Jump to content
IGNORED

Nintendo Versus Everyone: The Business Of Business


 Share

Recommended Posts

http://www.buzzcut.com/article.php?story=2005053122342247

Videogames are big business. We like to make that point clear when talking

about games. The fact that entertainment software generates a lot of money

helps us justify our interest and even our play.

Strangely, journalistic reporting and academic discourse on the subject of

business trails almost every other aspect of game thinking. You're as likely

to find good Neo-Marxist feminist game criticism as you are in depth

analysis of the medium as a business.

We see plenty of reporting and regurgitation of marketing hype. And we could

subsist on an endless diet of wild speculation. But we rarely get the kind

of business analysis that we need.

This gap was painfully obvious to me post-E3. Because while everyone was

busily laying bets on the horse race between Sony and Microsoft for the

dominance of the next generation of gaming, Nintendo was quietly disregarded

on the side.

Business-wise, this was weird. Because as far as I can tell, Nintendo is the

business story to watch. And strangely enough, you don't have to try very

hard to see why. I can only conclude that most of us are not looking at all.

Let me preface the following remarks with a couple of qualifiers. First, I

am not a Nintendo fanboy. Like a lot of people, I've been trying to figure

out Nintendo's strategy, and wondering why they don't do certain things.

Like everyone else, I sat in the Nintendo press conference at E3 and said,

"That's it? Where's the 'Revolution'?" Also, I don't consider myself a

business analyst or even a biz reporter.

But I like to talk about business. And I have become convinced that the

Nintendo story is emblematic of a chronic under-reporting of real business

stories.. Let me explain in some detail.

Brass in pocket: Profit is Profit

Since videogames are a big business, it's a good idea to understand how the

game of business is scored. And the most impressive stat of all is net

profit-the amount of money left over after the business has done what it has

to do. This isn't money collected from customers, but still owed to

suppliers, lenders or the taxman. This is cash, free and clear. This is the

company's walking around money that either gets paid out to stockholders or

saved for investment in new business opportunities.

In this light, it's odd how few game commentators seem to understand just

how profitable Nintendo really is. With a net margin of over 20%, Nintendo

is a financial rock star. Just by way of comparison, General Electric, that

monster global conglomerate whose executives write the books about corporate

leadership that other Fortune 500 execs read, clocks in with a net margin of

11% Nintendo's business engine is so efficient that even though they sell

far less than Sony, they make, bottom line, about as much as all of Sony,

Yes, that's right. Little Nintendo generates about as much cash as giant

Sony-electronics, movies, the works. (For a bunch of good financial data on

this subject in one place, see PCVSConsole).

Now there are a number of lessons in this. But let me point to the most

obvious:

When looking at the current console war, it's important to keep in mind that

Sony is a big company that does well on its games and film subsidiaries, but

has been taking big losses in electronics. Microsoft is a very, very

profitable software company that has so far taken large losses in its

entertainment division. And Nintendo is a reasonably large company that has

continued to make money with no obvious financial liabilities. As

businesses, these three companies have different strengths and weaknesses.

But none is the overwhelming leader from a business position.

Near term success dictates that Sony needs to hold market share and see the

industry grow. Microsoft needs to gain market share and see the industry

grow or else settle on an Reagan Cold War strategy-using the ample MS cash

warchest, pursue deficit spending in it's Xbox product line until the enemy,

in this case Sony, faces financial collapse. All Nintendo really needs to do

is just keep doing what it's doing.

The platitudes and proclamations of the gaming press to the side, Nintendo

is healthy. Even with the PSP in the market, Nintendo seems to be doing just

fine.

And even though the announcement at E3 of the Game Boy Micro was greeted

with a certain amount of skepticism and curious musing by the game press,

from a business strategy standpoint, I expect that it will turn to pure

gold.

Without making a significant investment in R&D or manufacturing, Nintendo

repackages current technology and resells it at what, I would expect, is a

healthy margin. Not only will the Micro put GBA technology in new hands,

inevitably large numbers of the units will find their way into the shirt

pockets and key chains of many current GBA owners. Not only will Nintendo

make money on this new hardware product, it will stimulate additional demand

for GBA software.

