Case Study: Nintendo's Disruptive Strategy: Implications for the Video Game Indu

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Read the case study located on page 277  of the section titled Case Studies in your textbook and prepare a 3- to 4-page report in a Microsoft Word document concerning the following situation:

To consider the viability of Nintendo's new strategy, the CEO of Nintendo, has brought you in as a consultant. Your task is to use the company's competitive analysis to predict potential competitor behaviour. To do so, complete the following tasks:

  • Identify and describe the competitive rivalry that Nintendo can anticipate in its business units.
    • Determine the extent to which Nintendo competes with other companies in its industry by assessing the levels of market commonality and resource similarity for each major competitor.
    • Evaluate the drivers that will influence each of the competitors' actions and responses.
    • Consider the factors that impact the likelihood of attack and response from competitors, and discuss any relevant conditions that might influence Nintendo's competitive moves.
  • Discuss how Nintendo's fast-cycle markets affect the competitive dynamics facing it.

In order to increase the company's top managers' understanding of Nintendo's corporate-level strategy, the CEO has also asked you to prepare an overview of diversification practices that can help the company successfully implement its strategy in the various new markets where it has no proprietary advantage. Based on the situation, complete the following tasks:

  • Define Nintendo's level of diversification and the type of diversification strategy it is using. Identify ways that the company can build upon or extend its resources to create value.
  • Based on the predictions and results of this study, discuss how Nintendo can plan to build and sustain competitive advantages, which are critical for creating value for shareholders.

Support your responses with examples.

Cite any sources in APA format.

Submission Details

Submit your document to the W2 Assignment 2 Dropbox by Tuesday, June 10, 2014.

Assignment 2 Grading Criteria

Maximum Points

Identified and described the competitive rivalry that Nintendo can anticipate in its business units.

20

Discussed how Nintendo's fast-cycle markets affect the competitive dynamics facing it.

5

Defined Nintendo's level of diversification and the type of diversification strategy it is using. Identified ways that the company can build upon or extend its resources to create value.

10

Discussed how Nintendo can plan to build and sustain competitive advantages, which are critical for creating value for shareholders.

10

Used correct spelling, grammar, and professional vocabulary. Cited all sources using APA format.

5

Total:

