Judo Strategy: Nintendo Wii Smacks Microsoft, Sony

 

Update Sept. 2007: Nintendo vs Sony and EA chart (Nov 2006-Sept 2007)

Original Post by Zack Urlocker: Nov. 2007

Every few years it seems there's a new gaming console with better graphics, more complicated controls and higher prices launched just in time for the holiday season. By this point, you're probably growing bored with the televised reports of kids waiting in line at the local Best Buy as Microsoft and Sony battle for market share in living rooms around the world. 

But what's different this year is that the newest entry from Nintendo is not trying to beat competitors with better more advanced processors and the more complicated games that hardcore gamers crave. Instead Nintendo's new console is a stripped-down product that aims to widen the market by pulling in non-gamers. How? With a technically inferior product that gets the job done for regular people and occasional gamers.

Nintendo's management realized there's no way they could outspend Microsoft and Sony when it comes to advanced hardware design. So why even bother? Instead the new Nintendo Wii (pronounced: "weee!") gaming console takes a disruptive approach: focus on fun and expand the market by appealing to non-gamers.

The Nintendo Wii is the runt of the litter when it comes to hardware specifications. It doesn't have the HD graphics, surround sound or DVD drives of its more expensive competitors. But it's outfoxed both Microsoft and Sony by packing more fun for a fraction of the price. Nintendo Wii sells for $250 compared to $500 for the Sony Playstation and around $400 for the Microsoft Xbox 360. Nintendo also throws in a set of five simple but addictive games dubbed Wii Sports with every console, making the Wii a much better value and a more complete offering out of the box. More importantly, Nintendo has parlayed their lower cost hardware into two further competitive advantages: games are cheaper to develop and they make money on every console sold. While it sounds like basic common sense, for the gaming industry this goes against all of the conventional rules.

The computer gaming industry, which now generates more revenue than Hollywood box-office ticket sales, suffers from the same "blockbuster" mentality as the film industry. Studios bank on expensive stars and big-budget productions. Sometimes they win big and sometimes the Ishtar hits the fans costing the studios tens or even hundreds of millions in losses. Today's popular games can routinely cost $12 million - $20 million to develop by an army of hundreds of programmers and graphic artists at game developers like Electronic Arts. Nintendo's approach is more like the latest James Bond Casino Royale movie that focuses on the characters rather than special effects. Games on the Wii cost about half as much to develop as those on Xbox and Playstation, enabling them to recoup their development costs at much lower volumes. And as with Hollywood movies, there's no clear evidence that big-budget special effects make for a more satisfied consumer.

While it might seem like an obviously good strategy to make money rather than lose money on hardware sales, this has never been the thinking from Sony or Microsoft. Instead, they've followed the classic razorblade strategy, selling consoles at a loss to hardcore gamers (despite the expensive price tags) in an attempt to make up for the losses by selling games with hefty licensing royalties. Microsoft lost, er, invested, more than $4 billion with the launch of the original Xbox. Sources estimate that Sony loses over $200 per console with the Playstation 3. Both companies have to sell a heckuva lot of games at $50 a pop in order to break even. In Nintendo's case, they're ahead of the game from day one.

Beyond the fact that Nintendo's got a better business model than either Sony or Microsoft, they've also delivered an innovative approach to gaming. With the Wii, Nintendo has introduced a motion-sensor based wireless remote. So instead of trying to master the complex sequences of controller buttons to play games, you can control, say a tennis game, by swatting the Wii remote in the air. The Wii remote recognizes physical gestures in 3D space making games more interactive and more fun than competitors. Even hardcore gamers will be drawn to the novelty of the Wii remote.

The combination of lower price and more fun enables Nintendo to appeal to a broader market than Sony or Microsoft. While it's too early to predict the outcome of this year's raging console battle, Nintendo is playing a disruptive game and playing it profitably. Nintendo sold 600,000 units in the first 8 days generating $190 million in sales in North America alone.  Nintendo announce that they would sell an estimated 4 million units by end of year, compared to Sony's projected 1 million units. Microsoft has shipped an estimated 6 million Xbox 360 units since it's launch a year ago.

Let's take Nintendo's lessons in entrepreneurial judo one step further. Are there other crowded, ultra-competitive markets where simpler, stripped down functionality could be used to enlarge the market? 

Signs to look for would be complex or expensive products or services that appear to be overshooting customer needs. How about:

• Office software?
• Hollywood movies?
• Automobiles?
• PCs?
• Telecommunications services?
• MBA or executive MBA programs (pdf)?

Zack Urlocker is a software executive and author of The Open Force blog.
Interested in writing a guest-column on disruption? Contact The Disruption Group here.

**Other Views/Update**

NY Times' John Markoff reports on the progress and controversy of the $150-laptop.  Thoughts on how this is disruptive to the PC industry.

The Disruption Group's site includes a CEO Guide to the Benefits of Disruption (pdf) and other tools for managing disruption.

The New Yorker's financial columnist James Surowiecki describes the Nintendo Wii strategy in his column "In Praise of Third Place".

Ed Sim at BeyondVC says startups can learn from Nintendo's strategy. In a related post, he says special care must be used by startups competing against large incumbent suppliers: "As a startup you have to get away from a feature/function battle because you will always lose against a big boy."

BusinessWeek interviews Nintendo's designers in "The Big Ideas Behind Nintendo's Wii".

For background, check out the Dartmouth University Tuck School of Business case study "Microsoft's Xbox Gamble" which describes Microsoft's entry into the gaming industry a few years back.

WSJ and others have reported on aches, pains and strains from the Wii's emphasis on gestures.

Sony PS3 game titles must exceed 500,000 copies for Sony to breakeven, says gaming software president.

Comments

[Dib8rman]

The Wii represents nothing new at all to the industry that was ripe for disruption, you never see it until it’s too late. Sadly for Sony and Microsoft too late in the gaming industry isn’t 2007 or 2008 it was 2005. The Wii represents a shift not a change, the mainstream are relegated to niche and the niche becomes standard if this keeps up. Of course theirs still money to be made and in the perfect disruptive business model gobbling that group as well. It’s almost refreshing really to see that games don’t have to look real or have a bagillion colors – I was kind of missing the 120 something colors of NES; their download service grants that also, so I’d say they covered a lot of bases. Reggis said something recently about Nintendo moving into the next step – so if their business model is the standard, then chances are theirs going to be a huge blow to the possible and some what to the current user base of Sony and Microsoft.

[Nintendo Wii]

Yea, plus 85% of the population who buy and play video games don't have a HD tv anyway!

[CaptainHowdy]

Wii is the best next gen console HD doesnt matter to me anymore