While Sony and Microsoft spent E3 showing off what billions of dollars of

investment can do at their press events, Nintendo was demonstrating how

minimal investment can generate cash.

That folks, is called smart business.

Yes, it makes for dull news. And the GBM can't come close to generating the

excitement of a PS3 or an Xbox 360. But this is where the fan-fueled press

keeps going off the rails. We get excited about big ideas and the glitz and

glory that colossal investments can create. But we miss the simple, sober

successes of a solid business plan.

Hiding in Plain Sight: Market Differentiation

The chiming, chattering agreement of the game press these days is that Sony

is going to beat Microsoft, but that Microsoft is going to take a chunk out

of Sony. No one seems to think much about the next Nintendo hardware

platform. And unless the big N surprises everyone with direct neural

implants or something, I expect that the fan's attention will continue to

focus on the slugfest between Sony and MS.

But I think this is a misread and a gross misunderstanding of this market.

Today Nintendo commands about 10% of the videogame market, give or take.

This is important because Nintendo is terribly profitably, as we discussed,

with this little slice of the game business. They have a business that has

evolved to thrive at the edge of the market.

If you are Nintendo, you dream about taking over the lead in the market once

again. But the reality is, you have a business built such that it could last

500 years doing just what it is doing, making cash hand over fist on a tenth

of the market.

Further, you watched as Sega bet the farm on the Dreamcast and lost. You

understand the opportunity and risk of ambition.

So, what do you do?

One obvious strategy is that you don't do anything. You launch your next

system with adequate power and adequate features, but you don't worry about

competing with Sony or Microsoft. In fact, you do everything you can to not

compete.

In the war between Coke and Pepsi, non-cola sales go up. All the money Coke

and Pepsi spend trying to displace each other in the market generates

enormous amounts of interest in soda pop. But some people don't want cola.

So they buy root beer, and lemon-flavored fizzy water. Not-a-cola doesn't

have to spend the marketing dollars in the cola wars, but benefits from the

attention generated by the prize fight-majority control of the soda market

via cola.

It will work out the same way in the videogame business. Microsoft will

increase Sony's costs. Sony has to invest more in hardware R&D, marketing

and game development. Sony and Microsoft then engage in a battle of the

titans, fighting for market dominance. All Nintendo needs to do it stay out

of the way. It just needs to be not-Sony and not-Microsoft. It just needs to

be Nintendo.

How can they do it? Well, here' s a couple of strategies that would probably

work.

  1.. Launch a competitive, low cast product. If the Revolution turns out to

be a $150 machine that generates graphics similar enough to the PS3 and the

360 that the layman can't easily tell the difference, then Joe and Jane

Casual Gamer will probably buy a Nintendo machine.

  2.. Market to the core audience-fan boys and families. Whatever Sony and

Microsoft do, they are going to have a hard time convincing mom or dad that

their system is good for the kids. The kids will beg for a PS3 to play the

latest blood-soaked adventure from Rockstar or to get their mitts on Halo

for the 360. But parents are going to be happier buying junior a Nintendo

machine with a Mario game. The fan boy angle is already in works with the

announcement that the Revolution will play games from entire history of

Nintendo in emulation.

  3.. Produce a portable console. We know the Revolution will be small. But

will it be small enough to haul around? If so, every kid in America will

want a Revolution in their backpack. We've seen the 360. It's a classy piece

of hardware. But it's a component for the home entertainment system. And if

the PS3 is as powerful as people claim, it will probably be the size RD-D2.

A portable console would be cool. And would sell.

  4.. Don't do anything special with the hardware, just keep producing

triple AAA titles. If you want Mario, Metroid or Starfox, you'll have to buy

a Nintendo.

Now the common objection to these strategies is that Nintendo will never

displace Sony or Microsoft following these paths. And that's partially

right. None of these strategies is likely to do much to expand Nintendo's

current market share. But remember, if Nintendo sticks with profitability

and 10% of a growing market, then they will be cash rich and competitive for

the foreseeable future.