50

CASE STUDY 

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Case 20 Nintendo's Disruptive Strategy: Implications for the Video Game Industry Havovi Joshi Samuel Tsang The University of Hong Kong, Asia Case Research Centre For some time we have believed the game industry is ready for disruption. Not just from Nintendo, but from all game developers. It is what we all need to expand our audience. It is what we all need to expand our imaginations. —SATORU IWATA PRESIDENT OF NINTENDO Co. LTD 1 In the 2008 BusinessWeek-Boston Consulting Group ranking of the world's most innovative companies, Nintendo Co. Ltd (“Nintendo”) was ranked seventh, up from thirty-ninth the previous year.2 This improvement was in recognition of Nintendo's transformation into an innovative design powerhouse that challenged the video game industry's prevailing business model. In 2000, when Sony, Microsoft, and Nintendo (the “big three” of the video game console manufacturers) released their latest products, Sony's PlayStation 2 (PS2) emerged as the clear winner, outselling Microsoft's Xbox, and Nintendo's GameCube. In 2006, these players introduced a new generation of video game consoles, precipitating a new competitive battle in the industry. Microsoft and Sony continued with their previous strategy of increasing the computing power of their newest products and adding a more impressive graphical interface. However, Satoru Iwata, president of Nintendo, believed that the video game industry had been focusing far too much on existing gamers and completely neglecting non-gamers. In light of this belief, the company repositioned itself by developing a radically different console, the Wii (pronounced “we”). The Wii was an interesting machine that used a wand-like remote controller to detect players' hand movements, allowing them to emulate the real-life play of such games as tennis, bowling, and boxing. The new console proved to be a runaway success. By September 2007, Nintendo had become Japan's most valuable listed company after Toyota, and its market value had tripled since the launch of the Wii. In spite of this initial success, however, it was not clear whether Nintendo had really disrupted the industry and significantly changed the dynamics of competition in it. History of Nintendo, 1889 to 2002 Nintendo's3 roots could be traced all the way back to 1889 in Kyoto, Japan, when Fusajiro Yamauchi, the founder of the company, started manufacturing playing cards. In 1907, the company began producing Western playing cards, and by 1951, it had become the Nintendo Playing Card Company. In 1959, it began making theme cards under a licensing agreement with Walt Disney Company; by 1963, the company had gone public and taken its current name. During the period 1970 to 1985, Nintendo began focusing on the manufacture of electronic toys and entered the emerging field of video games (see Exhibit 1). Havovi Joshi and Samuel Tsang prepared this case under the supervision of Professor Ali Farhoomand for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. © 2009 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the Internet)—without the permission of The University of Hong Kong. Interestingly, 1991, the year Nintendo launched the highly popular Super NES in the United States, was also the year Nintendo's vision become Sony's opportunity—and the creation of what could be described as Nintendo's “greatest challenge” for over a decade—the Sony PlayStation (PS). Nintendo had wanted to incorporate CD-ROM into its Super NES, and Sony had agreed to create the PS for this purpose. However, over the next two years there were many conflicts of vision between Nintendo and Sony, and the two finally parted ways. Nintendo went ahead with Philips 276277technology,4 and Sony was left with the PS, which the company decided to continue developing. Given Sony's clout and resources, when the PS and its wide range of games were finally released in Japan in 1994, the console was an instant success. In 1995, Sony released the PS in the United States, totally uprooting Nintendo's established name in the industry. Exhibit 1 The History of Nintendo, 1989 to 2002 Source: Nintendo Co. Ltd, 2008, Annual Report, http://www.nintendo.co.jp/ir/pdf/2008/annual0803e.pdf (accessed October 3, 2008). For many years, Nintendo was a dominant player in the video game industry. It had sold more than two billion games since 1985. Its top-selling series included 277278nonviolent and easy-to-play games such as “Super Mario Bros.” and “The Legend of Zelda.” Its games were so successful largely because they appealed to all age groups across different cultures. The title of a book published in 1993 summed up Nintendo's supremacy: Game Over: How Nintendo Zapped an American Industry, Captured Your Dollars, and Enslaved Your Children. Suddenly, after the debut of the Sony PS, it was no longer the leader of the video game industry. Nintendo tried various strategies to counter Sony. However, competition continued to intensify, and the PS2 also captured a significant portion of the video game market, maintaining a dominant position in the industry. In May 2001, Microsoft too entered the video game market by introducing the Xbox console, leaving Nintendo with an even smaller piece of the market. In 2002, Nintendo appointed Satoru Iwata5 as president of the company. It was hoped that, with his experience and deep insights into how the market evolved, Iwata would help the company develop a brand-new vision and approach.6 The Video Game Industry History The video game industry was born in the 1970s. In the early days, notable players such as Atari from the United States and Namco from Japan brought video games to teenagers in the form of arcade games found in malls and video game arcades. With the introduction of home consoles, video games began to make their way into households around the globe. In the 1980s and early 1990s, many new players came to the market. With the increasing popularity of personal computers (PCs), gamers were no longer limited to playing their favorite video game titles on proprietary consoles. Although the market was affected by the introduction of PCs, video game makers achieved steady growth. Nevertheless, the target customer group of video game consoles was narrowly confined to teenagers. Armed with insightful targeting and positioning, image-conscious branding, and superb graphics technologies, Sony introduced the PS in the mid1990s. The Japanese electronics giant revolutionized the perception of video game consoles and successfully captured new players, thereby helping the industry grow substantially. Video gaming suddenly became the new popular entertainment. It was especially well received by young adults, mostly males in their late 20s or early 30s, and often with substantial disposable incomes. By the time Sony launched the PS2 in 2000, technology giant Microsoft realized that it could no longer ignore the runaway success of this product or the effect the booming video game market was having on its traditional PC and software domains. Thus Microsoft's video game console, the Xbox, was launched in 2001. Since the early 2000s, the convergence of information technology, telecommunications, media, and entertainment has brought dramatic social and technological changes. With the new socio-technological movement and a wider audience base, the big video game console markers such as Sony and Microsoft began to realize that there were new opportunities for their video gaming and console product offerings, which would play a far greater role in people's lives than mere entertainment. Trends in the Industry With the broad availability of broadband Internet, increasing sophistication of high-definition (HD) video technologies, and decreasing cost of hard-drive storage, video game console manufacturers realized that their products no longer had to be for gaming only. In fact, many players such as Sony and Microsoft envisioned their game consoles as all-encompassing home entertainment centers. Further, given the increasing speed achieved by broadband connections, Internet users were increasingly able to access large quantities of data files, especially those containing HD audio and video. Consequently, these console producers developed and offered online libraries as a new service enabling users to download and stream a variety of movies, music, and television shows through their consoles. As top-quality video materials became more readily available through HD broadcasting and Internet downloads, a new recording medium with increased storage capacity was required. Two formats, the Blu-ray for-mat7 developed by a consortium led by Sony, and the HD-DVD format developed by a consortium led by Toshiba, competed to become the standard in this area. By offering online games based on new and existing titles, console makers could provide similar social-networking or virtualworld services to get online gamers to play, connect, and form loyal communities. Such communities were expected to help create a perpetual demand for services and products created by the video game makers and their alliance partners. In fact, ingame advertising had already started and offered a new revenue stream to video game developers. Nintendo: Innovation and the Launch of the Wii Traditionally, Sony, Microsoft, and Nintendo would enter a new cycle or a new competitive battle every five to six years, and in 2000, Sony's PS2 emerged as the clear winner.8 Since then, the industry's focus turned even 278279 more to the technological advancement of the console hardware, particularly in terms of faster processing speed, higher definition of video quality, and increasing complexity of the games. The relentless pursuit of superior technologies became the driver of the industry's dynamics. However, the former leader in the video game industry, Nintendo, adopted a vastly different viewpoint about the industry's future development. Some years before the battle that began in 2006, Iwata saw the potential threats facing the industry. He observed that the video game market in Japan was shrinking. Based on various market trends and data, the key factor causing this reduction appeared to be the increasing complexity of video games, which required players to invest a significant amount of their time to learn and play them using increasingly complicated controllers with combinations of buttons and joysticks. Consequently, occasional gamers with busy lives had stopped playing. Further, for novices and non-gamers, the time required to learn and play these games was a major deterrent for potential newcomers to join the camp. Iwata also saw that the video game industry had largely ignored non-gamers and was focused on the existing players. Armed with these insights, Iwata decided to devise a radically new strategy as the foundation for leading Nintendo down an unorthodox path. The new strategy's objective was to reach out to non-gamers in order to create a bigger market. Iwata's mandate was for simpler games to be developed, targeting all customers, irrespective of age, gender, or gaming experience. These new games were to take no more than a few minutes to set up and play. In addition, they would require an easy-to-use controller. He also wanted the game scenarios to be largely based on reallife situations rather than fantasies. In order to pilot Iwata's idea, Nintendo first developed a new handheld gaming device called the DS, which stood for “double screen.” It was launched in 2004. The DS was positioned as “the machine that enriches the owner's daily life.” 9 One of the key features of this device was a touch-screen that gamers could tap or write on with a stylus. This innovative design enabled gamers to play without using complicated sets of buttons or a mini-joystick. The company then launched the Nintendo Wi-Fi Connection, an innovative service that allowed DS system players to play with other users through a wireless network. The DS was a huge success, and by April 2008, more than 70 million units had been sold worldwide. 10 Among the many DS game titles, the most popular was “Nintendogs,” particularly among female gamers. Players of “Nintendogs” could interact with their virtual pets through the DS's built-in microphone and “touch” them via the touch-screen. They could take these dogs for walks, teach them tricks, and enter them into competitions. Another popular game was “Brainage,” which featured brain-training games that were basically puzzles. Following the success of the DS, Nintendo rolled out the DS Lite in 2006. With its mature Game Boy and innovative DS systems, Nintendo remained the leader in the handheld console segment and continued to retain well over 90 percent of the handheld device market that it had captured since 1989. However, the deciding factor in Nintendo's success was the video game console segment. Since 2000, Nintendo had lost control of the fixed console market to Sony's PS. With its new strategy to capture non-gamers and expand the market, coupled with the lessons learned from the DS handheld device, Nintendo developed its new console, the Wii, which arrived about the same time as the rollout of Microsoft's Xbox 360 and Sony's PS3, and just in time for the 2006 holiday shopping season (see Exhibit 2 for a timeline). Our goal was to come up with a machine that moms would want—easy to use, quick to start up, not a huge energy drain, and quiet while it was running. Rather than just picking new technology, we thought seriously about what a game console should be. Iwata wanted a console that would play every Nintendo game ever made. —SHIGERU MIYAMOTO, MEMBER OF THE WII DEVELOPMENT TEAM 11 The Wii was an impressive, well-designed, tiny machine that was controlled with a wand-like controller that resembled a TV remote control. Without an elaborate joystick and wire, gamers could navigate the system simply by moving the controller. Motion detectors would then translate the movement of the wand into on-screen action, enabling simulation of real-life games such as tennis, bowling, and boxing. The games were sold on optical discs similar to DVDs. The Wii could also be connected to the Internet for online news and weather updates and to access Nintendo's classic game catalogue, which could be downloaded from the Web. To do this, players could access the Virtual Console service, whereby games originally released for the SNES and N64 could be downloaded from the Wii Shop Channel and accessed from the Wii. Nintendo positioned the Wii as “a machine that puts smiles on surrounding people's faces,” encouraging communication among family members as each of them found something personally relevant and were motivated to turn on the console every day in order to enjoy “the new life with Wii.”12 To promote the Wii, Nintendo adopted the same word-of-mouth strategy that had proven successful in promoting the DS. The company “recruited a handful of carefully chosen 279280 suburban housewives to spread the word among their friends that the Wii was a gaming console the whole family could enjoy together.”13 The Wii was also featured in the gamers' self-made video, which was then shared through YouTube and social networking sites. This once-experimental approach was more effective than the traditional advertising or mass-media campaigns used by Sony and Microsoft. In addition to becoming the home gaming system for the family, Wii also helped expand “exergaming,” which was the combination of on-screen action with physical exercise. The origins of exergaming can be traced to 1989, when Nintendo released the Power Pad and Power Glove, two accessories for its gaming console. The Power Pad was a “large plastic platform that plugged into the console and contained pressure sensors on which gamers could step or jump to play sports games.” 