Is Nintendo Playing the Wrong Game? (Business 2.0)

  1. Is Nintendo Playing the Wrong Game? (Business 2.0)

    07-15-2003, 06:05 PM

    Its competitors are turning their consoles into home entertainment centers. But Nintendo is sticking to games, a play-it-safe strategy that threatens to reduce the once-mighty company to irrelevance.


    If you want to see the future of video games, there's no place like the annual Electronic Entertainment Expo. Each May the industry's heavyweights roll out their latest marvels, displaying their visions for the next year and beyond. This year's E3 was no exception. In one corner, J Allard, vice president for Xbox, took the wraps off Xbox Music Mixer, a karaoke system for Microsoft's game console. In another corner, Sony entertained the crowd with its new EyeToy, a camera that will add videoconferencing to the PlayStation 2. But that was just the beginning for Sony. Videogames chief Ken Kutaragi soon dropped the real bomb: Sony will take on Nintendo's might Game Boy with a new handheld. Finally, with anticipation at a crescendo, Nintendo CEO and president Satoru Iwata faced the crowd to meet his rivals' news with some of his own: Nintendo would oson release a four-way version of the arcade classic Pac-Man.

    You could almost hear the air being sucked out of the room. This was a moment for vision and drama, a chance for Nintendo to dazzle the industry with its genius. Instead, Iwata served up four-way Pac-Man. The idea struck everyone as breathtakingly backward.

    If ever there was a time for audacity, this is it. Nintendo once owned the videogame business. It was reputedly Japan's single most profitable company in 1991, with its game console in one of every three American homes. In fact, a 1994 book about the company was titled Game Over: How Nintendo Conquered the World. Now the company is on the ropes. In just a decade, its share of the US console market has shriveled from 90 percent to just 15 - nowhere near striking distance of Sony's dominant PlayStation 2. Though Nintendo is still profitable, nearly half of its earnings now come from the handheld Game Boy (see "Another Crisis on His Hands" below). And those earnings have takend a nosedive, plunging 37 percent from 2002 to 2003. The worst part? Nintendo managed all this in the midst of a videogame explosion - in the past seven years, worldwide sales have doubled, to $27 billion. In the United States, about half of all hoems now have a video game console; 30 percent of those have at least two.

    How could Nintendo have let Sony devour its lunch? The short answer is that is stopped paying attention. The videogame business has changed, but Nintendo hasn't. In 1990, two-thirds of console players were younger than 18; today the opposite is true, and the average player is 29. Yet Nintendo has continued to serve kiddie fare almost exclusively. It resisted the transition from cartridges to CD-ROMs, which are far cheaper to produce and fatten the bottom line much faster. (Nintendo's GameCube now uses minidiscs.) And while its hardware competitors were making nice with third-party developers in order to expand their all-important game libraries, Nintendo continued to treat the developers as rivals. Now Sony and Microsoft are expanding the scope of the entire videogame business, morphing their consoles into all-in-one home entertainment devices in their battle to dominate the long trumpeted but slow-to-arrive world of PC/TV convergence. Nintendo, meanwhile, is still a game company - and only a game company. Which is precisely the problem, according to most people in the industry. "The battle is over entertainment. Period," declares Jack Tretton, executive vice president at Sony Computer Entertainment America. "if you don't have that vision, you are forever going to be a niche player."

    Given the circumstances, Iwata can be forgiven squirming. Sitting in Nintendo's spartan US headquarters in Redmond, Washington, one day in April, he freely admits that his rivals' grand vision for the future of the industry has brough on a "sense of crisis for us." But that doesn't mean he's ready to give up. He has a nice cushion - $6 billion in cash - and a decision to make. Will he take on Sony and Microsoft in the battle for control of the world's living rooms, or will he continue to focus exclusively on games? But there's an even bigger question now looming that could make all of the above moot: No matter which path he chooses, is it simply too late to turn Nintendo around?

    No company knew home entertainment better than Nintendo. It began life in 1889 as a wildy successful maker of playing cards. But by the 1970's, Nintendo president Hiroshi Yamauchi was looking for new ways to grow. As David Scheff reported in Game Over, his first shots were misfires - instant rice, love hotels, a taxi service - and couldn't have come at a worse time. The oil crisis was choking everyone, and Nintendo's sales were so slow that the company nearly filed for bankruptcy. That scarce left Yamauchi with little appetite for adventure; he vowed that Nintendo would always have plenty of cash on hand and would never take another chance on unproven business.

