Analysis: Manufacturing cost and estimated sales of the Gateway 3DS by Wololo

[ElYubiYubi]

I'm gonna quote his entire Blog Entry

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[1]. At the time, there were about 80 millions Nintendo DS sold around the world[2]. 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[3], 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[4]. Those sell for as low as $3.5[5].
• The PCB itself, given its size, can be manufactured for $0.5 or less[6]
• Assembly of all the components is the expensive part and can cost up to $5[6]
• 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[7], which can be confirmed by the fact that some retailers in China sell the device for as low as $55[8].
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[9]), 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

• [1] http://www.escapistmagazine.com/articles/view/issues/issue_179/5553-The-Slot-1-Secret.3
• [2] http://en.wikipedia.org/wiki/Nintendo_DS_sales
• [3] http://en.wikipedia.org/wiki/Nintendo_3DS#Sales
• [4] http://gbatemp.net/review/gateway-3ds.79/
• [5] http://www.aliexpress.com/item/Free-Shipping-5PCS-A3P125-VQG100-A3P125-QFP/846695463.html
• [6] http://www.bittele.com
• [7] http://chinadistrib.com
• [8] http://aliexpress.com
• [9] http://gamasutra.com/view/news/184609/3DS_piracy_is_a_problem__because_publishers_say_so.php

What you guys think?

Source

 

[Tom Bombadildo]

Whaaaaaaaaaaaaaat? You mean a business is out to get money and not help the community? COLOR ME FUCKING SHOCKED.

Oh wait no, it's terribly obvious any flashcard team is out for money and not for the "community".

 

[Ryukouki]

To say that companies are out for their customers is laughable. It's always about the money.

 

[Hyro-Sama]

Well, if anything that blog post was informative. I personally don't see how it demonizes the Gateway Team in anyway. Not that they really need help that department considering their current predicament.

 

[weatMod]

honestly after reading this it just makes me realize how much of a risky business that this 3ds flashcart venture truly is, the profit margins are slim if you consider that they have 12 employees (estimate) and they are making 6 million by your estimate , over the course of YEARS , and assuming that they meet the sales you projected, which i think is highly doubtful, it still only works out to 500k per person for x # of years work, they are not exactly getting rich

i doubt that ds flashcart users account for a full 1% of the ds user base, and i bet that your estimate of 1.25 % of ds users using flashcards is grossly over exaggerated,

for one thing i can imagine that there are thousands of ds mode flashcards sitting on resellers warehouse shelves to this day ,not that that would really impact the manufacturers profit all that much as it would the resellers,

but the fact that GW requires a FW that was already months old when GW was finally announced ,let alone released to the public, it would suggest an almost infinitesimal amount of the 3ds userbase that actually have and are using these cards

i would love to know what the actual GW userbase is and what the total # of units produced in their production runs are, but we will never know that

 

[ridiucle]

of course they are a business to make money
u dont just go out your way for nothing
but people forget that gateway have made promises that everyone were saying they were lying which infact to date they have kept every promise they have made therefore have been good to the community
the whole brick code thing i think is bullshit, yes there are 3ds's being bricked but there is no solid evidence other then speculation of a "brick code"

 

[vorgrien]

Mathieluh stated that he has read the code and it is indeed real. If you are familiar with who he is then you know that he is indeed very reputable, especially when it comes to disassembly and code analyzing.

 

[Gahars]

Breaking News: Company Tries to Maximize Profit. Also, birds fly and existence is. More at 11.

 

[weatMod]

can you imagine if the GW team was on sharktank, bet this would go over like a lead balloon ,all business venutres are risky and this is certainly no different ,makes me wonder though ,how did they get the capital for this, i cant see anyone wanting to dish out money to fund this it is high risk IMO

 

[ridiucle]

Mathieluh stated that he has read the code and it is indeed real. If you are familiar with who he is then you know that he is indeed very reputable, especially when it comes to disassembly and code analyzing.

yet they say all cover over 1.1 is encrypted and unreadable

 

[Snailface]

Gateway is the devil, there is one truth that even its biggest detractors have to concede: the homebrew scene wouldn't be anywhere without them.

(And GW wouldn't be anywhere without y8 and neimod's research, but they weren't in the sharing mood)

 

[weatMod]

Breaking News: Company Tries to Maximize Profit. Also, birds fly and existence is. More at 11.

 

[DSoryu]

The only point I see here is this part:

...Undercutting their competitors prices would have been a cleverer way than injecting malware in their firmware?...

