Nintendo Versus Everyone: The Business of Business
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.
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.
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.
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.
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 lose 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 lose 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 lose 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.
du bist für mich nur ein angeber übrigens ich hab schon eine nur hab ich keine MS Brille die könntest du mir vieleicht mal leihen 
Zocker mit Nintendofanbrille...*g*