    So he returned to the firm's longstanding strenghts; its experience in entertainment and its unparalled pipeline into Japan's toy and department stores. Nintendo experimented with an oddball assortment of novelties - an extending gripper device, a periscope - that sold modestly well. The company's first electronic breakthrough was a toy gun that shot a beam of light. From there Nintendo moved into arcade games, which in the late 1970's were on a roll. In 1983, Nintendo's R&D department came up with a video arcade for the living room: the Family Computer - Famicom for short.

    The Famicom was an overnight sensation in Japan. It had a tougher time cracking the US market. American retailers, still bruised by the recent failure of Atari, weren't exactly enthusiastic about stocking another videogame system. But after a successful test rollout in New York in 1985, the renamed Nintendo Entertainment System (NES) quickly became the hottest toy on the market. Delighted retailers couldn't keep it in stock.

    By the end of the decade, Nintendo pretty much was the videogame business. Its hold on the market was so overwhelming that even Wal-Mart cowered. When Sega wanted to launch Genesis, the first real challenge to Nintendo's vidoegame monopoly, the retailing superpower was leery; its relationship with Nintendo was too lucrative to jeopardize (Sega had to unleash a marketing blitz on Wal-Mart's hometown of Bentonvilee, Arkansas, buying up every billboard in town and slapping a logo on every seat cushion at the University of Arkansas football stadium - to finally land some shelf space).

    Dominance bred arrogance. Nintendo saw no reason to play nicely with others, especially third-party game publishers. Since the company sold its consoles at cost or slightly less and made its money on its games, the model dictated that it view third-party developers as a threat. Nintendo was also determined to avoid Atari's fate; that system died in large part because of its second-rate software. Maniacal about quality control, Nintendo meted out just a handful of extraordinarily restrictive NES licenses. "Nintendo said you could only make five games a year. It also insisted that your games had to be Nintendo exclusives for at least two years," recalls Greg Fischbach, former co-chairman of Acclaim, one of the lucky few to score a license.

    The hardware was a different matter. When Nintendo went to develop the next generation NES, it realized id didn't have the engineering know-how, so it looked outside for help. In 1988 it signed an agreement with Sony to create a CD-ROM drive for its next system, the Super Nintendo (SNES). The project's working name: the PlayStation. The plan was to merge Sony's hardware with Nintendo's software to create the ultimate gaming platform. But only days before the system was to be unvieled at the 1991 Consumer Electronics Show, Nintendo pulled the plug. Yamauchi couldnt' bear to help Sony, a potential competitor, enter the videogame business. Ever since, Nintendo has given up any ambition of being a console innovator and outsources its hardware development to firms like IBM and ATI, a leader in graphics technology.

    Nintendo gradually lost sight of its market. Gamers were getting older, but Nintendo didn't grow up with them. By the early 1990s, the kids who were once mesmerized by Donkey Kong and Schoolhouse Rock were now more interested in Nirvana and Wayne's World. Sega's line of games - led by a smart-aleck hedgehog named Sonic - held unmistakable teen appeal. "The way consumers saw it, Sonic was this edgy character and Mario was the round chubby plumber guy for kids," admits George Harrison, senior vice president for marketing at Nintendo of America.

    And if the games were just for kids, so evidently, was the hardware. Nintendo never bothered to make succesive generations of consoles backward-compatible; when a new Nintendo machine came out, the ocntrollers and software from the previous Nintendo systems were useless. This meant that consumers could easily justify switching to a rival console. And switch they did. Before long, Sega grabbed half the market.


    Third in a Three-Way Race:
    US Sales of Nintendo's GameCube are limping along behind those of Sony's PlayStation 2 and Microsoft's Xbox.

    Market Share:

    PlayStation 2: 65%
    Xbox: 20%
    GameCube: 15%

    Note: Sales figures through April 30. Source: NPD TRTS

    Down, Down, Down
    Nintendo once dominated the American living room with its NES, but its system sales have slid with each successive generation.

    Number of Units Sold Worldwide

    NES (1985): Approx 61 Million
    SNES (1991): Approx 50 Million
    N64 (1996): Approx 32 Million
    GCN (2001): Approx 10 Million

    Note: As of March 31. Source: Nintendo of America.