14 The Power Glove was a “glove-like controller that translated various gestures into on-screen movements.”15 However, these two accessories had not sold well. Now, with the introduction of the Wii into millions of households, boxing, tennis, bowling, golf, and baseball games would require players to act out the physical movements involved in these sports. Consequently, it was predicted that the Wii would spawn a whole new generation of exergaming that would go far beyond the existing games that used dance mats or video cameras to detect players' actions, as the Wii's controller could detect more subtle movements and could be used to record and analyze these movements through intelligent software to determine the players' physical fitness levels. 16 Exhibit 2 Significant Milestones in the Video Game Console Industry Source: Time, 2005, Video game console timeline—video game history—Xbox 360, http://www.time.com/covers/1101050523/console_timeline/ (accessed August 13, 2008). The Wii proved to be a runaway success and by September 2007, Nintendo became Japan's most valuable listed company after Toyota, at US$72 billion in market value—nearly tripling in value since the launch of the Wii (see Exhibits 3 and 4).17 280281 Exhibit 3 Nintendo's Income Statements, 2006 to 2008 (US$ Millions) Source: Adapted from BusinessWeek, 2008, Financial results for Nintendo Co. Ltd, www.investing.businessweek.com/research/stocks/financials (accessed August 4, 2008). Key Players in the Video Game Industry Video Game Hardware Other than Nintendo, the video game hardware industry (essentially comprising the manufacture of consoles and devices) was dominated by Sony with its PS family, and Microsoft with the Xbox 360. Sony18 For decades, Sony defined the leading edge in gadgetry, producing transistor radios in the 1950s, Trinitron TVs in the 1960s, and the revolutionary Walkman in the 1970s.19 Similarly, when the company introduced the PS in Japan in March 1994 and in the United States in 1995, it brought the technology of video gaming to a whole new level (see Exhibit 5). With Sony's strategy of attracting older teenagers and young adults (who had significantly more disposable income) by offering more sophisticated and often more violent games, the PS dominated the market. In 2000, the PS2 was released and completely won over the video game market. The PS2 was not only backward-compatible with the PS, but could also be used to play CDs and DVDs. For most people who bought the PS2, it was their first DVD player. In July 2008, Sony announced that worldwide PS2 console sales exceeded 140 million, 20 making the PS2 the best-selling console in history. In order to compete against Nintendo, the ruler of the handheld video game market, Sony introduced the PlayStation Portable (“PSP”) in 2004. In the meantime, Sony continued to release other electronics, such as Sony Connect, an online music service; Vaio Pocket, a portable music player designed to compete with Apple's iPod; and Network Walkman, which was the first Walkman with a hard drive. 281282 Exhibit 4 Nintendo's Consolidated Sales Information for the Six Months Ending September 30, 2007 (US$ Millions) (US$1 = ¥115.4 on March 31, 2008) Source: Nintendo Co. Ltd, 2007, Consolidated financial statements for the six months ending September 30, 2007, http://www.nintendo.com/corp/report/FY07FinanciaiP£SiiltsYdf, October 25 (accessed August 1, 2008). Although the PS product line dominated the market, the sales of Sony's other electronics (e.g., DVD recorders, TVs, and computers) and music products dropped significantly. Consumer demand remained weak as there was a battle over prices, with Apple's iPod undermining the sales of Sony's CD and MiniDisc Walkmans, as well as their TV products. These challenges, in addition to the costs incurred in streamlining operations, significantly decreased Sony's market value, and in 2004 the company reported a loss. Sony, once acknowledged globally for its cutting-edge technological innovations, was coming to be perceived as a bureaucratic conglomerate. In order to rectify the situation, in 2005 Sony brought in Sir Howard Stringer to replace Nobuyuki Idei as chairman and chief executive. Stringer was the first non-Japanese chief of the company and, prior to this post, had been the head of the company's U.S. and electronics divisions. After taking over, Stringer announced Project Nippon, a corporate restructuring plan designed to revamp Sony's electronics business and foster better collaboration between the company's divisions. His plan called for eliminating 10,000 jobs (the company had 150,000 employees) and closing 11 of Sony's 65 factories. Stringer also revealed plans for improved research-and-development (R&D) with a stronger focus on consumer demand, aiming to reestablish Sony's presence in Japan. Sony's emphasis became HD products for consumers and broadcasters, and semiconductors designed to improve performance in the company's products. As one of the major weapons in Sir Stringer's grand plan, Sony planned to introduce and leverage the PS3 to regain its position in the electronics industry. The PS3 was designed to be a multimedia entertainment hub. Thus, people would buy the PS3 to watch movies in addition to playing games. Its computing power would also allow users to chat online, listen to music, and view highquality animations. The machine would also be backward-compatible with games designed for previous PS consoles. Sony hoped that it would be able to utilize the Cell computer chip, jointly developed with IBM and Toshiba, in other products too, such as selling home servers broadband and high-definition television (HDTV) systems. This powerful chip would power the new PS3, whose games would also be the first mass utilization of the Blu-ray format.21 In November 2006, after several delays, Sony's PS3 was released nearly a year after Microsoft's Xbox 360 and within a week of the debut of Nintendo's Wii. However, the results were largely disappointing. Supply problems and the high price tag of the PS3 resulted in Sony losing its dominant position in the console market to Nintendo. To boost sales, the company slashed the price of the PS3 in mid-2007. Around the same time, because of continuous setbacks in terms of delays and inability to ramp up production, Sony fired Ken Kutaragi, who was the chief architect of the PS product line. 282283 Exhibit 5 Evolution of Technology in the Video Game Console Industry's War for Supremacy Source: Adapted from D. Lero, 2007, A history of gaming, http://www.gamespot.com/pages/unions/home.php?union_id=Contributions, November 14 (accessed August 13, 2008). In July 2008, 20 months after the release of the PS3, the console had barely achieved 10 percent of its sales target. At the end of Sony's fiscal year in March 2008, sales were 12.85 million, and the company expected to sell just about 10 million in the fiscal year ending March 2009.22 Sony's more pressing need was to steer the PS3 to profitability, which was estimated to finally happen by 2009 (see Exhibits 6 and 7). Given the shaky situation, Sony had no plans to cease development of games for the older PS2 system and planned to continue rolling out titles specifically for it. 23 Microsoft Entering the video game business in 2001 was one of Microsoft's diversification moves when the company recognized the remarkable success of Sony's PS2 and the potential threat the video game market posed to its stronghold in the PC market. The Xbox was the company's first foray into the industry and was launched to compete directly with Sony's PS2 and Nintendo's GameCube. In November 2002, the company launched Xbox Live, allowing subscribers to play online Xbox games with other subscribers around the world. By mid-2005, the service had attracted about two million subscribers worldwide. However, by May 2005, the software giant had sold only 21.3 million Xbox units, which put the company in a distant second place behind Sony's PS2 (which had sold 83.5 million units) and slightly ahead of Nintendo's GameCube (with sales of 18.3 million units).24 By August 2005, Microsoft's Xbox division had cost the company US$4 billion.25 Soon after, production of the Xbox was ended in favor of the Xbox 360. Microsoft was determined to capture the top spot in the market with the launch of the Xbox 360 in November 2005, several months ahead of its rivals (Sony's PS3 appeared in the market in late 2006, about a week after Nintendo's Wii). Some believed that the previous success of Sony's PS2 was partly due to its advantage in reaching the market earlier than its rivals; thus, Microsoft imitated this marketing strategy and became the first game console in the new business cycle. Further, having learned a hard lesson from the flop of the original Xbox in Japan, Microsoft worked closely with the producers of Japanese games in an attempt to neutralize the traditional advantages of its two main rivals. The company also abandoned its previous approach of using off-the-shelf parts provided by Intel and NVIDIA to build its consoles because while such an approach was efficient, it lacked the flexibility that Microsoft's rivals enjoyed in reducing costs and increasing profit margins during a console's lifetime.26 (For instance, Sony had gradually reduced the number of chips required by its 283284PS2 without sacrificing its performance.) Subsequently, Microsoft adopted a new design for its Xbox 360 in the hope that this would achieve a new degree of manufacturing flexibility that could help integrate various components and increase profitability in the future (see Exhibit 8).27 Exhibit 6 Sonny's Income Statement, 2006–2008 (US$ Million) Source: Adapted from C. Colbert, 2008, Sony Corporation, Hoover's Company Information. Exhibit 7 Analysis of Sony's Income Statement for the Year Ending March 31, 2008 Source: Adapted from D. Jenkins, 2008, “Sony's game division sees 26% sales jump, http://www.gamasutra.com/php-bin/newsindex.php?story=8638, May 14 (accessed August 11, 2008). Video Game Software The computer game industry, one of the biggest money-spinners in the global entertainment industry, routinely spent amounts ranging from US$12 million to US$20 million to develop each game. As the consoles became more expensive, the cost of developing games for them also increased. However, Nintendo turned its lower-cost hardware into another competitive advantage. By focusing on characters rather than special effects, developing Wii games cost the company about half what its competition was spending on Xbox and PS games, and thus the expense could be recouped at a much lower sales volume. Nintendo had also thrown in 284285five simple but highly addictive games, Wii Sports, with each console so that the buyer was getting a “complete” product at a great price. Sony and Microsoft, on the other hand, incurred losses on the consoles they sold, despite their high price. To compensate for these losses, they sold their games with high licensing royalties. As of July 2008, 6 of the 10 most popular games worldwide were for Nintendo consoles (see Exhibit 9). Exhibit 8 Microsoft's Income Statement, 2005-2007 (US$ Millions) Source: Adapted from S. Shafer, 2008, Microsoft Corporation, Hoover's Company Information. Exhibit 9 Top 10 Games Worldwide, July 2008 (approximate number of units in thousands) Source: Adapted from VGChartz, 2008, “Worldwide chart for week ending July 25, 2008, http://www.vgchartz.com (accessed August 4, 2008). Nintendo also focused on developing first-party titles. Nintendo had placed its top software designers at the helm of hardware design. Thus, while Sony and Microsoft relied heavily on third parties to develop titles, 285286Nintendo's consoles were designed to suit the concepts of the games that would run on them, allowing the creation of early first-party titles that really showcased the hardware, including low-profit and offbeat games like Brainage. Such games would have been impossible on another company's hardware.28 The sales of hardware consoles such as the Wii, Xbox, and PS were highly correlated to the launch and sale of the video games that could be played on them. For instance, in March 2008, Nintendo launched its exclusive hit game “Super Smash Bros. Brawl” for the Wii and, in that month, along with selling 2.7 million copies of the game, the company sold more video game consoles in the United States than Sony and Microsoft combined.29 The Battle Begins Until the launch of the Wii at the end of 2006, competition in the video game market was straightforward. The leader was the company that introduced a wider array of games with high-quality graphics and increasingly complex gameplay. Then Microsoft introduced the Xbox 360 in November 2005, and Nintendo and Sony followed about a year later with the Wii and PS3. It was apparent that the rules of competition had changed. Sony continued to claim success in selling the aging PS2 console. Given its long history in the market, the PS2 had outsold both the Xbox 360 and the Wii. Microsoft also remained confident about its Xbox 360. As of May 2008, Microsoft announced its Xbox 360 game machine had beaten the Wii and PS3 to reach 10 million units in U.S. sales. 