 

[Taleweaver]

Okay, so the blog is obviously a reply to someone speaking out of their ass (communities tend to follow evolutions, not the other way around). But the breaking down of the price is a pretty interesting read. Of course the whole principle hinges on the fact that it needs to be able to actually sell them (some countries now ban these things as they're pretty much exclusively used for illegal purposes).

Gahars: what do you mean, 'existence is'? WTF...why wasn't I informed? When the hell did that damn existence started being? :confuciused:

 

[Veho]

Nice writeup, interesting read. It's interesting to know what's in there.

I don't fault the Gateway team for ramping up their profit margin. Grabbing as much as you can while you can is sensible business practice. What I do take issue with is the bricking code.

:confuciused:

That was terrible

 

[Chaosruler]

what Wololo proved is very obvious, question is why he takes a side? I mean taking a side against piracy is understanable but taking a side against team gateway might make us think he got something personal against them...if he's in it to take off gateway's mask he should already know it's useless, if a pirate wants to pirate his console he'd be willing to deal with thiefs for that

also, wololo might have a slight miscalculation there, according to some internet digs, gateway exploit firmware can be used on DSTwo, meaning DSTwo uses similar hardware to gateway exploit card, meaning that the DS card is probably with a CPU inside it like the DSTwo was, and DSTwo's manfucatring cost is about $15 by itself, or something like that iirc

 

[Joe88]

the exploit installer will run on every ds flash card that support 3ds firmware 4.1-4.5
the one included by gateway is just a cheap r4 clone, about $3-4

 

[Seqa]

honestly after reading this it just makes me realize how much of a risky business that this 3ds flashcart venture truly is, the profit margins are slim if you consider that they have 12 employees (estimate) and they are making 6 million by your estimate , over the course or YEARS , and assuming that they meet the sales you projected, which i think is highly doubtful, it still only works out to 500k per person for x # of years work, they are not exactly getting rich

i doubt that ds flashcart users account for a full 1% of the ds user base, and i bet that your estimate of 1.25 % of ds users using flashcards is grossly over exaggerated,

for one thing i can imagine that there are thousands of ds mode flashcards sitting on resellers warehouse shelves to this day ,not that that would really impact the manufacturers profit all that much as it would the resellers,

but the fact that GW requires a FW that was already months old when GW was finally announced ,let alone released to the public, it would suggest an almost infinitesimal amount of the 3ds userbase that actually have and are using these cards

i would love to know what the actual GW userbase is and what the total # of units produced in their production runs are, but we will never know that

I don't know how it's done, but tempering with the firmware seems to be possible. I have a 4.5 3DSXL, but this specific color edition (mint x white JP) came out in late April 2013. Correct me if I'm wrong, but that is after Nintendo went past 4.5, no?

 

[Qtis]

what Wololo proved is very obvious, question is why he takes a side? I mean taking a side against piracy is understanable but taking a side against team gateway might make us think he got something personal against them...if he's in it to take off gateway's mask he should already know it's useless, if a pirate wants to pirate his console he'd be willing to deal with thiefs for that

I don't think he's taking sides per se, but he is trying to explain the roots for the situation. He's not actually saying the Gateway is bull, but instead trying to explain the basic reasoning behind a company's work. Calling the Gateway the White Knight of 3DS hacking scene is absurd in many ways, since this is a company in question. If it was a random hacker that released the exploit to everyone and "let the scene decide" on how to use it, then we could have a White Knight situation.

As a side note, I find it kinda odd that people are ready to doubt and blame Mathieulth, yellow8, Normmatt and co for the problems here, when they were in many ways critical for usable flashcart software before. For example, how many people honestly used the standard AK2i loader compared to AKAIO? Sure someone could take sides, but then again, why would anyone start bricking people's consoles. If I had a Gateway for my 3DS (currently on 2.XX or 3.XX firmware btw), did testing with other flashcarts too and the code from the Gateway (be it their cart or someone else's) leads to my 3DS being bricked, I'd be pissed off. Really pissed. If this happened with the DS flashcarts, I'd have a dead DS Lite and DSi XL waiting for me since I did some testing with a couple of review flashkits (iEvo, DSTwo, AK2i, etc). But I digress.

 

[Veho]

what Wololo proved is very obvious, question is why he takes a side? I mean taking a side against piracy is understanable but taking a side against team gateway might make us think he got something personal against them...

Because of the bricking code, basically.