistic. Activision sold 30 million toys in the first 6 months of its release. Even if Wii U hardware sales miraculously doubled, Nintendo would still have to sell over two toys for every Wii U owner to match the first six month’s of Activision-Blizzard’s performance. Even worse, Nintendo has to do this with two other competitors, Activision-Blizzard and Disney competing directly in the “toys to game” genre. There is no blue ocean here.

Hoping to extend the market size for amiibo, Nintendo is extending amiibo functionality to Nintendo 3DS, via an accessory purchase and OS software update.

The Wii U’s market-size is just too small for the series to have any significant mainstream success. It’s telling that Nintendo is also releasing a separate 3DS toy reader accessory to help boost the potential for amiibo, but given the poor functionality of new features added via 3DS system updates like screenshot posting and Miiverse, it’s unlikely that the add-on will perform well on the portable platform.

amiibo Toy Inventory Management

amiibo toys are real physical assets - they take up space, they may have to be purchased back from retailers when they’re not sold, and they cannot easily be replenished when supply exceeds demand. Manufacturing costs for amiibo toys will far exceed the cost to manufacture a software disc for Nintendo's games, and the significant size of packaged toys brings added inventory and distribution costs. This array of new costs and challenges illustrates the added risks of entering the traditional toy market. Estimating demand for amiibo will be challenging, and Nintendo already has a history of poorly forecasting demand, as seen in steep unofficial retail price drops of Kirby’s Epic Yarn, Star Fox 64 3D and Steel Diver. Nintendo also suffers significant supply constraints when the company releases hits – Mario Kart 8 was sold out at most retailers the day after release, and Nintendo’s last 3DS blockbuster, Animal Crossing, was so hard to find in stores that millions of consumers downloaded the game from the eShop instead.

Too Much amiibo is a Bad Thing

Nintendo may be mismanaging SKUs for amiibo, as the company seems to be offering far more product varieties than retailers will be willing to support. Given the limited shelf-space retailers will provide Nintendo, it’s surprising that Nintendo already has ten toys planned for the launch of amiibo, with additional toy releases planned for the remainder of the Super Smash Brothers line-up, as well as potential toys for Mario Kart 8, Mario Party 10, Captain Toad: Treasure Tracker and Yoshi’s Woolly World.

Getting shelf-space at traditional retailers will be hard, but getting shelf-space for Nintendo's second and third-tier of characters will be even harder.

CONSULGAMER expects amiibo to have both limited retail support and inventory management problems for Nintendo, and launching a toy line with a wide range of toy varieties only increases complexity for the company. The individual toys people want may be hard to find, and Nintendo may be left with excess inventory of characters too niche for the average consumer.

amiibo is a Rushed Job

Nintendo developed a reputation over the last few years of releasing products before they’re ready. The company released an upgraded 3DS seventeen months after the original was released, the release of the Wii U was plagued by hours of software patch downloads, and the Wii U’s much-vaunted TVii functionality did not even make the system’s release date. It looks the same with amiibo. With only six months until the toy-line’s release, Nintendo has yet to demo the toy’s functionality. CONSULGAMER isn’t aware of any live amiibo demos occurring behind closed doors at E3, and considering the significant retailer support required to launch a new toy line, it’s striking that Nintendo did not have anything to show at E3, a retailer trade show.

What’s the Point?

Nintendo of America President Reggie Fils-Aime says amiibo will boost Wii U sales, but given the toy’s UK pricing of $22 USD per figure, it’s unlikely that buyers will be anyone beyond hard-core Nintendo fans, who likely already own Wii U. U.S. prices of the toys are not yet available, but without an affordable price tag (or a Wii U hardware price drop, lowering the total out-of-pocket spend), the toys are unlikely to boost demand for the Wii U platform.

How Nintendo Can Succeed with amiibo

Still, amiibo has potential as a highly profitable venture for Nintendo, if executed correctly. amiibo allows Nintendo to better monetize the company’s biggest spending customers – enabling the collection of hundreds of more dollars from each of Nintendo's biggest fans. Consumers can now not only drop $50 on Super Smash Brothers Wii U, but they can also purchase 10-14 action figures, grossing Nintendo another $200 - $300 per big fan. With amiibo, Nintendo can collect money from the company's whales – Nintendo's biggest spenders, following the business model so successful for many free-to-play developers. By focusing on the biggest potential spenders, Nintendo may plan a more limited retail presence with amiibo – only selling the full line of products where the company's biggest core buyers are (ie GameStop), as well as online storefronts with extensive product varieties. Nintendo can also succeed outside of monetizing whales – through real innovation with amiibo. Will the toys just be a physical form of DLC, unlocking content or customization within existing games, or will they provide brand new gameplay experiences? Nintendo also has an advantage over "toy to game" competitors Activision-Blizzard and Disney because of cross-play across a series of Nintendo games, which may boost amiibo’s value-proposition. While Disney Infinity and Skylanders toys only work within those specific games, Nintendo's toys can interact with a series of different Nintendo blockbusters.

This holiday Nintendo will release an ambitious toy-line, and the strength of amiibo to both sell Wii U consoles and create a profitable new product line for Nintendo will finally be tested.

Stay in touch! The author, Bryan Cashman ( @consulgamer ), blogs about business issues in the video game industry at CONSULGAMER. This article represents Bryan's personal opinion only.