Nintendoom - Part 2 - Nintendo Should Go Third Party

Last time, we discussed the general ‘doomed’ meme as an outgrowth of the belief that Nintendo's hardware markets are in decline.  A close corollary to that meme is  the pivot from asserting Nintendo is doomed to giving them some free advice  –  that the company should become a software only publisher.

#2) Should Nintendo, in light of its imminent decline, cut their losses and put software on someone else’s platform.

The advice of going third-party is not new.   During the GameCube era,  analysts and gamers alike looked to Sega as a precedent and advised a third party approach to Nintendo’s business strategy.

The thinking goes something like this.

1. Nintendo’s decline is not a probability but a reality
2. In the wake of weakening and objectively weak hardware sales, Nintendo must seek new revenue sources from its core competency (software)
3. This revenue source  must therefore logically be placing their software on the widest audience possible  (at the time this was the PlayStation 2).

More recently, the discussion has hinged on the imepending ‘attack’ on Nintendo’s golden goose, the portable market, by tablet and smartphone devices and how the superior form factor and technology of these subsidized devices as well as the very low pricing of the ‘apps’ available post a mortal threat to Nintendo.

Understandably, this suggestion has been met with some anger. There’s no shortage of insightful and sometimes flippant remark on why Nintendo shouldn’t go third party.  The same topic was covered at length by most people.  The financial argument is well covered, as is evidenced by a recent opinion piece that summed up the dynamics of opinion and the realities quite succinctly.

“Last year Angry Birds developer Rovio estimated that they brought in around $100 million in revenue for 2011. That’s all their products, including all the Angry Birds games combined. Zynga, with all their social and mobile titles, swung to a loss a little smaller than Nintendo’s, with around $1 billion in revenue. Furthermore, the entire Apple App Store in its whole lifespan has brought in around $4 billion in revenue. That’s all apps combined since 2008. (Apple doesn’t have individual profit data on all those app makers.) Nintendo brought in around $12 billion in revenue in 2011 alone 

...

The reason social and mobile gaming are getting so much press is because of how fast they are growing compared to conventional console gaming. Rovio’s $100 million 2011 revenue estimate is a tenfold increase from 2010. “

Thus the underlying issue is laid bare.  It is ‘growth’.   Investors like growth. Therefore we must ask the question: Why can’t Nintendo make 12 billion dollars selling  0.99cent and advertiser funded ‘free’ apps?

The problem with a Nintendo pivot to a high growth third party strategy is simply an issue of ‘scope’. Nintendo has often been lambasted for their hardware as being ‘inferior’ , from the cartridges and mini-DVDs of the N64 and GameCube to the unfavourable matchup between the DS and the PSP and to the genuinely surprising decision not to upgrade the processing technology behind the Wii over the GameCube, outside of overclocking the processors in the GameCube and adding a tertiary CPU for the Wii's wireless communication features.

The criticisms however have tended to miss the point of Nintendo's hardware strategy. The company has often succeeded in marrying its hardware with its software.  The analysis that software is their only strength ignores the fact that they were often able to innovate on software by first laying the groundwork on hardware.  The Wii motion control technology, and touch screen of the DS allowed an entire class of Nintendo software to flourish where they could not find a home elsewhere at the time of their release.

Nintendo benefits from economies of scope in the sense that not only is it able to deploy their internal resources  (software engineers, hardware engineers, their capital reserves, R&D  etc) across a broad range of software, but those resources can be deployed in a way that enhance hardware development such that they support software.  This is an immeasurable competitive advantage for Nintendo that has allowed it to dominate the platforms it produces and yield higher than normal returns as a software developer on those platforms.

This philosophy is underlined by Nintendo’s assignment of software designers Katsuya Eguchi credited with the design of games as varied as Super Mario Bros. 3,  Star Fox, Wii Sports, and the Animal Crossing franchise with the position of overseeing the Wii U hardware.  Similarly, Hideaki Konno of Nintendogs and Mario Kart fame was assigned to oversee development of the 3DS.   These are software people assigned to manage hardware design such that the resulting software will take full benefit of the hardware.

While the 3DS has had its share of perceived problems – high introductory price, excessive concern over 3D from Nintendo turning off some customers, lack of games during launch – It is hard to argue Konno’s assignment was a poor one from a software perspective.  The most interesting innovations of the 3DS in its StreetPass mode is undeniable. Streetpass has morphed into a community, an active social network of sorts that connect local players into a gaming community.

Until such time that their hardware sales are so untenably low or software prices on appstores rise high enough, there is little reason for Nintendo to pursue a wholesale third party strategy.


Final Analysis:
There is a wrinkle to this story.  What if, some argue, Nintendo were to continue with business as usual but  approach the smartphone/tablet mobile market incrementally, by first putting their legacy software on the platform.

Assuming Nintendo is to become a third party publisher, this approach is what I believe is the most likely ‘third party’ scenario for Nintendo.  It does not deny that Nintendo earns above average profits from its own hardware from the economies of scope enjoyed, but it also allows an avenue for the company to tap into a high growth market by selling older games, likely at a premium compared to similar games on the market, on the appstore environment.

The argument goes further by nothing that Nintendo can effectively price discriminate across various consumer groups, by selling older titles (such as their Virtual Console library) digitally as app-store prices to consumers who will gladly pay $4.99 for an old Nintendo game, while keeping their premium titles on their own hardware at premium prices.

There are however some problems as well. A problem with this approach is that it risks fragmentation of Nintendo’s own markets.  The Virtual Console (VC)  titles, specifically Nintendo VC  games, are also one of their aces in terms of drawing consumer attention to Nintendo hardware. The effect of making these games non-exclusive to Nintendo could weaken the proposition of Nintendo branded hardware.