    For Sony, the timing could not have been better. In 1995, Nintendo's spurned partner exacted revenge by coming out with its own PlayStation. Having observed the gaming giant at close range, it was able to strike at each of Nintendo's weak spots. Sony made friends where Nintendo had made enemies, namely with third-party developers. Whereas Nintendo required developers to pay a $19 royalty per game, Sony charged only $9. By the end of the decade, PlaySation was home to some 1,000 titles, appealing to gamers of all ages. Nintendo's new N64, meanwhile, had just 225 titles, and those were on cartridges that cost developers $12 each to produce, compared with $1.50 apiece for PlayStation's CD-ROMs. It took just one generation for Sony to outstrip Nintendo: By 199, PlaySation had already claimed 60 percent of the markety, while N64 limped behind with 36 percent.

    The march toward convergence began in 200 with the release of the PlayStation 2, which quickly became a top-selling DVD player in Japan. Next year, Sony will introduce PSX, a PlayStation souped up with a TV tuner, DVD recording, a 120-gigabyte hard drive, TiVo-like capabilities, and full broadband support. Microsoft crowded into the market in 2001 with Xbox, which can already play mp3s, CDs and DVDs. Bill Gates has hinted that the next-generation Xbox will let users edit photos and video. Industry scuttlebutt also suggests that Xbox 2 will have video-recording technology and will even function as a Wi-Fi router.

    As Sony and Microsoft continue to grab more of the market with multimedia systems, Nintendo keeps plugging along with its single-purpose videogame technology. "Why would we ever include DVD playback in our videogame system" asks marketing VP Harrison. "If someone buys a DVD and watches it on a Nintendo GameCube, we wouldn't receive any revenue from that. We'd rather have them play our games."

    Maybe so, but the numbers suggest that Nintendo is simply playing the wrong game: Sony now owns 65 percent of the US market. Microsoft has 20 percent, leaving Nintendo with the scraps.

    This is the mess that Iwata just inherited over a year ago, when Hiroshi Yamauchi, son and grandson of Nintendo's two previous chairmen, reached outside of the family and tapped Iwata, who'd been at the company for barely three years. The 42-year-old director of corporate planning was stunned. "This was something I did not envision," he says. Yamauchi was clearly looking for a savior, for good reason. If current industry trends continue-and there's every reason to expect they will - Iwata will have to work miracles to put Nintendo back on top.

    Iwata does have epxerience nurshing ailing companies. He started out as a game developer at Hal Laboratory, a Nintendo affiliate. When a series of product delays drove Hal toward failure in the mid-1990's, Iwata reinvigorated the company and forestalled bankruptcy, earning himself a promotion to president and the nickname Director of Problem-Solving. Iwata's heroics got back to Yamauchi, and the chairman brought him to Nintendo in 2000. Now, faced with his biggest problem yet, he's taking a decidedly conservative approach: While Sony and Microsoft distract themselves with their fight over convergence, Nintendo will foucs on videogames more than ever.

    This more-of-the-same strategy cetainly doesn't sound like a battle plan for winning back Nintendo's bygone dominance. Iwata argues that his company has no choice. He insists that Nintendo's $6 billion in cash couldn't buy it enough of a stake in the consumer-electronics business to make a credible run at Sony and Microsoft. "They have reserves so vast they make us look rather poor," he says. "We have to find a way to compete without making it a question of which company is richer."

    Iwata is staking Nintendo's future on what might generously be termed a differentiation strategy. He concedes that Nintendo has focused too narrowly on kids, and he's now looking to expand. "My mantra is 5-year-olds to 95-year-olds," he says. In order to create a wider and more compelling software portfolio, Iwata is doing two things. First, he's investing in the buildout of a new R&D facility in Tokyo. It will open later this year and add 50 new developers to Nintendo's corps of 850. It's mission: "To provide entertainment to kids, adults, and even senior citizens," Iwata says.

    In addition, Iwata is working hard to mend fences with imporant third-party publishers like Electronic Arts. "Our relationship with Nintendo in the past was a distant one that didn't work very well," says Bruce McMillan, EA's senior VP for worldwide studios. But Iwata has reduced the royalty rate Nintendo charges third parties and is even letting Shigeru Miyamoto - the famous creator of Super Mario and Zelda - do the unheard-of: consult with independent companies like EA on game design. In turn, EA is expected to add special features to the Nintendo versions of franchises such as Madden Football and megahit domestic simulator The Sims. By continuing to focus on great games, Iwata argues, the company can survive no matter what the competition does. Iwata sees a time when Nintendo's games are so irresistible that even Xbox and PlayStation owners will buy a GameCube.