30 The head start of several months in selling the Xbox 360 gave Microsoft an edge over Sony's PS3 and Nintendo's Wii. The lead time also helped Microsoft and its partners build a vast library of games, which was a major factor for consideration when gamers chose a particular console. Exhibit 10 Sales Figures of Wii, PS3, and Xbox 360 in the United States (approximate number of units in thousands) Source: Adapted from PVC Forum, 2008, “Games sales chart—monthly console hardware sales in America, www.forum.pcvsconsole.com, July 17 (accessed August 11, 2008). However, within a month of Microsoft's announcement that it was the leader in the U.S. console war, the June 2008 figures were released and it was evident that the Wii had usurped the Xbox 360 as the leader. A total of 10.9 million Wiis were sold in the United States since its launch in November 2006, whereas a total of 10.4 million Xbox 360s were sold since its launch a year earlier.31 The PS3 came in a distant third with 4.8 million units sold. In the United States, which was Nintendo's largest market,32 the Wii had taken off the fastest by selling 600,000 units in the first eight days, generating US$190 million in sales. 33 In fact, because of its high demand and market buzz, many consumers found it difficult to get their hands on the machine even months after the launch (see Exhibit 10). The same story about demand existed 286287in other parts of the world, and Nintendo emerged as the clear month-on-month leader with the outstanding success of its new console (see Exhibit 11). Exhibit 11 Worldwide Sales Figures of Wii, PS3, and Xbox Units (approximate number of units in thousands) Source: Estimated data adapted from VGChartz, July 2008, World hardware sales—weekly comparison, http://www.vgchartz.com/aweekly.php (accessed August 16, 2008). In terms of profitability, Nintendo was in an enviable position of making a profit on each Wii console sold from the first day (see Exhibit 12). Sony, on the other hand, had already slashed the price of the PS3 by US$100 to US$499 to help boost sales of the console. This was still US$20 more than Microsoft's most expensive version of the Xbox 360 and about twice the price of Nintendo's Wii.34 287288 Exhibit 12 The Economics of the Game: Wii, PS3, and the Xbox 360 It was becoming clear that, in this latest battle between the Xbox 360, PS3, and Wii, the Wii was the clear winner of the game. Nintendo's Disruptive Strategy It was not just the video game industry that had felt the impact of the innovative Wii. With the December 2007 release of Wii Fit (an extension of the Wii for exercise activities utilizing the Wii Balances Board peripheral), the potential for capturing yet another class of non-gamers was significantly increased. Wii Fit aimed to integrate health and entertainment and featured approximately 40 different activities, including yoga, pushups, and other exercises. It was described as a way to help get families to exercise together. Within six months of being released, the product had sold two million copies in Japan and had long queues waiting for its delivery in many parts of the world. Its effect on the health industry was already evident, with doctors and therapists recommending it for various purposes, such as body balance, strength training, keeping patients interested in performing repetitive and tedious exercises, and for the elderly to enjoy expanding their range of motion. Nintendo's business model was also exciting for small, independent software producers. In May 2008, Nintendo made the strategic move of loosening its traditionally tight control over content by launching WiiWare in the United States and Europe. WiiWare, an online channel for distributing downloadable games, enabled users to download new games by independent developers. Reggis Fils-Aime, president of Nintendo of America,35 said, “Independent developers armed with small budgets and big ideas will be able to get their original games into the marketplace to see if we can find the next smash hit. WiiWare brings new levels of creativity and value to the ever-growing population of Wii owners.” While it was still too early to predict the final results, Nintendo's Wii has revolutionized and changed the nature of competition, and not just in the video-game industry. Would this disruptive transformation of the video game industry leave the competitors in the cold? What course of action was available to them? Appendix Disruptive Technology The term “disruptive technology” was coined by Clayton M. Christensen, a professor at the Harvard Business School. Christensen believed that leading companies, despite having followed all the right practices (i.e., keeping a close watch on competition, listening to their customers, and investing aggressively in new technologies), still lost their top positions when confronted with disruptive changes in technology and market structure. He suggested that, while keeping close to customers was critical for current success, it was paradoxically also the cause for companies' failure to meet the technological demands of customers in the future. To remain at the top of their industries, managers must first be able to spot disruptive technologies. To pursue these technologies, managers must protect them from the processes and incentives that are geared to serving mainstream customers. And the only way to do that is to create organizations that are completely independent of the mainstream business.36 Disruptive technology is an innovation that uses a “disruptive strategy”' rather than a “sustaining” strategy (one which improved the performance of an established product) or a “revolutionary” strategy (one which introduced products with dramatically improved features). Christensen argued that following good business practices could ultimately weaken a great company because truly important breakthrough technologies were often rejected by mainstream customers because they could not immediately use them. Companies with a strong customer focus would thus reject those strategically important innovations. As a result, it was left to the more nimble, entrepreneurial companies to pursue those disruptive opportunities, which might result in worse product performance in the short term, but in the long run were of strategic importance in creating new markets and finding new customers for future products. Case 20 Nintendo's Disruptive Strategy: Implications for the Video Game Industry Havovi Joshi Samuel Tsang The University of Hong Kong, Asia Case Research Centre For some time we have believed the game industry is ready for disruption. Not just from Nintendo, but from all game developers. It is what we all need to expand our audience. It is what we all need to expand our imaginations. —SATORU IWATA PRESIDENT OF NINTENDO Co. LTD 1 In the 2008 BusinessWeek-Boston Consulting Group ranking of the world's most innovative companies, Nintendo Co. Ltd (“Nintendo”) was ranked seventh, up from thirty-ninth the previous year.2 This improvement was in recognition of Nintendo's transformation into an innovative design powerhouse that challenged the video game industry's prevailing business model. In 2000, when Sony, Microsoft, and Nintendo (the “big three” of the video game console manufacturers) released their latest products, Sony's PlayStation 2 (PS2) emerged as the clear winner, outselling Microsoft's Xbox, and Nintendo's GameCube. In 2006, these players introduced a new generation of video game consoles, precipitating a new competitive battle in the industry. Microsoft and Sony continued with their previous strategy of increasing the computing power of their newest products and adding a more impressive graphical interface. However, Satoru Iwata, president of Nintendo, believed that the video game industry had been focusing far too much on existing gamers and completely neglecting non-gamers. In light of this belief, the company repositioned itself by developing a radically different console, the Wii (pronounced “we”). The Wii was an interesting machine that used a wand-like remote controller to detect players' hand movements, allowing them to emulate the real-life play of such games as tennis, bowling, and boxing. The new console proved to be a runaway success. By September 2007, Nintendo had become Japan's most valuable listed company after Toyota, and its market value had tripled since the launch of the Wii. In spite of this initial success, however, it was not clear whether Nintendo had really disrupted the industry and significantly changed the dynamics of competition in it. History of Nintendo, 1889 to 2002 Nintendo's3 roots could be traced all the way back to 1889 in Kyoto, Japan, when Fusajiro Yamauchi, the founder of the company, started manufacturing playing cards. In 1907, the company began producing Western playing cards, and by 1951, it had become the Nintendo Playing Card Company. In 1959, it began making theme cards under a licensing agreement with Walt Disney Company; by 1963, the company had gone public and taken its current name. During the period 1970 to 1985, Nintendo began focusing on the manufacture of electronic toys and entered the emerging field of video games (see Exhibit 1). Havovi Joshi and Samuel Tsang prepared this case under the supervision of Professor Ali Farhoomand for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. © 2009 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the Internet)—without the permission of The University of Hong Kong. Interestingly, 1991, the year Nintendo launched the highly popular Super NES in the United States, was also the year Nintendo's vision become Sony's opportunity—and the creation of what could be described as Nintendo's “greatest challenge” for over a decade—the Sony PlayStation (PS). Nintendo had wanted to incorporate CD-ROM into its Super NES, and Sony had agreed to create the PS for this purpose. However, over the next two years there were many conflicts of vision between Nintendo and Sony, and the two finally parted ways. Nintendo went ahead with Philips 276277technology,4 and Sony was left with the PS, which the company decided to continue developing. Given Sony's clout and resources, when the PS and its wide range of games were finally released in Japan in 1994, the console was an instant success. In 1995, Sony released the PS in the United States, totally uprooting Nintendo's established name in the industry. Exhibit 1 The History of Nintendo, 1989 to 2002 Source: Nintendo Co. Ltd, 2008, Annual Report, http://www.nintendo.co.jp/ir/pdf/2008/annual0803e.pdf (accessed October 3, 2008). For many years, Nintendo was a dominant player in the video game industry. It had sold more than two billion games since 1985. Its top-selling series included 277278nonviolent and easy-to-play games such as “Super Mario Bros.” and “The Legend of Zelda.” Its games were so successful largely because they appealed to all age groups across different cultures. The title of a book published in 1993 summed up Nintendo's supremacy: Game Over: How Nintendo Zapped an American Industry, Captured Your Dollars, and Enslaved Your Children. Suddenly, after the debut of the Sony PS, it was no longer the leader of the video game industry. Nintendo tried various strategies to counter Sony. However, competition continued to intensify, and the PS2 also captured a significant portion of the video game market, maintaining a dominant position in the industry. In May 2001, Microsoft too entered the video game market by introducing the Xbox console, leaving Nintendo with an even smaller piece of the market. In 2002, Nintendo appointed Satoru Iwata5 as president of the company. It was hoped that, with his experience and deep insights into how the market evolved, Iwata would help the company develop a brand-new vision and approach.6 The Video Game Industry History The video game industry was born in the 1970s. In the early days, notable players such as Atari from the United States and Namco from Japan brought video games to teenagers in the form of arcade games found in malls and video game arcades. With the introduction of home consoles, video games began to make their way into households around the globe. In the 1980s and early 1990s, many new players came to the market. With the increasing popularity of personal computers (PCs), gamers were no longer limited to playing their favorite video game titles on proprietary consoles. Although the market was affected by the introduction of PCs, video game makers achieved steady growth. Nevertheless, the target customer group of video game consoles was narrowly confined to teenagers. Armed with insightful targeting and positioning, image-conscious branding, and superb graphics technologies, Sony introduced the PS in the mid1990s. The Japanese electronics giant revolutionized the perception of video game consoles and successfully captured new players, thereby helping the industry grow substantially. Video gaming suddenly became the new popular entertainment. It was especially well received by young adults, mostly males in their late 20s or early 30s, and often with substantial disposable incomes. By