And this is where long-term thinking comes in.

Microsoft lost billions on the Xbox. They very well may loose money this

round, depending on how fast the market grows and how much of the market

they can grab. Sony has made lots of money on games. But facing a

significant loss in market share, they will need to see a massive growth in

the market to keep their net profits anywhere near where they have been.

So, a plausible scenario emerges that this generation of console wars

exhausts Sony and Microsoft. Any financial weakness this round diminishes

their ability to compete next round. And what happens while the dinosaurs

battle to the death? That's right. The profitable niche players come out.

Enter the age of the mammals. By 2010 Nintendo could find a moment of

opportunity, spend a lot and lead the next, next generation of videogaming

technology.

This is a lot of speculation. But what we know is startling. Microsoft will

attack Sony's market. Someone is going to loose out unless the game market

grows at a more phenomenal pace than it has to date. J Allard stood up at E3

and predicted a population of 1 billion gamers worldwide in the next

generation. That's triple or quadruple (or more) of the current population.

Possible, but unlikely without opening the former pirate markets of Latin

America and China.

So while Sony and Microsoft fly into the face of a risky future, Nintendo

doesn't have to worry about winning this round. They only need to survive.

And by Microsoft attacking Sony, Nintendo really doesn't have to do much to

stay in the game. Just keep doing what they have been doing.

And, perhaps not so surprisingly, that's what they've been saying all along,

"We're a game company. We make cool games. We'll keep making new games. That

is all."

It's the software stupid

My favorite disclaimer for all console war stories is that "Well, the games

are what's going to matter in the end." And that's is so perfectly right and

wrong at the same time.

What's wrong with the idea? Look no further than the Sega Dreamcast. Without

a doubt, this system had great games. For a year or two, arguably it had the

best games on any platform. But it failed, none-the-less. Sony convinced the

market to wait for the PS2. So, the story is always greater than games. And

the success of marketing, market position and the dream of new hardware

matters as much as games.

It also seems ironic that many times the same story that claim the next

generation is all about the games also picks the PS3 as the next generation

winner. That's odd since we have seen exactly zero PS3 games so far.

I think the PS3 will come out on top this generation because of brand

identity. Most people know that the PlayStation is the big videogame

machine. So when faced with conflicting information, the average consumer

will buy brand. And at this point, Sony is brand.

But there is some wisdom to the software story, when you consider it in

conjunction with brand. Madden sells because it is Madden. Even after EA

spent hundreds of millions of dollars acquiring an exclusive license for the

NFL brand, they kept the name of the game Madden. Why? Because in the world

of videogames, Madden is NFL. To drop the Madden name would certainly be to

loose sales.

So, who has brand in videogames? There are plenty of brands out there. But

no software brand is as strong as Nintendo's Just to say a game is a

Nintendo game is to give it a shine. Why do people cheer at the Nintendo E3

press conference? Because they are die hard fans. Generation after

generation of hardware, sequel after sequel, Nintendo game buyers return to

the stores.

Where the "it's the software stupid" argument leads is toward breakout

hits-Grand Theft Auto and Halo-and to software brands, Madden and Nintendo.

And if software brand matters in the next generation, who is going to

benefit? You can bet Nintendo will be at the front of that line.

What do I make out of all of this? Am I predicting the rise of Nintendo in

the coming golden age of videogaming? Not really. Do I hate Sony and

Microsoft and want to see them fail? Hardly. In fact, I think the opposite.

I'd like to see these game companies succeed and prosper. I think

competition is healthy and that financial cataclysm helps no one.

Still, I think that the press has grossly underestimated Nintendo's current

position. I expect that Nintendo will actually grow in the next generation.

And while I do not expect them to take a market leader role in the short

term, I think it is entirely possible that they will generate more profit

than their bigger, louder, competitors.

The Bottom Line

More than anything, I wanted to use this little screed as long form argument

for taking the business of games more seriously. How the industry operates

directly affects the less tangible aspects such as the aesthetics or social

impact of games. If we want to talk about videogames in a serious and

significant way, then we also need to get serious about thinking about the

business of games.

