In its latest FYE'23 earnings release, Nintendo (NTDOY  ) announced plans to establish a joint venture, Nintendo Systems, in partnership with DeNa. The venture is scheduled to kick off on April 3, 2023 with Nintendo contributing 80% of the capital and Dena contributing 20%.

The venture will be based in Tokyo and its total capital will be 5 billion yen. Nintendo Systems will be considered a subsidiary of Nintendo. The joint venture is not expected to have any impact on Nintendo's results for this fiscal year. The venture will also need to receive approval by antitrust committees to ensure it does not violate competition laws.

The joint venture will not be the first time Nintendo and DeNa will be partners. DeNa has developed a number of games for Nintendo since 2015, including the popular "Fire Emblem Heroes," "Super Mario Run," and "Mario Kart Tour." Nintendo's mobile games have grossed over $1.8 billion in revenue over the course of a few years, with Fire Emblem Heroes along accounting for $1 billion of that.

The stated goal of this venture is to "research and develop, as well as create value-added services to further reinforce Nintendo's relationship with consumers" via joint development of "game apps for smart devices".

Nintendo has long sold hardware devices and consoles and this is part of its goal to digitize and offer more software products, such as games. Its hardware sales fell 19% year-over-year to FY'E23 while software sales increased 1.6% over the same time period. Sales of its Switch device fell in part due to the ongoing chip shortage that is impacting industries from automotive to gaming.

Management reduced its forecast of hardware sales by 2 million units to 19 million to account for delayed production and shipments. The Company's overall net sales increased by a mere 5.2% year-over-year.

In part of the Company's goal to increase consumer engagement and interest in the Nintendo Switch, this partnership will increase downloadable software available for purchase. There is a reason why so many investors and companies are flocking to software, and Nintendo is no different. Industry average software gross margins are at ~70-85% while hardware margins sit at a comparatively lower 5-10% (at best).

It makes sense that to scale a business, pivoting / expanding to software is the way to go. In fact, Nintendo originally started out as a card-selling business in the early 1900s, selling Hanafuda cards, a type of Japanese playing card. The Company experimented with offering a taxi service and selling ramen noodles in the 1960s, before finding its place in games and electronic toys years later.

The Nintendo we know today started out in the 1980s with games such as "Donkey Kong" and "Mario Bros" and consoles such as Game Boy and the Nintendo DS; clearly Nintendo has come a long way since its beginnings a century ago.