the time Sony launched the PS2 in 2000, technology giant Microsoft realized that it could no longer ignore the runaway success of this product or the effect the booming video game market was having on its traditional PC and software domains. Thus Microsoft's video game console, the Xbox, was launched in 2001. Since the early 2000s, the convergence of information technology, telecommunications, media, and entertainment has brought dramatic social and technological changes. With the new socio-technological movement and a wider audience base, the big video game console markers such as Sony and Microsoft began to realize that there were new opportunities for their video gaming and console product offerings, which would play a far greater role in people's lives than mere entertainment. Trends in the Industry With the broad availability of broadband Internet, increasing sophistication of high-definition (HD) video technologies, and decreasing cost of hard-drive storage, video game console manufacturers realized that their products no longer had to be for gaming only. In fact, many players such as Sony and Microsoft envisioned their game consoles as all-encompassing home entertainment centers. Further, given the increasing speed achieved by broadband connections, Internet users were increasingly able to access large quantities of data files, especially those containing HD audio and video. Consequently, these console producers developed and offered online libraries as a new service enabling users to download and stream a variety of movies, music, and television shows through their consoles. As top-quality video materials became more readily available through HD broadcasting and Internet downloads, a new recording medium with increased storage capacity was required. Two formats, the Blu-ray for-mat7 developed by a consortium led by Sony, and the HD-DVD format developed by a consortium led by Toshiba, competed to become the standard in this area. By offering online games based on new and existing titles, console makers could provide similar social-networking or virtualworld services to get online gamers to play, connect, and form loyal communities. Such communities were expected to help create a perpetual demand for services and products created by the video game makers and their alliance partners. In fact, ingame advertising had already started and offered a new revenue stream to video game developers. Nintendo: Innovation and the Launch of the Wii Traditionally, Sony, Microsoft, and Nintendo would enter a new cycle or a new competitive battle every five to six years, and in 2000, Sony's PS2 emerged as the clear winner.8 Since then, the industry's focus turned even 278279 more to the technological advancement of the console hardware, particularly in terms of faster processing speed, higher definition of video quality, and increasing complexity of the games. The relentless pursuit of superior technologies became the driver of the industry's dynamics. However, the former leader in the video game industry, Nintendo, adopted a vastly different viewpoint about the industry's future development. Some years before the battle that began in 2006, Iwata saw the potential threats facing the industry. He observed that the video game market in Japan was shrinking. Based on various market trends and data, the key factor causing this reduction appeared to be the increasing complexity of video games, which required players to invest a significant amount of their time to learn and play them using increasingly complicated controllers with combinations of buttons and joysticks. Consequently, occasional gamers with busy lives had stopped playing. Further, for novices and non-gamers, the time required to learn and play these games was a major deterrent for potential newcomers to join the camp. Iwata also saw that the video game industry had largely ignored non-gamers and was focused on the existing players. Armed with these insights, Iwata decided to devise a radically new strategy as the foundation for leading Nintendo down an unorthodox path. The new strategy's objective was to reach out to non-gamers in order to create a bigger market. Iwata's mandate was for simpler games to be developed, targeting all customers, irrespective of age, gender, or gaming experience. These new games were to take no more than a few minutes to set up and play. In addition, they would require an easy-to-use controller. He also wanted the game scenarios to be largely based on reallife situations rather than fantasies. In order to pilot Iwata's idea, Nintendo first developed a new handheld gaming device called the DS, which stood for “double screen.” It was launched in 2004. The DS was positioned as “the machine that enriches the owner's daily life.” 9 One of the key features of this device was a touch-screen that gamers could tap or write on with a stylus. This innovative design enabled gamers to play without using complicated sets of buttons or a mini-joystick. The company then launched the Nintendo Wi-Fi Connection, an innovative service that allowed DS system players to play with other users through a wireless network. The DS was a huge success, and by April 2008, more than 70 million units had been sold worldwide. 10 Among the many DS game titles, the most popular was “Nintendogs,” particularly among female gamers. Players of “Nintendogs” could interact with their virtual pets through the DS's built-in microphone and “touch” them via the touch-screen. They could take these dogs for walks, teach them tricks, and enter them into competitions. Another popular game was “Brainage,” which featured brain-training games that were basically puzzles. Following the success of the DS, Nintendo rolled out the DS Lite in 2006. With its mature Game Boy and innovative DS systems, Nintendo remained the leader in the handheld console segment and continued to retain well over 90 percent of the handheld device market that it had captured since 1989. However, the deciding factor in Nintendo's success was the video game console segment. Since 2000, Nintendo had lost control of the fixed console market to Sony's PS. With its new strategy to capture non-gamers and expand the market, coupled with the lessons learned from the DS handheld device, Nintendo developed its new console, the Wii, which arrived about the same time as the rollout of Microsoft's Xbox 360 and Sony's PS3, and just in time for the 2006 holiday shopping season (see Exhibit 2 for a timeline). Our goal was to come up with a machine that moms would want—easy to use, quick to start up, not a huge energy drain, and quiet while it was running. Rather than just picking new technology, we thought seriously about what a game console should be. Iwata wanted a console that would play every Nintendo game ever made. —SHIGERU MIYAMOTO, MEMBER OF THE WII DEVELOPMENT TEAM 11 The Wii was an impressive, well-designed, tiny machine that was controlled with a wand-like controller that resembled a TV remote control. Without an elaborate joystick and wire, gamers could navigate the system simply by moving the controller. Motion detectors would then translate the movement of the wand into on-screen action, enabling simulation of real-life games such as tennis, bowling, and boxing. The games were sold on optical discs similar to DVDs. The Wii could also be connected to the Internet for online news and weather updates and to access Nintendo's classic game catalogue, which could be downloaded from the Web. To do this, players could access the Virtual Console service, whereby games originally released for the SNES and N64 could be downloaded from the Wii Shop Channel and accessed from the Wii. Nintendo positioned the Wii as “a machine that puts smiles on surrounding people's faces,” encouraging communication among family members as each of them found something personally relevant and were motivated to turn on the console every day in order to enjoy “the new life with Wii.”12 To promote the Wii, Nintendo adopted the same word-of-mouth strategy that had proven successful in promoting the DS. The company “recruited a handful of carefully chosen 279280 suburban housewives to spread the word among their friends that the Wii was a gaming console the whole family could enjoy together.”13 The Wii was also featured in the gamers' self-made video, which was then shared through YouTube and social networking sites. This once-experimental approach was more effective than the traditional advertising or mass-media campaigns used by Sony and Microsoft. In addition to becoming the home gaming system for the family, Wii also helped expand “exergaming,” which was the combination of on-screen action with physical exercise. The origins of exergaming can be traced to 1989, when Nintendo released the Power Pad and Power Glove, two accessories for its gaming console. The Power Pad was a “large plastic platform that plugged into the console and contained pressure sensors on which gamers could step or jump to play sports games.” 14 The Power Glove was a “glove-like controller that translated various gestures into on-screen movements.”15 However, these two accessories had not sold well. Now, with the introduction of the Wii into millions of households, boxing, tennis, bowling, golf, and baseball games would require players to act out the physical movements involved in these sports. Consequently, it was predicted that the Wii would spawn a whole new generation of exergaming that would go far beyond the existing games that used dance mats or video cameras to detect players' actions, as the Wii's controller could detect more subtle movements and could be used to record and analyze these movements through intelligent software to determine the players' physical fitness levels. 16 Exhibit 2 Significant Milestones in the Video Game Console Industry Source: Time, 2005, Video game console timeline—video game history—Xbox 360, http://www.time.com/covers/1101050523/console_timeline/ (accessed August 13, 2008). The Wii proved to be a runaway success and by September 2007, Nintendo became Japan's most valuable listed company after Toyota, at US$72 billion in market value—nearly tripling in value since the launch of the Wii (see Exhibits 3 and 4).17 280281 Exhibit 3 Nintendo's Income Statements, 2006 to 2008 (US$ Millions) Source: Adapted from BusinessWeek, 2008, Financial results for Nintendo Co. Ltd, www.investing.businessweek.com/research/stocks/financials (accessed August 4, 2008). Key Players in the Video Game Industry Video Game Hardware Other than Nintendo, the video game hardware industry (essentially comprising the manufacture of consoles and devices) was dominated by Sony with its PS family, and Microsoft with the Xbox 360. Sony18 For decades, Sony defined the leading edge in gadgetry, producing transistor radios in the 1950s, Trinitron TVs in the 1960s, and the revolutionary Walkman in the 1970s.19 Similarly, when the company introduced the PS in Japan in March 1994 and in the United States in 1995, it brought the technology of video gaming to a whole new level (see Exhibit 5). With Sony's strategy of attracting older teenagers and young adults (who had significantly more disposable income) by offering more sophisticated and often more violent games, the PS dominated the market. In 2000, the PS2 was released and completely won over the video game market. The PS2 was not only backward-compatible with the PS, but could also be used to play CDs and DVDs. For most people who bought the PS2, it was their first DVD player. In July 2008, Sony announced that worldwide PS2 console sales exceeded 140 million, 20 making the PS2 the best-selling console in history. In order to compete against Nintendo, the ruler of the handheld video game market, Sony introduced the PlayStation Portable (“PSP”) in 2004. In the meantime, Sony continued to release other electronics, such as Sony Connect, an online music service; Vaio Pocket, a portable music player designed to compete with Apple's iPod; and Network Walkman, which was the first Walkman with a hard drive. 