Falling into line and making gross proclamation about the supremacy of the

PS3 or the brilliance of the 360 marketing plan misses a raft of other

business issues which will collide with, and complicate the story. And that's

the story that I want to understand better. Sucking down marketing hype as

business intelligence is a foolish way to go about understanding videogames.

Ultimately, games and game companies should thrive or falter on the basis of

how well their products communicate with us. Games that matter to us should

make companies rich and those that don't should fade silently away. It's

proper to focus on the life of gaming rather than the business of gaming.

But the business matters and we risk missing the point if we don't pay

attention to the commercial spine of the medium

Or think about it this way. Microsoft spent billions of dollars more than

they made on the Xbox. For them, it was an investment in the future, a

future that they expect will make them money. For the average gamer, those

billions of dollars were a gift. In a very real sense, Microsoft subsidized

a big portion of the current generation of fun. They paid us to enjoy their

games and to delight in the new products and services their money goaded

their competitors into making. Whatever else you think about the Xbox, it

was corporate charity, and every gamer benefited in one way or the other.

The experience of playing videogames would be different if Bill Gates didn't

wake up one day and decide to aim his business at gaming.

We may not want to care about the suits behind the curtain. But they are

there, and the strings they pull make the industry dance.

Link to comment
Share on other sites

I'm not sure what you disagree about with the micro - I think he was spot on.

A product with next to zero R&D costs, using cheap, old, technology, can't really lose. And even with only modest hardware sales they are bound to generate GBA software sales, which are very profitable.

Link to comment
Share on other sites

Get back under your bridge, troll.

.::: Well in a way he's right. Nintendo still had the handheld market and is now trying to close the gates on Sony, by becoming truly synonimous to handheld gaming, not just the only choice. GB Micro is made partly for that. You now have three GBA models to choose from, meaning taste and size come into play just like they did with mobile phones.

As much as I disliked Nintendo showing the GBM, just as much did I want one and understood perfectly why they made it, when I actually held one.

Link to comment
Share on other sites

.. Launch a competitive, low cast product. If the Revolution turns out to

be a $150 machine that generates graphics similar enough to the PS3 and the

360 that the layman can't easily tell the difference, then Joe and Jane

Casual Gamer will probably buy a Nintendo machine.

  2.. Market to the core audience-fan boys and families. Whatever Sony and

Microsoft do, they are going to have a hard time convincing mom or dad that

their system is good for the kids. The kids will beg for a PS3 to play the

latest blood-soaked adventure from Rockstar or to get their mitts on Halo

for the 360. But parents are going to be happier buying junior a Nintendo

machine with a Mario game. The fan boy angle is already in works with the

announcement that the Revolution will play games from entire history of

Nintendo in emulation.

  3.. Produce a portable console. We know the Revolution will be small. But

will it be small enough to haul around? If so, every kid in America will

want a Revolution in their backpack. We've seen the 360. It's a classy piece

of hardware. But it's a component for the home entertainment system. And if

the PS3 is as powerful as people claim, it will probably be the size RD-D2.

A portable console would be cool. And would sell.

  4.. Don't do anything special with the hardware, just keep producing

triple AAA titles. If you want Mario, Metroid or Starfox, you'll have to buy

a Nintendo.

well I disagree with all of those. And surely so does nintendo, hence the revolution of the Revolution. Making it small is good, but hardly some sort of USP. And if people can't tell the differnce between nintendo graphics and playystation graphics, they'll go for the playstation. The kiddie angle, well XBox has parental locks, nintendo has Resident Evil 4. Also, it annoys the main bunch of 20-something people who would want it.

Link to comment
Share on other sites

An interesting read there. I too don't really agree with the author's potential strategies but then, what do I know?

It certainly does make you think about what Nintendo are doing a bit differently in this age of sales charts and PS2 'dominance'.

I sometimes get caught up thinking that the Cube is a failure and then I look at it and think of all the great games I've played (and will be playing). And the DS is a masterstroke IMO.

