A few days ago I published an article where I criticized the Gateway3DS team for having intentionally injected malware in their flashcart for the Nintendo 3DS. One of the thing that annoyed me is how most of the people buying the Gateway 3DS products almost described the Gateway team as “white knights” or “devs dedicated to the scene”. Set aside the flamewar-inducing tone of my article, I mostly wanted to open people’s eyes on the huge market and margin that the flashcart business is. As I mentioned, the Gateway team are looking at a potential benefit of millions of dollars, they are clearly in the business for money and not to “help the scene”. Good for them, but I just wanted to stop the myth that these guys are here for “the community”.
Now, when I mentioned millions of dollars, some people rolled eyes and said I basically pulled the numbers out of thin air. I’ve gone back to my research and came back with more precise numbers to prove my claims.
1. The market
It is difficult to estimate the number of 3DS flashcarts that have been sold and will be sold. However, solid data exists about Nintendo’s previous console, the NDS, and its levels of piracy: In 2008, the number of NDS Flashcarts in circulation was estimated to be about 1 million. At the time, there were about 80 millions Nintendo DS sold around the world. This means it is estimated that about 1.25% of nintendo DS users owned a Flashcart.
The ease of use of 3DS flashcarts is pretty much the same as their older sisters, minus the fact that they are not compatible with the latest firmwares, but people who want to pirate know about these limitations and tend to not update their 3DS. I’m extrapolating the NDS numbers and will assume that 1% of 3DS owners are owning or planning to purchase a Flashcart. With 35 millions 3DS owners worldwide in 2013, we are talking of a market of 350’000 units for Flashcarts. The Gateway 3DS sells for about $80 (a bit less in the US, a bit more in Europe where it is not unusual to see it sell for EUR 80), so we are looking at a market of 28 million dollars.
2. Manufacturing/recurring costs
Of course, the Gateway 3DS and its clones costs money to produce. If we want to calculate the benefits made by the cards, we need an estimate of the manufacturing cost, shipping costs, marketing costs, retailers share, etc…
Although the numbers are (of course) not public, it is easy to find information about the device itself, what components it is made of, etc… The manufacturing costs are reasonably easy to compute.
First of all, the Gateway 3DS is apparently (I do not own a Gateway3DS or a 3DS) made of 2 cards: one for the “old” DS mode, and one for the 3DS mode. The old DS flashcart costs close to nothing to produce. It is actually possible the Gateway 3DS team get those for free, surplus from the NDS era. But let’s assume they pay for it. Chinese professional retailers sell those for as low as $4 a piece if ordered in bulk.
So that’s it for the DS card, now let’s focus on the 3DS card.
- The main component on the Gateway 3DS is an Actel A3P125-VQG100. Those sell for as low as $3.5.
- The PCB itself, given its size, can be manufactured for $0.5 or less
- Assembly of all the components is the expensive part and can cost up to $5
- Throw in $2 for additional components on the card (although those can come for free if one has a good contract with the PCB assembly factory) and the casing
So we’ve got a manufacturing cost of $11 for the 3DS specific part of the Gateway 3DS.
Add to that the $4 price of the NDS card mentioned above, and a grossly inflated $5 for stickers, packaging, and some shipping, and you’ve got a total price of at most $20 for each Gateway3DS. More realistically, the price must be somewhere between $10 and $15, but let’s say $20 in case I forgot something huge, and to not be accused of underestimating any cost.
3. Fixed costs And intermediates
Manufacturing costs are not the only costs involved in creating the flashcarts.
There are of course initial “R&D” costs to find the hack, implement the device, etc… Those are extremely difficult to guess, but I’m going to give an estimate of $200’000. Where does that number come from? You can see it as $100’000 to pay a hacker/developer for a full year of full time work + $100’000 for hardware prototypes and a bunch of small things such as buying the website and creating a quick page for it. This value is also on the scale of the price of “kernel exploits” for various Mobile OSes today: see here for some generally accepted prices of hacks for specific devices. Those are selling prices, not costs, so it is fair to assume exploiting the Nintendo DS costs much less than the selling price of an iOS exploit, for example. Hence targeting the hundreds of thousands to be fair without over exaggerating the costs.