    Some of Iwata's resolve to stay the course may come from the cautionary tale of Sega, the gamemaker that posed such a threat to Nintendo a decade ago. After a protracted period in third place in the console market behind Nintendo and Sony, Sega shut down its hardware division altogether in 2001 to focus solely on software. It has steadily lost market share ever since. Haunted by that specter, Iwata repeatedly vows he'll never give up on the console business.

    It's possible that convergence could backfire and create an opportunity for Nintendo. Consumers could get turned off by rising console prices as Sony and Microsoft pack more functions into their boxes. Or consumers might not really want an all-in-one entertainment machine. "Name all they hybrid consumer-electronic devices that have been successful," notes Michael Pachter, an analyst at Wedbush Morgan Securities. "There's just one; the clock radio."

    But that's the minority view. Most in the videogame industry agree that Sony and Microsoft have gone the right track. "I'm not sure there's room for a stand-alone game machine," says Brian Farrell, CEO and president of THQ, the independent publishing giant responsible for such hits as SpongeBob Squarepants and WWE Wrestling. Jeff Laplin, CEO of Take-Two Interactive, which created the blockbuster Grand Theft Auto franchise, agrees. "I think Nintendo is going to have to redefine its hardware if it wants to compete," he says. "The simple fact is that people are looking for extra features."

    Iwata is betting that the rest of the industry is wrong. But that doesn't mean he isn't willing to hedge. "Another company could certainly take our game platform and use it in their products," he hints. In other words, Nintendo is willing to consider the TiVo model, building a stand-alone machine while making its technology available for incorporation in other kinds of hardware.

    That opens up a world of possibilities. There are plenty of companies that want a piece of the convergence business and don't want to cede the living room to Microsoft and Sony; they include consumer-electronics giants such as Panasonic, Samsung, and Sanyo, as well as PC manufacturers like Dell and Apple. If Apple, flying high on its success with the iPod, wanted to introduce a set-top-box, gaming technology from Nintendo would give the machine a fighting chance against the PlayStation.

    There's already some precedent. In Japan, Panasonic sells a device called the Q, whihc combines a DVD player with a GameCube. Could there be a Q in the offing for the US market? "Panasonic is one partner we would definately be interested in working with again," Iwata says, cryptically. Panasonic admits that is has a "strong relationship" with Nintendo, but refuses to say anymore.

    A joint venture partnership may be Nintendo's only hope of reversing its decline. But all hinting aside, Iwata couldn't pull off a dramatic rescue without fundamentally shifting the company's values. Nintendo isn't likely to take any genuine risks that could jeopardize its existing business (it's still the world's seocnd-largest game publisher) or dramatically deplete its reserves. So no mater what kidn of partnership Nintendo forms, its main business will likely be videogames - still profitable, but shrinking in relation to competitors. A humbling fate, indeed, for a company that once conquered the world.
  2. 07-15-2003, 06:26 PM
    It began life in 1998 as a wildy successful maker of playing cards.
    There's the money.
  3. 07-15-2003, 06:59 PM
    I remember fanboys on some forums would out-and-out violently flame anyone who made such observations as the report above about Nintendo. One that especially got you flamed is if you said Nintendo directed its market to mostly young kids. They would claim there was absolutely no proof of this and that people simply "misunderstand" Nintendo's maturity level of their games.
  4. Re: Is Nintendo Playing the Wrong Game? (Business 2.0)

    07-15-2003, 07:50 PM
    Quote Originally Posted by TheSilentAssassin
    In one corner, J Allard, vice president for Xbox, took the wraps off Xbox Music Mixer, a karaoke system for Microsoft's game console.
    Karaoke on my home console? SOLD!!!! :lol:
    Martin Bedard

    Arcade Finder - Find the coin-op games you want to play!
  5. 07-15-2003, 07:55 PM
    I corrected was suppose to say 1889
  6. 07-15-2003, 08:25 PM
    so what?

    Nintendo has already rumored to be pulling out of making console systems entirely and just focus on making new games. for the other console systems. I think this would be a good move on their part.

    Also, as far as the stats....they are bogus just giving them out like that.

    Nintendo's market is mainly kids. x-box and PS2 are for teenagers and young adults. Teenagers and young adults have a lot more money they spend on console games than younger kids that normally have to get their parents to buy it for them. Yes, Nintendo has some titles designed for the older market but not very many compared to x-box and PS2.

    That target market alone makes a big difference. Many 18 year olds are not interested in half or more of the Nintendo games. They want the more mature and violent games the xbox and PS2 systems have to offer.

