Thursday, May 24, 2012

Nintendoom - Part I - Has 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.

Part 2 -  Should Nintendo go third party?
Part 3 - All we want is Mario in every box

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