Invention that gets out into the world is innovation. Sure, some ideas had failed – a toy vacuum cleaner, a taxi service, a chain of “love hotels” – but if the recent Wii shortage demonstrates anything, is that Nintendo’s latest “reinvention” has caught “the next great wave” within the video gaming industry. From its business-changing arcade machines to handhelds, 3-D graphics to interactive game-play; Nintendo has shown a skill for leapfrogging its industry.
Capturing the Market
The first major leap was in 1983, when the video game business was suffering a severe crash. The market was flooded with consoles of low quality video games by smaller companies and a growing number of home computer users, which caused consumers and retailers to lose faith and interest in video game consoles. Most video game companies filed for bankruptcy, or moved into other industries, abandoning their game consoles. Nintendo released the Famicom in Japan and unlike the other consoles of the time, like ColecoVision, Famicom supported high-resolution sprites and tiled backgrounds but with more colors. This allowed Famicom games to be longer and have more detailed graphics. Nintendo brought their Famicom over to the US in the form of the Nintendo Entertainment System (NES) in 1985. Nintendo went on to sell nearly 61.9[1] million NES units worldwide, outselling any system in the 8-bit era. Nintendo’s innovation in the video game industry had set the standards for subsequent consoles in everything from game design (Super Mario Brothers, popularizing the platform game genre) to controller layout (the D-pad). In addition, with the NES, Nintendo introduced a now-standard business model of software licensing for third-party developers.
After its international success with the NES, in midst of the fourth generation (1989) of home video game systems, Nintendo introduced the SNES. This too became a global success, becoming the best-selling console of the 16-bit era despite its relatively late start and the fierce competition it faced in North America from Sega’s Genesis console. Nintendo dominated, by reaching sales of 49.1[2] million units despite its competition in Sega’s Genesis and NEC’s TurboGrafx-16, selling 29 million and 10[3] million, respectively. The SNES was considered to embody the “Golden Age of video games”, based on its many groundbreaking games and the perceived focus on game-play over graphics and technical gimmicks, much like its predecessor.
Sustaining Technology
As it prepared to launch its next home video game console, Nintendo was faced with, what Clayton Christensen would have stated, “strategic alternatives facing performance oversupply and the consequent likelihood that disruptive approaches will change the nature of competition in their industry.”[4] Ultimately, Nintendo chose to abandon their innovative ways and stuck with a cartridge based system to place into the Nintendo 64 like its predecessors rather than embracing new technologies available during the time. Publicly, Nintendo defended this decision on the grounds that it would give games shorter load times than a Compact Disc (and would decrease piracy). However, it also allowed Nintendo to charge higher licensing fees, as cartridge production was considerably more expensive than CD production.
Many third-party developers viewed this as an underhanded attempt to raise more money for Nintendo and many of them became more reluctant to release games on the N64. Despite these and other moves by Nintendo, almost every other contemporary system began to move to the new CD-ROM technology (the Nintendo 64 was the last major home video game console to use cartridges), and many game developers began to embrace the notable entrant competitors in the industry, such as Sony and its PlayStation video game console. What became appealing to publishers was the fact that CDs could be produced at significantly less expense and with more flexibility (it was easy to change production to meet demand), and they were able to pass the lower costs onto consumers. What’s more, the console manufacturer gets a licensing fee for every third-party game sold, and it bears no development costs.
This presents a fascinating question on whether Nintendo’s business practices were now based on a value network where generating revenue was held in favor than embracing innovative ideas. Maybe they became so confident in their current customer market they chose to become a “closed-door” operation and try to continue their success. Nintendo has never had a problem coming up with great games under Shigeru Miyamoto, legendary videogame designer, and his creative direction. Pokémon, Super Mario, The Legend of Zelda – Nintendo titles have dominated the bestseller list for each Nintendo console. But that’s not necessarily a good thing for the company. Third-party games increase consumer interest in the hardware, which sells more software. “It really is pure profit,” said Reggie Fils-Aime, the president and COO of Nintendo of America. “Third-party games can really determine who wins.”[5]
The theory held true as Nintendo and its majority of first-party games slowly lost its market share as Sony sold over 120[6] million Playstation consoles and was able to produce more third-party games quicker and cheaper for the video gaming market. Nintendo’s N64 went on to sell 32.9[7] million units between 1993-2002, but failed to capture the new generation of customers playing video games.