    Now if you look at sales for "kids" games...not counting those rated for teenagers or M....I'd bet Nintendo holds up very well versus the other 2 console systems if not even beating them.

    The stats here are almost like taking some new Barney the Dinosaur album and saying it's a failure just because it only has 1% of the market share. it's not a failure at all...within it's targeted market.

    Stats are a dangerous thing when taken out of context...which people do all the time.
    --Rick Carter
    My streaming broadcast channel:
  7. never die

    07-15-2003, 09:43 PM
    i, myself am a nintendo fanboy, and i say, if nintendo is going to die, they are going to die hard. they will dominate the video game industry untill there heart gives out, oh and for the record, they made playing cards in 1889 not 1998. but i dont think nintnedo will ever die.
  8. RE

    07-16-2003, 04:42 AM
    Nintendo will survive. They always do that :)

    Besides, these days thay have a lot of titles for the 'older' players. Titles as "eternal darkness" and the "resident Evil games" shows that clearly (Just a few examples)
  9. Disagree on Some

    07-16-2003, 03:22 PM
    Hello all:

    My personal take, and I have to be careful of what I say, is as follows...

    What categorizes a system as a "kid's-oriented" system versus a "teenage-oriented" or "adult-oriented" system definitely has to do with the game library moreso than the components, be they CD or cart, or whether internet is available.

    That stated, I have to look at a game library in 6-categories...

    -> Sports-theme (baseball, football, soccer, wrestling, etc)
    -> Racing-theme
    -> Fighting-theme
    -> RPG and Adventure-theme
    -> Puzzle-solving
    -> All other (and this is a huge category !!)

    For the most part, "sports" could include a serious baseball title, or even "Mario Baseball", should one exist. "Racing" includes both "F-Zero", "Gran Turismo" and even "Mario Kart". "Fighting theme" includes both "Mortal Kombat" and "Clayfighter". In my "categories", I lump the genres together.

    "RPG" and adventure games could include the serious to the semi-serious. "Puzzle solving" could include "Tetris". It's the "all other" that's broad.

    A serious RPGer doesn't care if the Zelda character is serious looking ("OoT") or slightly cartoonish (I believe one of the newer Zeldas is like this), and same goes for the serious players of the first four genres.

    However, a serious puzzle player may like "Tetris", but may be turned off if the shapes are instead little Pokemon or Barney characters (no offense to the many fans of these shows) and thus not buy the cart because of that.

    As for "all other", let's face it...a serious or older gamer may not be so quick to play a game based on "Barney", while a younger gamer may not want to play, or their parent(s) may not want them to play, "Doom 3".

    Okay...time to get to the point.

    I look at Nintendo's offerings, and they tend to give the thumbs up to the (A) tried and true titles (i.e. sequels, licenses, etc) and (B) games designed for a younger gamer. But they still offers sports, etc. So why would I go thru the trouble to type this all out if I seem to have answered my own question ? Here's why.

    I sort of mentally strip-out all the 1st four categories from what a system offers. Why ? Well, they have cross-over appeal as I explained. So I look at the balance which is categories 5 & 6.

    Of those, for Nintendo, they are heavily leaning towards the younger set. The average Xbox title is geared for the older gamer (over 16) while the Playstation tries for the best mix of both worlds.

    Just an opinion. And a long-winded one at that !!

  10. 02-18-2021, 10:36 PM
    Nintendo will always be around for many reasons, but mainly three.

    1. They absolutely crush the portable style. Always have, always will. Playing games on the go is becoming more and more convenient for everyone.

    2. Price. It's that simple. It really is the same entertainment for much less compared to Xbox and Playstation. In todays economy where it seems even the well paid are becoming tight with their money, cheaper is just more practical. It's the same reason I won't watch movies in a movie theater unless they are something I absolutely want to see (No Time to Die is one of them if the damn thing ever gets released). I would rather stay home and save the money.

    3. Nintendo doesn't target kids...they target parents and people with less money. For me it was always Nintendo growing up, in college it was Xbox/Playstation, now I'm back to Nintendo (not that I ever left them). Xbox and Playstation seem to be trying to become more like a PC where you can do all these things on them and it's just loading up the price tag for something most of us already have to do those things; PC's, Smart phones/tablets and Smart TVs. Xbox/Playstation seem to produce things for 16-23 year olds. Maturing high school kids and single/not yet married people. Nintendo seems more direct to just playing games and that's what most people want.

    That's just me
    Likes starcrytas liked this post
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