281282 Exhibit 4 Nintendo's Consolidated Sales Information for the Six Months Ending September 30, 2007 (US$ Millions) (US$1 = ¥115.4 on March 31, 2008) Source: Nintendo Co. Ltd, 2007, Consolidated financial statements for the six months ending September 30, 2007, http://www.nintendo.com/corp/report/FY07FinanciaiP£SiiltsYdf, October 25 (accessed August 1, 2008). Although the PS product line dominated the market, the sales of Sony's other electronics (e.g., DVD recorders, TVs, and computers) and music products dropped significantly. Consumer demand remained weak as there was a battle over prices, with Apple's iPod undermining the sales of Sony's CD and MiniDisc Walkmans, as well as their TV products. These challenges, in addition to the costs incurred in streamlining operations, significantly decreased Sony's market value, and in 2004 the company reported a loss. Sony, once acknowledged globally for its cutting-edge technological innovations, was coming to be perceived as a bureaucratic conglomerate. In order to rectify the situation, in 2005 Sony brought in Sir Howard Stringer to replace Nobuyuki Idei as chairman and chief executive. Stringer was the first non-Japanese chief of the company and, prior to this post, had been the head of the company's U.S. and electronics divisions. After taking over, Stringer announced Project Nippon, a corporate restructuring plan designed to revamp Sony's electronics business and foster better collaboration between the company's divisions. His plan called for eliminating 10,000 jobs (the company had 150,000 employees) and closing 11 of Sony's 65 factories. Stringer also revealed plans for improved research-and-development (R&D) with a stronger focus on consumer demand, aiming to reestablish Sony's presence in Japan. Sony's emphasis became HD products for consumers and broadcasters, and semiconductors designed to improve performance in the company's products. As one of the major weapons in Sir Stringer's grand plan, Sony planned to introduce and leverage the PS3 to regain its position in the electronics industry. The PS3 was designed to be a multimedia entertainment hub. Thus, people would buy the PS3 to watch movies in addition to playing games. Its computing power would also allow users to chat online, listen to music, and view highquality animations. The machine would also be backward-compatible with games designed for previous PS consoles. Sony hoped that it would be able to utilize the Cell computer chip, jointly developed with IBM and Toshiba, in other products too, such as selling home servers broadband and high-definition television (HDTV) systems. This powerful chip would power the new PS3, whose games would also be the first mass utilization of the Blu-ray format.21 In November 2006, after several delays, Sony's PS3 was released nearly a year after Microsoft's Xbox 360 and within a week of the debut of Nintendo's Wii. However, the results were largely disappointing. Supply problems and the high price tag of the PS3 resulted in Sony losing its dominant position in the console market to Nintendo. To boost sales, the company slashed the price of the PS3 in mid-2007. Around the same time, because of continuous setbacks in terms of delays and inability to ramp up production, Sony fired Ken Kutaragi, who was the chief architect of the PS product line. 282283 Exhibit 5 Evolution of Technology in the Video Game Console Industry's War for Supremacy Source: Adapted from D. Lero, 2007, A history of gaming, http://www.gamespot.com/pages/unions/home.php?union_id=Contributions, November 14 (accessed August 13, 2008). In July 2008, 20 months after the release of the PS3, the console had barely achieved 10 percent of its sales target. At the end of Sony's fiscal year in March 2008, sales were 12.85 million, and the company expected to sell just about 10 million in the fiscal year ending March 2009.22 Sony's more pressing need was to steer the PS3 to profitability, which was estimated to finally happen by 2009 (see Exhibits 6 and 7). Given the shaky situation, Sony had no plans to cease development of games for the older PS2 system and planned to continue rolling out titles specifically for it. 23 Microsoft Entering the video game business in 2001 was one of Microsoft's diversification moves when the company recognized the remarkable success of Sony's PS2 and the potential threat the video game market posed to its stronghold in the PC market. The Xbox was the company's first foray into the industry and was launched to compete directly with Sony's PS2 and Nintendo's GameCube. In November 2002, the company launched Xbox Live, allowing subscribers to play online Xbox games with other subscribers around the world. By mid-2005, the service had attracted about two million subscribers worldwide. However, by May 2005, the software giant had sold only 21.3 million Xbox units, which put the company in a distant second place behind Sony's PS2 (which had sold 83.5 million units) and slightly ahead of Nintendo's GameCube (with sales of 18.3 million units).24 By August 2005, Microsoft's Xbox division had cost the company US$4 billion.25 Soon after, production of the Xbox was ended in favor of the Xbox 360. Microsoft was determined to capture the top spot in the market with the launch of the Xbox 360 in November 2005, several months ahead of its rivals (Sony's PS3 appeared in the market in late 2006, about a week after Nintendo's Wii). Some believed that the previous success of Sony's PS2 was partly due to its advantage in reaching the market earlier than its rivals; thus, Microsoft imitated this marketing strategy and became the first game console in the new business cycle. Further, having learned a hard lesson from the flop of the original Xbox in Japan, Microsoft worked closely with the producers of Japanese games in an attempt to neutralize the traditional advantages of its two main rivals. The company also abandoned its previous approach of using off-the-shelf parts provided by Intel and NVIDIA to build its consoles because while such an approach was efficient, it lacked the flexibility that Microsoft's rivals enjoyed in reducing costs and increasing profit margins during a console's lifetime.26 (For instance, Sony had gradually reduced the number of chips required by its 283284PS2 without sacrificing its performance.) Subsequently, Microsoft adopted a new design for its Xbox 360 in the hope that this would achieve a new degree of manufacturing flexibility that could help integrate various components and increase profitability in the future (see Exhibit 8).27 Exhibit 6 Sonny's Income Statement, 2006–2008 (US$ Million) Source: Adapted from C. Colbert, 2008, Sony Corporation, Hoover's Company Information. Exhibit 7 Analysis of Sony's Income Statement for the Year Ending March 31, 2008 Source: Adapted from D. Jenkins, 2008, “Sony's game division sees 26% sales jump, http://www.gamasutra.com/php-bin/newsindex.php?story=8638, May 14 (accessed August 11, 2008). Video Game Software The computer game industry, one of the biggest money-spinners in the global entertainment industry, routinely spent amounts ranging from US$12 million to US$20 million to develop each game. As the consoles became more expensive, the cost of developing games for them also increased. However, Nintendo turned its lower-cost hardware into another competitive advantage. By focusing on characters rather than special effects, developing Wii games cost the company about half what its competition was spending on Xbox and PS games, and thus the expense could be recouped at a much lower sales volume. Nintendo had also thrown in 284285five simple but highly addictive games, Wii Sports, with each console so that the buyer was getting a “complete” product at a great price. Sony and Microsoft, on the other hand, incurred losses on the consoles they sold, despite their high price. To compensate for these losses, they sold their games with high licensing royalties. As of July 2008, 6 of the 10 most popular games worldwide were for Nintendo consoles (see Exhibit 9). Exhibit 8 Microsoft's Income Statement, 2005-2007 (US$ Millions) Source: Adapted from S. Shafer, 2008, Microsoft Corporation, Hoover's Company Information. Exhibit 9 Top 10 Games Worldwide, July 2008 (approximate number of units in thousands) Source: Adapted from VGChartz, 2008, “Worldwide chart for week ending July 25, 2008, http://www.vgchartz.com (accessed August 4, 2008). Nintendo also focused on developing first-party titles. Nintendo had placed its top software designers at the helm of hardware design. Thus, while Sony and Microsoft relied heavily on third parties to develop titles, 285286Nintendo's consoles were designed to suit the concepts of the games that would run on them, allowing the creation of early first-party titles that really showcased the hardware, including low-profit and offbeat games like Brainage. Such games would have been impossible on another company's hardware.28 The sales of hardware consoles such as the Wii, Xbox, and PS were highly correlated to the launch and sale of the video games that could be played on them. For instance, in March 2008, Nintendo launched its exclusive hit game “Super Smash Bros. Brawl” for the Wii and, in that month, along with selling 2.7 million copies of the game, the company sold more video game consoles in the United States than Sony and Microsoft combined.29 The Battle Begins Until the launch of the Wii at the end of 2006, competition in the video game market was straightforward. The leader was the company that introduced a wider array of games with high-quality graphics and increasingly complex gameplay. Then Microsoft introduced the Xbox 360 in November 2005, and Nintendo and Sony followed about a year later with the Wii and PS3. It was apparent that the rules of competition had changed. Sony continued to claim success in selling the aging PS2 console. Given its long history in the market, the PS2 had outsold both the Xbox 360 and the Wii. Microsoft also remained confident about its Xbox 360. As of May 2008, Microsoft announced its Xbox 360 game machine had beaten the Wii and PS3 to reach 10 million units in U.S. sales. 30 The head start of several months in selling the Xbox 360 gave Microsoft an edge over Sony's PS3 and Nintendo's Wii. The lead time also helped Microsoft and its partners build a vast library of games, which was a major factor for consideration when gamers chose a particular console. Exhibit 10 Sales Figures of Wii, PS3, and Xbox 360 in the United States (approximate number of units in thousands) Source: Adapted from PVC Forum, 2008, “Games sales chart—monthly console hardware sales in America, www.forum.pcvsconsole.com, July 17 (accessed August 11, 2008). However, within a month of Microsoft's announcement that it was the leader in the U.S. console war, the June 2008 figures were released and it was evident that the Wii had usurped the Xbox 360 as the leader. A total of 10.9 million Wiis were sold in the United States since its launch in November 2006, whereas a total of 10.4 million Xbox 360s were sold since its launch a year earlier.31 The PS3 came in a distant third with 4.8 million units sold. In the United States, which was Nintendo's largest market,32 the Wii had taken off the fastest by selling 600,000 units in the first eight days, generating US$190 million in sales. 33 In fact, because of its high demand and market buzz, many consumers found it difficult to get their hands on the machine even months after the launch (see Exhibit 10). The same story about demand existed 286287in other parts of the world, and Nintendo emerged as the clear month-on-month leader with the outstanding success of its new console (see Exhibit 11). Exhibit 11 Worldwide Sales Figures of Wii, PS3, and Xbox Units (approximate number of units in thousands) Source: Estimated data adapted from VGChartz, July 2008, World hardware sales—weekly comparison, http://www.vgchartz.com/aweekly.php (accessed August 16, 2008). In terms of profitability, Nintendo was in an enviable position of making a profit on each Wii console sold from the first day (see Exhibit 12). Sony, on the other hand, had already slashed the price of the PS3 by US$100 to US$499 to help boost sales of the console. This was still US$20 more than Microsoft's most expensive version of the Xbox 360 and about twice the price of Nintendo's Wii.34 287288 Exhibit 12 The Economics of the Game: Wii, PS3, and the Xbox 360 It was becoming clear that, in this latest battle between the Xbox 360, PS3, and Wii, the Wii was the clear winner of the game. Nintendo's Disruptive Strategy It was not just the video game industry that had felt the impact of the innovative Wii. With the December 2007 release of Wii Fit (an extension of the Wii for exercise activities utilizing the Wii Balances Board peripheral), the potential for capturing yet another class of non-gamers was significantly increased. Wii Fit aimed to integrate health and entertainment and featured approximately 40 different activities, including yoga, pushups, and other exercises. It was described as a way to help get families to exercise together. Within six months of being released, the product had sold two million copies in Japan and had long queues waiting for its delivery in many parts of the world. Its effect on the health industry was already evident, with doctors and therapists recommending it for various purposes, such as body balance, strength training, keeping patients interested in performing repetitive and tedious exercises, and for the elderly to enjoy expanding their range of motion. Nintendo's business model was also exciting for small, independent software producers. In May 2008, Nintendo made the strategic move of loosening its traditionally tight control over content by launching WiiWare in the United States and Europe. WiiWare, an online channel for distributing downloadable games, enabled users to download new games by independent developers. Reggis Fils-Aime, president of Nintendo of America,35 said, “Independent developers armed with small budgets and big ideas will be able to get their original games into the marketplace to see if we can find the next smash hit. WiiWare brings new levels of creativity and value to the ever-growing population of Wii owners.” While it was still too early to predict the final results, Nintendo's Wii has revolutionized and changed the nature of competition, and not just in the video-game industry. Would this disruptive transformation of the video game industry leave the competitors in the cold? What course of action was available to them? Appendix Disruptive Technology The term “disruptive technology” was coined by Clayton M. Christensen, a professor at the Harvard Business School. Christensen believed that leading companies, despite having followed all the right practices (i.e., keeping a close watch on competition, listening to their customers, and investing aggressively in new technologies), still lost their top positions when confronted with disruptive changes in technology and market structure. He suggested that, while keeping close to customers was critical for current success, it was paradoxically also the cause for companies' failure to meet the technological demands of customers in the future. To remain at the top of their industries, managers must first be able to spot disruptive technologies. To pursue these technologies, managers must protect them from the processes and incentives that are geared to serving mainstream customers. And the only way to do that is to create organizations that are completely independent of the mainstream business.36 Disruptive technology is an innovation that uses a “disruptive strategy”' rather than a “sustaining” strategy (one which improved the performance of an established product) or a “revolutionary” strategy (one which introduced products with dramatically improved features). Christensen argued that following good business practices could ultimately weaken a great company because truly important breakthrough technologies were often rejected by