Link to comment
Share on other sites

Very interesting. Also recommend reading 'Game Over' by David Sheff.

I got this free with a copy of Arcade years ago, and while it skirts around some issues, it's a very interesting look at how Nintendo works. They are pretty ruthless business wise.

Link to comment
Share on other sites

I think that if Nintendo didn't have the dominance in the handheld-market they would have sunk on the GameCube.

Do you think they lost money on the GC? Or do you think people buy GC because of the GBA's presence?

I'm pretty sure Nintendo have done well in both markets from a business point of view.

MS have bought their way into the market by providing a good product for less than it costs them to make. Great for the consumer but a bit of an illusion really - they won't keep doing that forever. One of the points of the article is that this 'war' between MS & Sony actually benefits Nintendo for free.

Link to comment
Share on other sites

How is that trolling? Your thought was stupid.

A couple of years ago it was all IF NINTENDO DIDN'T HAVE POKEMON THEY'D BE FUCKED.

It's just stupid.

If Microsoft didn't have Halo, if Sony didn't have Playstation. I mean, it's just a stupid thing to say.

I said that because the author mainly talks about what the Revolution should do or should be:

  1.. Launch a competitive, low cast product. If the Revolution turns out to

be a $150 machine that generates graphics similar enough to the PS3 and the

360 that the layman can't easily tell the difference, then Joe and Jane

Casual Gamer will probably buy a Nintendo machine.

  2.. Market to the core audience-fan boys and families. Whatever Sony and

Microsoft do, they are going to have a hard time convincing mom or dad that

their system is good for the kids. The kids will beg for a PS3 to play the

latest blood-soaked adventure from Rockstar or to get their mitts on Halo

for the 360. But parents are going to be happier buying junior a Nintendo

machine with a Mario game. The fan boy angle is already in works with the

announcement that the Revolution will play games from entire history of

Nintendo in emulation.

  3.. Produce a portable console. We know the Revolution will be small. But

will it be small enough to haul around? If so, every kid in America will

want a Revolution in their backpack. We've seen the 360. It's a classy piece

of hardware. But it's a component for the home entertainment system. And if

the PS3 is as powerful as people claim, it will probably be the size RD-D2.

A portable console would be cool. And would sell.

  4.. Don't do anything special with the hardware, just keep producing

triple AAA titles. If you want Mario, Metroid or Starfox, you'll have to buy

a Nintendo.

Now the common objection to these strategies is that Nintendo will never

displace Sony or Microsoft following these paths. And that's partially

right. None of these strategies is likely to do much to expand Nintendo's

current market share. But remember, if Nintendo sticks with profitability

and 10% of a growing market, then they will be cash rich and competitive for

the foreseeable future.

My point is that Nintendo is loosing the battle on the 'home-consoles' front. There's no doubt that in the handheld market they are and probably will be dominant, but making the same mistake on the home-console market as they did with the Cube, as the author here suggests, seems a bit dumb to me. The Cube sold shit, the software didn't do too well and maybe it's profitable when it comes to manufacturing price vs selling price, but considering the huge amount of money and time invested in R&D and software development, it can't be enough to run a whole company on.

Maybe I didn't make myself clear. I'm not saying Nintendo is doing bad business, far from it. I just think that the article stretches that the solution is in the home-market while I think the handheld market is much more important to Nintendo. Which is the area they should invest in most. (And with the success of the DS and the announcement of the GBM it seems they do). By the waym, I thought you were trolling not by what you said but how you said it. I've seen your colourful way of expressing yourself in earlier threads and it makes me cringe for some reason.

Link to comment
Share on other sites

I actually saw some pretty interesting figures recently... from the days of the N64 Nintendo have been seen as being in terminal decline when compared to the ascendency of the PlayStation brand. But when you compare yearly profits going back to the mid nineties Nintendo is just marginally (~$500m) behind. Infact this recent financial year, on the back of DS, they announced profts of $819m!

Link to comment
Share on other sites

My point is that Nintendo is loosing the battle on the 'home-consoles' front.