Nintendo finally made the switch to CD formatted games, with the introduction of its GameCube, but by then it was too late. During the sixth generation (1998-2006) of video game consoles, Sony’s PlayStation 2 and newcomer Microsoft’s Xbox capitalized on the mishaps of Nintendo’s business strategies and decisions and established their dominance in the market. Sony achieved sales dominance in this generation, with 127[8] million sold by the end of 2007, making the PlayStation 2 the best-selling console in history. Microsoft’s Xbox came in second with over 24[9] million sold and the Nintendo GameCube was third with 21.6[10] million sold. Nintendo’s arsenal of franchises and history in the industry, though earning it a loyal fan base, failed to give it an advantage against the Xbox and PlayStation 2, which captured the majority of the audience that preferred ‘Mature’ titles.
Disruptive Opportunity
In 2002, PlayStation2 was king, and Microsoft was challenging Sony in a technological arms race. But Satoru Iwata, newly appointed president and CEO, felt his competitors were fighting the wrong battle. Cramming more technology into consoles would only make the games more expensive, harder to use, and worst of all, less fun. Iwata, 47, started as a developer for a firm Nintendo bought in 2000. Since taking over in 2002 he has westernized Nintendo, instituting performance-based raises and a retirement age of 65. Iwata has made Nintendo as efficient as a bullet train and the company’s 3,400 employees generated $8.26 billion in revenue last year, or $2.5 million each.[11] “We decided that Nintendo was going to take another route – game expansion,” says Iwata. “We are not competing against Sony or Microsoft. We are battling the indifference of people who have no interest in videogames.”[12] Nintendo knew it had to restructure its current value network and saw this as a perfect opportunity to introduce its own risky innovative products while the other firms battled for technical performance oversupply.
So the company plotted to attract current hard-core and casual gamers, non-gamers, and lapsed gamers by focusing on new game-play experiences and new forms of interaction with games rather than cutting edge graphics and expensive technology. This approach was implemented first in the portable market with the Nintendo DS in 2004. Handhelds weren’t a new concept. Nintendo had sold tens of millions of Game Boys. But Sony’s forthcoming PSP was being touted as a multimedia machine rich in technology and with an ability to play movies. Iwata went cheaper, smaller (the size of the device), and broader (the intended market). The DS has side-by-side screens, one of which is a touchscreen; Wi-Fi; and voice recognition – all to make it approachable and communal. As of this spring the company has sold more than 40[13] million DS devices, compared with 25[14] million PSPs. So when it came time to launch the Wii, Nintendo already had a model to follow.
Product Development for Disruptive Technology
The typical life cycle of a game console goes something like this: Manufacturer produces or commissions the most sophisticated parts it can come up with and hopes to milk them for half a decade. Both the PS3 and Xbox 360, for example, have processors that are far more powerful than you’ll find in most PCs. Each uses high-end graphics chips that support high-definition games; Sony even includes a Blu-ray DVD drive. The boxes are expensive at first. Hard-core game freaks pay dearly to have a console early, but sales really jump in years two, three and four, as Moore’s law and economies of scale drive prices down and third-party developers release must-have games. By year five the buzz has begun about the next generation, and the onetime latest, greatest machine can be found at a local garage sale for $50.
The Wii busted that mold. First, Nintendo used off-the-shelf parts from numerous suppliers. Sony co-developed the PS3’s screaming-fast 3.2-gigahertz “cell” chip and does the manufacturing in its own facilities. Nintendo bought its 729-megahertz and its graphics are marginally better than the PS2 and the original Xbox, but they pale next to the PS3 and Xbox 360. Taking this route enabled the company to introduce the Wii at $250 in the U.S. (vs. $599 for the PS3 and as much as $399 for the 360) and still turn a profit on every unit. And while a $250 sticker makes the Wii more of an impulse buy than even an iPod, it’s not the price tag that makes it fly off shelves.
The Wii introduced an innovative interface for the video gaming experience, dubbed the Wiimote. Videogame controllers generally feature a confusing array of buttons, and watching an avid gamer work the device, thumbs pattering across plastic, can be intimidating. By contrast the Wii’s wireless, motion-sensitive remote, which Miyamoto had been dreaming of for years, often requires no button manipulation whatsoever. Nintendo expressed hope that these new control schemes it had implemented will render current conventionally controlled consoles obsolete, possibly leading to Nintendo capturing a large portion of the existing market as well.