mainstream customers because they could not immediately use them. Companies with a strong customer focus would thus reject those strategically important innovations. As a result, it was left to the more nimble, entrepreneurial companies to pursue those disruptive opportunities, which might result in worse product performance in the short term, but in the long run were of strategic importance in creating new markets and finding new customers for future products. Case 20 Nintendo's Disruptive Strategy: Implications for the Video Game Industry Havovi Joshi Samuel Tsang The University of Hong Kong, Asia Case Research Centre For some time we have believed the game industry is ready for disruption. Not just from Nintendo, but from all game developers. It is what we all need to expand our audience. It is what we all need to expand our imaginations. —SATORU IWATA PRESIDENT OF NINTENDO Co. LTD 1 In the 2008 BusinessWeek-Boston Consulting Group ranking of the world's most innovative companies, Nintendo Co. Ltd (“Nintendo”) was ranked seventh, up from thirty-ninth the previous year.2 This improvement was in recognition of Nintendo's transformation into an innovative design powerhouse that challenged the video game industry's prevailing business model. In 2000, when Sony, Microsoft, and Nintendo (the “big three” of the video game console manufacturers) released their latest products, Sony's PlayStation 2 (PS2) emerged as the clear winner, outselling Microsoft's Xbox, and Nintendo's GameCube. In 2006, these players introduced a new generation of video game consoles, precipitating a new competitive battle in the industry. Microsoft and Sony continued with their previous strategy of increasing the computing power of their newest products and adding a more impressive graphical interface. However, Satoru Iwata, president of Nintendo, believed that the video game industry had been focusing far too much on existing gamers and completely neglecting non-gamers. In light of this belief, the company repositioned itself by developing a radically different console, the Wii (pronounced “we”). The Wii was an interesting machine that used a wand-like remote controller to detect players' hand movements, allowing them to emulate the real-life play of such games as tennis, bowling, and boxing. The new console proved to be a runaway success. By September 2007, Nintendo had become Japan's most valuable listed company after Toyota, and its market value had tripled since the launch of the Wii. In spite of this initial success, however, it was not clear whether Nintendo had really disrupted the industry and significantly changed the dynamics of competition in it. History of Nintendo, 1889 to 2002 Nintendo's3 roots could be traced all the way back to 1889 in Kyoto, Japan, when Fusajiro Yamauchi, the founder of the company, started manufacturing playing cards. In 1907, the company began producing Western playing cards, and by 1951, it had become the Nintendo Playing Card Company. In 1959, it began making theme cards under a licensing agreement with Walt Disney Company; by 1963, the company had gone public and taken its current name. During the period 1970 to 1985, Nintendo began focusing on the manufacture of electronic toys and entered the emerging field of video games (see Exhibit 1). Havovi Joshi and Samuel Tsang prepared this case under the supervision of Professor Ali Farhoomand for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. © 2009 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the Internet)—without the permission of The University of Hong Kong. Interestingly, 1991, the year Nintendo launched the highly popular Super NES in the United States, was also the year Nintendo's vision become Sony's opportunity—and the creation of what could be described as Nintendo's “greatest challenge” for over a decade—the Sony PlayStation (PS). Nintendo had wanted to incorporate CD-ROM into its Super NES, and Sony had agreed to create the PS for this purpose. However, over the next two years there were many conflicts of vision between Nintendo and Sony, and the two finally parted ways. Nintendo went ahead with Philips 276277technology,4 and Sony was left with the PS, which the company decided to continue developing. Given Sony's clout and resources, when the PS and its wide range of games were finally released in Japan in 1994, the console was an instant success. In 1995, Sony released the PS in the United States, totally uprooting Nintendo's established name in the industry. Exhibit 1 The History of Nintendo, 1989 to 2002 Source: Nintendo Co. Ltd, 2008, Annual Report, http://www.nintendo.co.jp/ir/pdf/2008/annual0803e.pdf (accessed October 3, 2008). For many years, Nintendo was a dominant player in the video game industry. It had sold more than two billion games since 1985. Its top-selling series included 277278nonviolent and easy-to-play games such as “Super Mario Bros.” and “The Legend of Zelda.” Its games were so successful largely because they appealed to all age groups across different cultures. The title of a book published in 1993 summed up Nintendo's supremacy: Game Over: How Nintendo Zapped an American Industry, Captured Your Dollars, and Enslaved Your Children. Suddenly, after the debut of the Sony PS, it was no longer the leader of the video game industry. Nintendo tried various strategies to counter Sony. However, competition continued to intensify, and the PS2 also captured a significant portion of the video game market, maintaining a dominant position in the industry. In May 2001, Microsoft too entered the video game market by introducing the Xbox console, leaving Nintendo with an even smaller piece of the market. In 2002, Nintendo appointed Satoru Iwata5 as president of the company. It was hoped that, with his experience and deep insights into how the market evolved, Iwata would help the company develop a brand-new vision and approach.6 The Video Game Industry History The video game industry was born in the 1970s. In the early days, notable players such as Atari from the United States and Namco from Japan brought video games to teenagers in the form of arcade games found in malls and video game arcades. With the introduction of home consoles, video games began to make their way into households around the globe. In the 1980s and early 1990s, many new players came to the market. With the increasing popularity of personal computers (PCs), gamers were no longer limited to playing their favorite video game titles on proprietary consoles. Although the market was affected by the introduction of PCs, video game makers achieved steady growth. Nevertheless, the target customer group of video game consoles was narrowly confined to teenagers. Armed with insightful targeting and positioning, image-conscious branding, and superb graphics technologies, Sony introduced the PS in the mid1990s. The Japanese electronics giant revolutionized the perception of video game consoles and successfully captured new players, thereby helping the industry grow substantially. Video gaming suddenly became the new popular entertainment. It was especially well received by young adults, mostly males in their late 20s or early 30s, and often with substantial disposable incomes. By the time Sony launched the PS2 in 2000, technology giant Microsoft realized that it could no longer ignore the runaway success of this product or the effect the booming video game market was having on its traditional PC and software domains. Thus Microsoft's video game console, the Xbox, was launched in 2001. Since the early 2000s, the convergence of information technology, telecommunications, media, and entertainment has brought dramatic social and technological changes. With the new socio-technological movement and a wider audience base, the big video game console markers such as Sony and Microsoft began to realize that there were new opportunities for their video gaming and console product offerings, which would play a far greater role in people's lives than mere entertainment. Trends in the Industry With the broad availability of broadband Internet, increasing sophistication of high-definition (HD) video technologies, and decreasing cost of hard-drive storage, video game console manufacturers realized that their products no longer had to be for gaming only. In fact, many players such as Sony and Microsoft envisioned their game consoles as all-encompassing home entertainment centers. Further, given the increasing speed achieved by broadband connections, Internet users were increasingly able to access large quantities of data files, especially those containing HD audio and video. Consequently, these console producers developed and offered online libraries as a new service enabling users to download and stream a variety of movies, music, and television shows through their consoles. As top-quality video materials became more readily available through HD broadcasting and Internet downloads, a new recording medium with increased storage capacity was required. Two formats, the Blu-ray for-mat7 developed by a consortium led by Sony, and the HD-DVD format developed by a consortium led by Toshiba, competed to become the standard in this area. By offering online games based on new and existing titles, console makers could provide similar social-networking or virtualworld services to get online gamers to play, connect, and form loyal communities. Such communities were expected to help create a perpetual demand for services and products created by the video game makers and their alliance partners. In fact, ingame advertising had already started and offered a new revenue stream to video game developers. Nintendo: Innovation and the Launch of the Wii Traditionally, Sony, Microsoft, and Nintendo would enter a new cycle or a new competitive battle every five to six years, and in 2000, Sony's PS2 emerged as the clear winner.8 Since then, the industry's focus turned even 278279 more to the technological advancement of the console hardware, particularly in terms of faster processing speed, higher definition of video quality, and increasing complexity of the games. The relentless pursuit of superior technologies became the driver of the industry's dynamics. However, the former leader in the video game industry, Nintendo, adopted a vastly different viewpoint about the industry's future development. Some years before the battle that began in 2006, Iwata saw the potential threats facing the industry. He observed that the video game market in Japan was shrinking. Based on various market trends and data, the key factor causing this reduction appeared to be the increasing complexity of video games, which required players to invest a significant amount of their time to learn and play them using increasingly complicated controllers with combinations of buttons and joysticks. Consequently, occasional gamers with busy lives had stopped playing. Further, for novices and non-gamers, the time required to learn and play these games was a major deterrent for potential newcomers to join the camp. Iwata also saw that the video game industry had largely ignored non-gamers and was focused on the existing players. Armed with these insights, Iwata decided to devise a radically new strategy as the foundation for leading Nintendo down an unorthodox path. The new strategy's objective was to reach out to non-gamers in order to create a bigger market. Iwata's mandate was for simpler games to be developed, targeting all customers, irrespective of age, gender, or gaming experience. These new games were to take no more than a few minutes to set up and play. In addition, they would require an easy-to-use controller. He also wanted the game scenarios to be largely based on reallife situations rather than fantasies. In order to pilot Iwata's idea, Nintendo first developed a new handheld gaming device called the DS, which stood for “double screen.” It was launched in 2004. The DS was positioned as “the machine that enriches the owner's daily life.” 9 One of the key features of this device was a touch-screen that gamers could tap or write on with a stylus. This innovative design enabled gamers to play without using complicated sets of buttons or a mini-joystick. The company then launched the Nintendo Wi-Fi Connection, an innovative service that allowed DS system players to play with other users through a wireless network. The DS was a huge success, and by April 2008, more than 70 million units had been sold worldwide. 