But what is the battle exactly? What's the point in market share if you are losing money hand over fist? Ms have sold a small percentage more Xboxes than Nintendo have GC's. Why is Nintendo seen as losing when they've made a lot of money on a smaller number of units compared to a massive loss?

Link to comment
Share on other sites

I said that because the author mainly talks about what the Revolution should do or should be:

My point is that Nintendo is loosing the battle on the 'home-consoles' front. There's no doubt that in the handheld market they are and probably will be dominant, but making the same mistake on the home-console market as they did with the Cube, as the author here suggests, seems a bit dumb to me.  The Cube sold shit, the software didn't do too well and maybe it's profitable when it comes to manufacturing price vs selling price, but considering the huge amount of money and time invested in R&D and software development, it can't be enough to run a whole company on.

Maybe I didn't make myself clear. I'm not saying Nintendo is doing bad business, far from it. I just think that the article stretches that the solution is in the home-market while I think the handheld market is much more important to Nintendo. Which is the area they should invest in most. (And with the success of the DS and the announcement of the GBM it seems they do). By the waym, I thought you were trolling not by what you said but how you said it. I've seen your colourful way of expressing yourself in earlier threads and it makes me cringe for some reason.

Okay, I should have said IF IFs and ANDs WERE POTS AND PANS.

Anyway, I don't think you read the article properly.

Link to comment
Share on other sites

.::: Because they aren't shouting hard enough. They aren't weilling to keep up with the competition.

And of course they lack a lot games other players deem important and are available on Xbox and PS2.

Link to comment
Share on other sites

It's an interesting article, but I'm not sure about some of his conclusions. I'm particularly unsure that you can make any meaningful comparison between Nintendo and General Electric, given that it's like comparing an organism to an ecosystem.

And he misspells 'lose' throughout.

Link to comment
Share on other sites

Sony and (probably moreso) Microsoft are going for the highest market share and presumably, once (if) one of them achieves it they will take advantage of their monopolistic position to simply rip the gamers off.

Nintendo fundamentally understand the way to court customers, brand loyalty and profit from releasing quality products. The other two do it by marketing and relying on a quite risky long-term business model.

I'd hate it if Nintendo changed their strategy and tried to compete on Sony and Microsoft's terms.

Link to comment
Share on other sites

Since the launch of Xbox Microsofts game division has lost $3bn roughly IIRC... (actually can anyone verify that figure, might be a little bit higher), although they lost only $58m last year which was quite a successful year for Xbox (Halo2 helped). This years Xbox figures will give them a loss as well probably, due to the 360 launch. Yet Nintendo will be seen as a failure with over a billion dollars profit for last year and this. Bizarre when you think about it.

Link to comment
Share on other sites

Sony and (probably moreso) Microsoft are going for the highest market share and presumably, once (if) one of them achieves it they will take advantage of their monopolistic position to simply rip the gamers off.

Yeah this is pretty worrying. Sony and Microsoft are giving us loads of free stuff, making losses left right and centre just to please us. There's going to be a time when they want to recoup their losses and we have to start paying. Either that or I'm just being paranoid.

Link to comment
Share on other sites

they have already openly admitted they are going to rip us off. ok they didn't put it in those words but games for £50 ?

Yeah, but they can't legally set the retail price, so once the demand slows up the games will come down in price.

Link to comment
Share on other sites

Yeah, but they can't legally set the retail price, so once the demand slows up the games will come down in price.

retailers are hardly going to sell the games for no profit are they ? games prices will be higher during the next generation. that much is certain.
Link to comment
Share on other sites

Yeah, but they can't legally set the retail price, so once the demand slows up the games will come down in price.

No, but they can fix the price they sell stock to the distributors. If they increase that then the distributors increase the price to retailers to protect their margains and the retailers do the same with the public. Therefore they can effectively for the price point they want. Also note what a recent company said (can't remember who exactly) it's really only the UK which has a culture of price cutting... in many other markets games retain their release price for long periods.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue. Use of this website is subject to our Privacy Policy, Terms of Use, and Guidelines.