A risky strategy, so far, has paid off, with demand for the Wii outstripping supply throughout 2007. Since Nintendo profited on each console right from the start unlike its competitors, it has already achieved very positive returns. With only a few exceptions, monthly worldwide Wii sales have been higher than the Xbox 360 and PlayStation 3, eroding Microsoft’s early lead and widening the gap between its market share and Sony’s. On September 12, 2007, it was reported by the British newspaper Financial Times that the Wii’s sales had surpassed the Xbox 360, which was released one year previously, and became the market leader in worldwide home console sales for the current generation.
Last checked, as of March 31st, 2008, Nintendo has sold nearly 24.5 million Wii consoles globally, and Microsoft’s Xbox 360 was second with 19 million, and Sony’s PS3 was third at 13 million. Disruptive shift? I believe so as for now.
Performance Oversupply
Now the question was, how this happen? How did Nintendo overtake the giants of Sony and Microsoft? In 2004, two business professors W. Chan Kim and Renée Mauborgne published a book by the title “Blue Ocean Strategy”. It theorizes that the most innovative companies have one thing in common – they separate themselves from a throng of bloody competition (in the red ocean) and set out to create new markets (in the blue ocean). Turns out Iwata had a name for his line of attack that he had been preaching at Nintendo.
Starbucks is an example. There’s always been coffee; Howard Schultz gave us the coffee experience. Or Apple, which gave us the iPod and iTunes – and created a new form of entertainment. So to appeal to casual and non-gamers, Nintendo created the Wii Series of games, where players make use of the motion-sensing abilities of the console and its peripherals to simulate real world activities, such as sports, table games, music, or doing exercises. In Miyamoto’s eyes technology is just a tool, and less of it is often more. “What I want to do,” he says, “is to make it so people can actually feel something unprecedented.”[15]
Sony views the world through the eyes of an engineer, seeing an impressive proprietary technology (Betamax, Memory Stick, Blu-ray) and forcing it on the market. Gaming has been the Sony’s profit center for years. Suddenly, when everyone thought the PS3 would solidify Sony’s dominance, along came the Wii. With an unheard-of price and few quality games to choose from, the PS3 has produced disappointing sales; the father of the PlayStation, Ken Kutaragi was recently forced to resign his post as chairman of Sony Computer Entertainment. Sony’s biggest mistake was scheduling the successor to its current hardware (PS2) on a 4-year life cycle without paying attention to changes in the market rendering them in an inflexible approach.
Iwata knows the Wiimote alone won’t sustain Nintendo forever. The Wii gives Nintendo a few options. It could stick with the current Wii for a few years until today’s top-end technology falls to Kmart prices. At that point it could introduce a Wii 2.0 with technology similar to today’s PS3, but on the cheap. It could cut $50 off the sticker to compete with the price cuts that are undoubtedly coming from Sony and Microsoft. But that’s red-ocean thinking. Iwata wants to keep innovating, to do for gaming what Starbucks has done for coffee or Apple has done for music. “The relationship with the Mac or PC to iTunes and the iPod,” he says, “that kind of combination may be possible between DS and Wii. We are successfully moving up the blue ocean,” Iwata continues. “But once the blue ocean has become big enough for so many people to notice, it is going to change its color to red.”[16]
The Right Strategy
The only thing more fun than bowling in your living room with a bunch of friends is having their digital counterparts cheer you on from the alley inside your TV. The experience makes you forget about graphics altogether. You don’t mind that your Mii character is missing arms and legs. “We are not competing against Sony or Microsoft. We are battling the indifference of people who have no interest in videogames,”[17] states Satoru Iwata. Nintendo once again succeeded in its introduction of a “disruptive innovation” by simply applying its resources and capabilities to the video gaming experience into the untapped market, which could value or accept the attributes of a product such as the Wii. The reason why so many Wii owners were first time gamers, like my sister, was Nintendo’s focus on creating an overall “home” gaming experience anyone can enjoy and was simple and fun. Something possibly the whole household can enjoy, not just the teenage son and his online friends.
With Iwata behind the wheel and with his focus on the future, Nintendo, I believe, will continue to adapt its company’s value network to provide innovations and create ever more alternative gaming experiences. Quoted from an interview on GameSpot.com, Iwata said, “We need to forecast what the future will be like with the expected evolution of new technologies which are available at any given time, and try to identify the so-called ‘sweet spot’ of technology over the next few years.”[18]
1 – 3, 6 – 10, 13, 14 – As of August 2007. Information was acquired from Wikipedia.com.
4 – Quoted from “The Innovator’s Dilemma” – Clayton M. Christensen.
5, 11, 12, 15, 16, 17 – Quotes from article from the Fortune June 2007 Issue.
Cafe Time Run! 
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