Further, until the time Nintendo can articulate a more coherent Virtual Console strategy – treating VC as a platform and making it something more in-line with Apple’s itunes where bought games are tied to user accounts and is transferable between hardware and does not require repurchasing a game on a new platform –  the dream of a Nintendo titles on appstores seem to be strategically risky at best.

Nintendoom - Part I - Nintendo has Failed

Recently, a member on a popular videogame forums asked:  (condensed with parts bolded for effect)

“As long as I've been a gamer and paying some attention to the industry ... analysts, supposed experts and self-declared informed forum posters have never failed to assert [that] Nintendo's days are numbered.

Equally, the opinion that the company must transition to a third-party model has never faded.  

Are there some common misconception(s) that lead to these doomed/third party ideas, that if nipped in the bud, would reduce the persistence of the assertions?”

From the above, there are 3 essential questions worth considering.

1. Does Nintendo's market exposure doom it to failure?
2. A corollary to the first is  - Should Nintendo, in light of its imminent decline, cut their losses and put software on someone else’s platform?
3. Most interesting of all - If 1 and 2 are false, or mostly false, why do this view continue to persist?

#1) Does Nintendo's market exposure doom it to failure?

For those looking, there are plenty to point to in terms of Nintendo failing.  This is unrelated to hardware/design/planning failures which will be a future topic of discussion, but rather the failure of the company as a whole to ‘adapt to change’.

The declining stock price is often cited as one reason, with no context.   In this case, the Nintendo share price is driven by the company’s first reported loss in decades, extreme uncertainty in the Wii U’s performance and overall global economic uncertainty and how it may affect Nintendo’s best customers, Europe and North America, where the company earns most of its sales.

Stock prices however is used only to set-up the next point, that there is a tremendous growth uptake in alternative mobile devices like smartphones and tablets that overlap the traditional territory of home consoles and dedicated portable game machines and as a result Nintendo has lost its ‘market’ to smartphones and tablets and can never recover from this.  The first assertion is increasingly difficult to refute. There’s no question tablet and smartphone penetration has ballooned in North America and Europe in the past several years.  There is no question people use them to play games.  There is even less argument that free, free-to-play titles with in-app purchases and cheap $0.99~1.99 games on the app stores  of Apple and Google are popular downloads.

There is however some question as to the severity of its impact on the long-term viability to the portable hardware market and the console market.  You’ll note that I’ve left our Japan when citing the territories where smartphone penetration has ballooned.

Japan has had a fairly mature cellphone gaming industry for at least a decade.  In fact, some of the Nintendo DS’ early titles were straight ports of cellphone games.  That fact that Nintendo has carved out a stabled portable market in Japan since the GameBoyAdvance era seems to indicate that there is a third way other than ‘winning’ or ‘losing’ against phones.

That is however not to say that Nintendo shouldn’t change.  They absolutely must change to adapt to changing market conditions.  Yet this would seem be anachronistic to the underlying assumptions of those claiming Nintendo has lost its sense of the market.  How can a company doomed to fail adapt?

It can’t, but assuming Nintendo can't adapt is a leap of logic made by those convinced by the company's imminent failure.  People like winners.  And the growth sector are on devices not traditionally produced by Nintendo.  The failure in logic is to assume that the winning will go on forever, or that there is no chance for a stable equilibrium , a third way.

It’s often too easy to draw straight lines into the future.  Like all things the exponential adoption of tablets and smartphones will slow, even if overall shipments continue to grow over time.    The discussion brings us to one interesting parallel.

From the mid 1990s, with the release of Windows 95 to the early ‘00s when Microsoft’s valuation peaked at 583 billion dollars in December 1999 , PC ownership nearly quadrupled in the developed economies.  This period saw the rise of Blizzard as a major force in gaming on the PC, the rise of on-line games, Microsoft’s positioning of Windows as a key gaming platform, and the use of the web and ‘flash games’ as alternatives to games with the most aggressive move into monetizing the PC based free to play gaming coming from Yahoo when they first established Yahoo Games in 1997.   The service would prove increasingly popular well in the 2000's as broadband connection became the norm and more and non-tech savvy users gained access to the internet.

Despite the exponential growth of PC ownership, and free games played on browsers, video games continued to thrive on dedicated services.   The early 00’s was also Nintendo’s low point as a company,  with the third place finish of the GameCube,  and the attack of the maturing Keitai (portable phone)  gaming in Japan on Nintendo’s GameBoy Advance market, the company looked destined to fail.  At the time, there were no shortage of prognostications then of their imminent demise and or conversion to a software only company. Yet Nintendo emerged  from their lows to produce the Nintendo DS and the Wii and earn billions in profits.  The lesson to be drawn here isn't that the past will repeat again as is often implied with historical comparisons such as this.   Perhaps Nintendo will not have a DS or Wii success this time around, but that is not to say an equilibrium cannot be reached. There's good reason to believe the dedicated game platforms will survive and thrive by adapting instead of going away. And as long as that market exists, Nintendo will not be doomed to failure.

Next time -  Should Nintendo go third party?

Club Nintendo: 3DS Card Case 18

I've been waiting for months for these to go back in-stock at ClubNintendo, and they finally restocked them recently.

Due to a technical glitch (the ClubNintendo coin tracker being slow to revise my points) I thought my first order didn't go through so I accidentally ordered 2 cases.  Not that it's a problem as I don't mind having 2.  The second remains in mint condition... for now.

Looks great on the shelf!