10 Among the many DS game titles, the most popular was “Nintendogs,” particularly among female gamers. Players of “Nintendogs” could interact with their virtual pets through the DS's built-in microphone and “touch” them via the touch-screen. They could take these dogs for walks, teach them tricks, and enter them into competitions. Another popular game was “Brainage,” which featured brain-training games that were basically puzzles. Following the success of the DS, Nintendo rolled out the DS Lite in 2006. With its mature Game Boy and innovative DS systems, Nintendo remained the leader in the handheld console segment and continued to retain well over 90 percent of the handheld device market that it had captured since 1989. However, the deciding factor in Nintendo's success was the video game console segment. Since 2000, Nintendo had lost control of the fixed console market to Sony's PS. With its new strategy to capture non-gamers and expand the market, coupled with the lessons learned from the DS handheld device, Nintendo developed its new console, the Wii, which arrived about the same time as the rollout of Microsoft's Xbox 360 and Sony's PS3, and just in time for the 2006 holiday shopping season (see Exhibit 2 for a timeline). Our goal was to come up with a machine that moms would want—easy to use, quick to start up, not a huge energy drain, and quiet while it was running. Rather than just picking new technology, we thought seriously about what a game console should be. Iwata wanted a console that would play every Nintendo game ever made. —SHIGERU MIYAMOTO, MEMBER OF THE WII DEVELOPMENT TEAM 11 The Wii was an impressive, well-designed, tiny machine that was controlled with a wand-like controller that resembled a TV remote control. Without an elaborate joystick and wire, gamers could navigate the system simply by moving the controller. Motion detectors would then translate the movement of the wand into on-screen action, enabling simulation of real-life games such as tennis, bowling, and boxing. The games were sold on optical discs similar to DVDs. The Wii could also be connected to the Internet for online news and weather updates and to access Nintendo's classic game catalogue, which could be downloaded from the Web. To do this, players could access the Virtual Console service, whereby games originally released for the SNES and N64 could be downloaded from the Wii Shop Channel and accessed from the Wii. Nintendo positioned the Wii as “a machine that puts smiles on surrounding people's faces,” encouraging communication among family members as each of them found something personally relevant and were motivated to turn on the console every day in order to enjoy “the new life with Wii.”12 To promote the Wii, Nintendo adopted the same word-of-mouth strategy that had proven successful in promoting the DS. The company “recruited a handful of carefully chosen 279280 suburban housewives to spread the word among their friends that the Wii was a gaming console the whole family could enjoy together.”13 The Wii was also featured in the gamers' self-made video, which was then shared through YouTube and social networking sites. This once-experimental approach was more effective than the traditional advertising or mass-media campaigns used by Sony and Microsoft. In addition to becoming the home gaming system for the family, Wii also helped expand “exergaming,” which was the combination of on-screen action with physical exercise. The origins of exergaming can be traced to 1989, when Nintendo released the Power Pad and Power Glove, two accessories for its gaming console. The Power Pad was a “large plastic platform that plugged into the console and contained pressure sensors on which gamers could step or jump to play sports games.” 14 The Power Glove was a “glove-like controller that translated various gestures into on-screen movements.”15 However, these two accessories had not sold well. Now, with the introduction of the Wii into millions of households, boxing, tennis, bowling, golf, and baseball games would require players to act out the physical movements involved in these sports. Consequently, it was predicted that the Wii would spawn a whole new generation of exergaming that would go far beyond the existing games that used dance mats or video cameras to detect players' actions, as the Wii's controller could detect more subtle movements and could be used to record and analyze these movements through intelligent software to determine the players' physical fitness levels. 16 Exhibit 2 Significant Milestones in the Video Game Console Industry Source: Time, 2005, Video game console timeline—video game history—Xbox 360, http://www.time.com/covers/1101050523/console_timeline/ (accessed August 13, 2008). The Wii proved to be a runaway success and by September 2007, Nintendo became Japan's most valuable listed company after Toyota, at US$72 billion in market value—nearly tripling in value since the launch of the Wii (see Exhibits 3 and 4).17 280281 Exhibit 3 Nintendo's Income Statements, 2006 to 2008 (US$ Millions) Source: Adapted from BusinessWeek, 2008, Financial results for Nintendo Co. Ltd, www.investing.businessweek.com/research/stocks/financials (accessed August 4, 2008). Key Players in the Video Game Industry Video Game Hardware Other than Nintendo, the video game hardware industry (essentially comprising the manufacture of consoles and devices) was dominated by Sony with its PS family, and Microsoft with the Xbox 360. Sony18 For decades, Sony defined the leading edge in gadgetry, producing transistor radios in the 1950s, Trinitron TVs in the 1960s, and the revolutionary Walkman in the 1970s.19 Similarly, when the company introduced the PS in Japan in March 1994 and in the United States in 1995, it brought the technology of video gaming to a whole new level (see Exhibit 5). With Sony's strategy of attracting older teenagers and young adults (who had significantly more disposable income) by offering more sophisticated and often more violent games, the PS dominated the market. In 2000, the PS2 was released and completely won over the video game market. The PS2 was not only backward-compatible with the PS, but could also be used to play CDs and DVDs. For most people who bought the PS2, it was their first DVD player. In July 2008, Sony announced that worldwide PS2 console sales exceeded 140 million, 20 making the PS2 the best-selling console in history. In order to compete against Nintendo, the ruler of the handheld video game market, Sony introduced the PlayStation Portable (“PSP”) in 2004. In the meantime, Sony continued to release other electronics, such as Sony Connect, an online music service; Vaio Pocket, a portable music player designed to compete with Apple's iPod; and Network Walkman, which was the first Walkman with a hard drive. 281282 Exhibit 4 Nintendo's Consolidated Sales Information for the Six Months Ending September 30, 2007 (US$ Millions) (US$1 = ¥115.4 on March 31, 2008) Source: Nintendo Co. Ltd, 2007, Consolidated financial statements for the six months ending September 30, 2007, http://www.nintendo.com/corp/report/FY07FinanciaiP£SiiltsYdf, October 25 (accessed August 1, 2008). Although the PS product line dominated the market, the sales of Sony's other electronics (e.g., DVD recorders, TVs, and computers) and music products dropped significantly. Consumer demand remained weak as there was a battle over prices, with Apple's iPod undermining the sales of Sony's CD and MiniDisc Walkmans, as well as their TV products. These challenges, in addition to the costs incurred in streamlining operations, significantly decreased Sony's market value, and in 2004 the company reported a loss. Sony, once acknowledged globally for its cutting-edge technological innovations, was coming to be perceived as a bureaucratic conglomerate. In order to rectify the situation, in 2005 Sony brought in Sir Howard Stringer to replace Nobuyuki Idei as chairman and chief executive. Stringer was the first non-Japanese chief of the company and, prior to this post, had been the head of the company's U.S. and electronics divisions. After taking over, Stringer announced Project Nippon, a corporate restructuring plan designed to revamp Sony's electronics business and foster better collaboration between the company's divisions. His plan called for eliminating 10,000 jobs (the company had 150,000 employees) and closing 11 of Sony's 65 factories. Stringer also revealed plans for improved research-and-development (R&D) with a stronger focus on consumer demand, aiming to reestablish Sony's presence in Japan. Sony's emphasis became HD products for consumers and broadcasters, and semiconductors designed to improve performance in the company's products. As one of the major weapons in Sir Stringer's grand plan, Sony planned to introduce and leverage the PS3 to regain its position in the electronics industry. The PS3 was designed to be a multimedia entertainment hub. Thus, people would buy the PS3 to watch movies in addition to playing games. Its computing power would also allow users to chat online, listen to music, and view highquality animations. The machine would also be backward-compatible with games designed for previous PS consoles. Sony hoped that it would be able to utilize the Cell computer chip, jointly developed with IBM and Toshiba, in other products too, such as selling home servers broadband and high-definition television (HDTV) systems. This powerful chip would power the new PS3, whose games would also be the first mass utilization of the Blu-ray format.21 In November 2006, after several delays, Sony's PS3 was released nearly a year after Microsoft's Xbox 360 and within a week of the debut of Nintendo's Wii. However, the results were largely disappointing. Supply problems and the high price tag of the PS3 resulted in Sony losing its dominant position in the console market to Nintendo. To boost sales, the company slashed the price of the PS3 in mid-2007. Around the same time, because of continuous setbacks in terms of delays and inability to ramp up production, Sony fired Ken Kutaragi, who was the chief architect of the PS product line. 282283 Exhibit 5 Evolution of Technology in the Video Game Console Industry's War for Supremacy Source: Adapted from D. Lero, 2007, A history of gaming, http://www.gamespot.com/pages/unions/home.php?union_id=Contributions, November 14 (accessed August 13, 2008). In July 2008, 20 months after the release of the PS3, the console had barely achieved 10 percent of its sales target. At the end of Sony's fiscal year in March 2008, sales were 12.85 million, and the company expected to sell just about 10 million in the fiscal year ending March 2009.22 Sony's more pressing need was to steer the PS3 to profitability, which was estimated to finally happen by 2009 (see Exhibits 6 and 7). Given the shaky situation, Sony had no plans to cease development of games for the older PS2 system and planned to continue rolling out titles specifically for it. 23 Microsoft Entering the video game business in 2001 was one of Microsoft's diversification moves when the company recognized the remarkable success of Sony's PS2 and the potential threat the video game market posed to its stronghold in the PC market. The Xbox was the company's first foray into the industry and was launched to compete directly with Sony's PS2 and Nintendo's GameCube. In November 2002, the company launched Xbox Live, allowing subscribers to play online Xbox games with other subscribers around the world. By mid-2005, the service had attracted about two million subscribers worldwide. However, by May 2005, the software giant had sold only 21.3 million Xbox units, which put the company in a distant second place behind Sony's PS2 (which had sold 83.5 million units) and slightly ahead of Nintendo's GameCube (with sales of 18.3 million units).24 By August 2005, Microsoft's Xbox division had cost the company US$4 billion.25 Soon after, production of the Xbox was ended in favor of the Xbox 360. Microsoft was determined to capture the top spot in the market with the launch of the Xbox 360 in November 2005, several months ahead of its rivals (Sony's PS3 appeared in the market in late 2006, about a week after Nintendo's Wii). Some believed that the previous success of Sony's PS2 was partly due to its advantage in reaching the market earlier than its rivals; thus, Microsoft imitated this marketing strategy and became the first game console in the new business cycle. Further, having learned a hard lesson from the flop of the original Xbox in Japan, Microsoft worked closely with the producers of Japanese games in an attempt to neutralize the traditional advantages of its two main rivals. The company also abandoned its previous approach of using off-the-shelf parts provided by Intel and NVIDIA to build its consoles because while such an approach was efficient, it lacked the flexibility that Microsoft's rivals enjoyed in reducing costs and increasing profit margins during a console's lifetime.26 (For instance, Sony had gradually reduced the number of chips required by its 283284PS2 without sacrificing its performance.) Subsequently, Microsoft adopted a new design for its Xbox 360 in the hope that this would achieve a new degree of manufacturing flexibility that could help integrate various components and increase profitability in the future (see Exhibit 8).27 Exhibit 6 Sonny's Income Statement, 2006–2008 (US$ Million) Source: Adapted from C. Colbert, 2008, Sony Corporation, Hoover's Company Information. Exhibit 7 Analysis of Sony's Income Statement for the Year Ending March 31, 2008 Source: Adapted from D. Jenkins, 2008, “Sony's game division sees 26% sales jump, http://www.gamasutra.com/php-bin/newsindex.php?story=8638, May 14 (accessed August 11, 2008). Video Game Software The computer game industry, one of the biggest money-spinners in the global entertainment industry, routinely spent amounts ranging from US$12 million to US$20 million to develop each game. As the consoles became more expensive, the cost of developing games for them also increased. However, Nintendo turned its lower-cost hardware into another competitive advantage. By focusing on characters rather than special effects, developing Wii games cost the company about half what its competition was spending on Xbox and PS games, and thus the expense could be recouped at a much lower sales volume. Nintendo had also thrown in 284285five simple but highly addictive games, Wii Sports, with each console so that the buyer was getting a “complete” product at a great price. Sony and Microsoft, on the other hand, incurred losses on the consoles they sold, despite their high price. To compensate for these losses, they sold their games with high licensing royalties. As of July 2008, 6 of the 10 most popular games worldwide were for Nintendo consoles (see Exhibit 9). Exhibit 8 Microsoft's Income Statement, 2005-2007 (US$ Millions) Source: Adapted from S. Shafer, 2008, Microsoft Corporation, Hoover's Company Information. Exhibit 9 Top 10 Games Worldwide, July 2008 (approximate number of units in thousands) Source: Adapted from VGChartz, 2008, “Worldwide chart for week ending July 25, 2008, http://www.vgchartz.com (accessed August 4, 2008). Nintendo also focused on developing first-party titles. Nintendo had placed its top software designers at the helm of hardware design. Thus, while Sony and Microsoft relied heavily on third parties to develop titles, 285286Nintendo's consoles were designed to suit the concepts of the games that would run on them, allowing the creation of early first-party...
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