Just days after the head of Microsoft’s Xbox gaming business hoisted the white flag, Nintendo heightened speculation that the Japanese mainstay may have to accelerate development of a next-generation console to stanch the hemorrhaging of demand for its Switch.

Fresh from the recent $1 billion box office success of its video-game-based Super Mario Bros. movie, it had less comforting news in tow when it unveiled annual results.

Overall hardware sales of the Switch fell a further 22% to 18 million units for the fiscal period to end-March, down substantially from its peak two years earlier at 28.8 million. 

“We did not experience the growth in sales mainly during the holiday season that we saw in the previous fiscal year,“ the company said in a statement on Tuesday.

Thanks to three straight generations of consumers that grew up with consoles, whether it was the classic Nintendo Entertainment System or the more recent Wii, video games are big business.

Nearly half the world’s population is estimated to play, and consoles are for many the gateway to immersive fantasies that can earn more revenue than most movies.

For example, Warner Bros. Discovery on Tuesday said its Harry Potter-themed Hogwarts Legacy game raked in over $1 billion since its debut in February.

In the Switch, Nintendo poured all of its decades-long leadership in handheld gaming into developing the first hybrid console device that works seamlessly whether on the go or hooked up to your television. 

More than 125 million units have since been sold, but it’s now in its sixth year of production and higher demand for the premium version that launched in October 2021, which comes complete with a larger, richer resolution OLED display, has only helped temper the declines. 

Nintendo Switch sales are down overall 22% year over year, but OLED models are up 59%. While Switch sales have peaked and will continue to decline, there’s clearly demand for better hardware here. Nintendo now says no new hardware for 2023, so all eyes now on 2024? pic.twitter.com/qvw1eVQ21j

— Tom Warren (@tomwarren) May 9, 2023

The development of an all-new 2nd-gen Switch would not come cheap, however, especially since consoles are initially sold at a loss to lure in more customers.

In October, Xbox head Phil Spencer estimated that Microsoft subsidized sales of its latest generation console for as much as $200 each.

That very same Microsoft exec conceded last week he no longer hopes the third-place Xbox Series X will ever catch up to either Sony PlayStation 5 or Nintendo Switch, even with the help of major exclusive first-party titles like Starfield from the company’s own Bethesda Studios.

And while Sony may be tripping up on its metaverse ambitions—with sales of its second-gen virtual reality headset that competes with the wireless Meta Quest 2 disappointing—its PS5 is cleaning up. 

The semiconductor shortage used to mean scalpers could sell the fifth-gen console at horrendous markups. But the chip crunch is finally easing, and that is catapulting sales to new heights.

New competitors rising

Nintendo isn’t just struggling to poach consumers away from Sony’s PlayStation 5, though, or even an Xbox in those markets where Microsoft is traditionally strong, like North America.

New handhelds like Valve’s $399 Steam Deck are directly taking on the Switch, and even offer the same seamless hybrid functionality with the purchase of a separate TV docking station.

There’s also a potentially bigger threat right on the horizon. 

On Thursday, Asus’ Republic of Gamers brand is set to finally unveil pricing and specs for the hotly anticipated ROG Ally, which is expected to blow everything out of the water in terms of computing power.

Nintendo’s hopes for the year rest on strong demand for its exclusive games, above all the new “Tears of the Kingdom” game based on its smash-hit Legend of Zelda franchise. It lands in stores on Friday.