In this week’s Business Review Weekly, I have a column on strategy in the video game industry: most notably, the performance of Nintendo. The column is over the fold.
The game is never over
BRW, 15 March 2007, p.27
The notoriously fickle video game industry has a lot to teach business about the virtues of sitting out cyclical changes.
Business school professors love the video game industry. First, it is technologically dynamic, with distinct generations of products. As computing power has progressed, so too has the power of the games. Second, it has gone back and forth in its market leadership, having been led initially by Atari (remember Pong), then Nintendo, then Sega, then Sony and now possibly Microsoft. The players persist but the winners change. Finally, most students have had some experience with the industry. Master of Business Administration graduates grew up with video games and their children are now playing them. All this adds up for engaging classes and discussions about what consitutes the right strategy.
The common theme is how different players “changed the game”. Nintendo was a textbook example. It sold consoles cheaply in order to make money on the games. Have enough consoles in households and developers see potential sales. Have enough developers on side and games fill store shelves. Have enough games and the undecided consumer becomes decided. A virtuous cycle takes over and, before you know it, Mario is a bigger name than Mickey Mouse.
However, every virtuous cycle can breed its own downfall. Nintendo’s profits came from its tight control of developers. That left a window open for Sega to entice some of these away and leapfrog Nintendo in technology. It bought the virtuous cycle by changing the game through technology and Nintendo’s reign was over. The same happened to Sega when Sony utilised CD technology to leapfrog it. For the past five years, Microsoft and Sony have competed fiercely for the lead, with each trying to change the game by leveraging things outside of gaming.
During this time, Nintendo didn’t go away. It’s technology grew more sophisticated but was always a step behind. The Nintendo64 stayed with cartridges as Sony and Sega moved onto CDs. The Nintendo GameCube had small DVDs (so consumers couldn’t play movies) as Sony and Microsoft had normal ones. And with this, it lost market leadership. Hardly game-changing.
But is that the whole story? It depends on how you think of the market. The consumers, who loved Nintendo in the 1980s and early 1990s, grew up. They wanted games that were more adult, and adults appreciate realistic graphics and complex games. Nintendo ignored them and continued to pump out games that would appeal to the same demographic it had before – children. For that, it attracted the ire of its its old customers and lost sales. Being family friendly meant appealing to both adults and children and not just children alone, so others took up the slack.
What about today? The story is exactly the same. Sony and Microsoft are pummeling each other for the adult game market. Each is trying to change the game – in Sony’s case, spending money on expensive hardware in an attempt to push its Blu-Ray DVD standard. Nintendo ignored all of this. It kept its latest console, with the unsexy but unforgettable name, Wii, secret (developing the first games in-house). It designed a machine with the specifications of the previous technological generation (the old game). The box was small, used 10 per cent of the power of others, and wouldn’t play DVDs. Clearly, once again, it was no technological competitor for Sony and Microsoft.
But Nintendo did one important thing. It continued to ignore the vast bulk of customers in the broad gaming market. Instead, Nintendo has stuck to its market – the children. This time it has made a direct appeal to the parents, not by keeping the violence out, but by putting the physical activity in. The Wii uses a new controller that has to be moved around to use. With this development, the most fun to be had is off the couch. The consumer can play tennis, bowl and even box. This is exciting for children and attractive for parents. Faced with a gift choice, the Wii stands out. It is cheaper ($399 compared with Sony’s PlayStation 3 at $999) and involves clear physical activity.
And there is the lesson. Nintendo changed the game by sticking to what it was good at. It considered itself selling to a market rather than a specific customer. That meant loss of market share for many years but not so much as to cause it to go out of business. But now, its time has come. Sticking ruthlessly to knitting pays off and so Nintendo will live on.