To be clear, it could be as low as $10’000 for what I know, but I’m saying $200’000 to be sure I am not underestimating the actual investments, the goal being to get an idea of the lower end of the total benefits when all is said and done.
The next step is the distribution and marketing circuit. How do the cards reach retailers, etc… I’ve already integrated the shipping costs from the factory to the distributor in the manufacturing costs section above, so that part’s addressed.
It is also relatively easy to see the price at which the Gateway is sold from the main distributor to retailers. It goes as low as $50, which can be confirmed by the fact that some retailers in China sell the device for as low as $55.
This is interesting because it simplifies the rest of the computation a lot: the Marketing costs, affiliates, etc… are all handled by the retailers. Retailers are not the Gateway3DS team themselves, but we know they buy the devices from $50 to $60, and resell it for about $80. Considering shipping, marketing, affiliates, etc, the retailers easily make a $10 to $20 profit on the Gateway 3DS, but that’s not what I want to compute right now. My point here is that the shipping and marketing costs after the card is sold to retailers, is handled by retailers themselves. The gateway 3DS team does close to no marketing themselves, except the occasional update to their website or email, which I have included in my $200’000 fixed costs above.
4. Put it all back together
What we have so far is:
- Each Gateway 3DS package costs less than $20 to manufacture, package, and ship to the distributor
- There are fixed investment costs (R&D, marketing, etc…) from the Gateway team estimated to be less than $200’000
- The distributor resells the card for $50, indicating Gateway sells it to the distributor for less than that. We can assume $40 (which means a benefit of $40-$20 = $20).
- We are looking at a market of 350’000 units
If we crunch the final numbers, we have:
((Sell price – Manufacturing/shipping/packaging costs) * total units) – fixed costs = (($40 – $20) * 350000) – $200’000 = $6’800’000
The handful of people behind the Gateway team are looking at potential benefits of more than 6 million dollars through the next couple years.
Lots of these numbers are highly speculative of course, but the magic of this is that you can stretch them a lot and still get insane profit. For example imagine that only 0.1 percent of 3DS users are interested in piracy (a level at which you would really start to ask yourself why game developers and Nintendo think piracy is a problem), we are still looking at a benefit of $500’000 (raise your hand if that’s way much more money than you would make in 10 years of work), and that’s assuming the R&D costs are as high as $200’000 in the first place.
The numbers above also mean the Gateway team need to sell 10’000 units in order to counterbalance the initial investment of $200’000. Again, that value of $200’000 is highly speculative. For example, if the developers are part of the team, it is likely they do not get paid a lump sum, but take a share of the profits instead, at which point the initial investment is less than $100’000, meaning only 5’000 units need to be sold to start making profit.
You’ll also note that at half the price ($40 instead of $80), there would still be a nice profit involved there: imagine them selling the device for $25 to the distributor, the distributor reselling it for $30, and retailers selling it for $40. The Gateway team’s profit is divided by 4, still being more than a million dollar potentially. Undercutting their competitors prices would have been a cleverer way than injecting malware in their firmware? That also shows the business is very profitable for clones that sell for around $60, since those get a huge profit margin as well for close to no risk or investment.
I am trying to not pass any moral judgement here, but the people buying these chips need to realize a huge profit goes in the pockets of those who sell it to them, and that profit margin is completely unrealistic compared to the work and actual investment in the product. This is because you are not really paying these people for their work, you are paying for piracy.
Feel free to flame in the comments
-  http://www.escapistmagazine.com/articles/view/issues/issue_179/5553-The-Slot-1-Secret.3
-  http://en.wikipedia.org/wiki/Nintendo_DS_sales
-  http://en.wikipedia.org/wiki/Nintendo_3DS#Sales
-  http://gbatemp.net/review/gateway-3ds.79/
-  http://www.aliexpress.com/item/Free-Shipping-5PCS-A3P125-VQG100-A3P125-QFP/846695463.html
-  http://www.bittele.com
-  http://chinadistrib.com
-  http://aliexpress.com
-  http://gamasutra.com/view/news/184609/3DS_piracy_is_a_problem__because_publishers_say_so.php