When the Ocean Turns Red for Nintendo

By Yo Tong on February 1, 2012
Will the challenge posed from the smartphone market be too big an obstacle for Nintendo?

Arguably the most influential company in the video game industry, Nintendo has enjoyed huge success with its consoles for decades. However, in the face of drastic changes in the gaming market, Nintendo is visibly struggling.

A survey by Interpret showed that 43.8% of the portable gaming market played games on smartphones, which represents a significant 53.2% increase over the past year. At the same time, the proportion of those who play on the Nintendo DS or PSP has fallen by 13%. According to the report, 27.2% of the polled consumers indicated that they play games only on their smartphones and not on their DS or PSP.

Such a trend has caused a severe dent in Nintendo’s profits. The company announced on January 26th that its losses for the financial year to March are expected to be 65 billion Yen (US $852m), up from a forecast of 20 billion Yen (US $262m) in October. Far worse than initial market predictions.

Nintendo's imminent annual loss, which is set to be its first in at least three decades, is mainly due to its sluggish sales performance on the 3DS amidst changes in consumers' preference who are increasingly leaning towards playing games on smartphones.

Nintendo has cut 3DS prices by as much as 40% just six months after its initial launch in February 2011, resulting in a loss for every 3DS sold. The Japanese company lowered the sales forecast for this March from 16 million to 14 million units for the 3DS, and from 6 million to 5.5 million units for the DS.

It is rare for Nintendo to sell its hardware at a negative margin as the company has long been well-known for its audacity in exploring new market options and for its adroitness in cost control.

Nintendo’s business strategy is elegantly encapsulated in the concept of “Lateral Thinking with Withered Technology”, an idea advocated by Yokoi Gunpei, the late Director of Development at Nintendo. “Withered Technology” refers to technology that is widely used and well understood, whereas “lateral thinking” refers to new and radical ways of using such technology.

Under this strategy, Nintendo has made astonishing achievements and established its dominance. Its successes with the video game console Wii and the handheld game console DS were even regarded as a textbook case of Blue Ocean Strategy, because it created “new demand in places where there [was] none, thus making the pie bigger instead of fighting over who [got] the largest slice of the pie,” stated Patricio O’Gorman in Wii: Creating a Blue Ocean The Nintendo Way.

This served the dual purpose of creating innovation for customers at a relatively low cost while rendering competition irrelevant, because it caused a change in the rules of the market.

However, Nintendo has made a sublime shift of this strategy in the home console Wii U and the handheld console 3DS, in which it focused more on technical excellence and used sophisticated technology. The Wii U was announced at the Electronic Entertainment Expo 2011 (E3 2011). While the controller prototype received mixed reviews, it was its technical specifications, especially the graphical processing unit (GPU), which invited widespread speculation. According to Marc Diana, Channel Marketing Manager of AMD, the GPU used in Wii U will be a customized ATI Radeon HD 4000 series. In terms of graphical horsepower, it is equivalent to DirectX 10.1 with Shader Model 4.1 support, which is superior to that found in both the Xbox 360 and the PS3.

When 3DS made its debut February last year, it caused a wave of enthusiasm as the first handheld video game console featuring auto-stereoscopic technology, or naked-eye 3D. Though such cutting-edge technology was one of the major selling points of the successor of DS, it was subsequently deemed unnecessary by Nintendo. Ironically, the first video game console featuring 3D graphics was Nintendo's Virtual Boy, which ended in one of the most remarkable marketing failures in video game history.

Nintendo’s setback is symbolic, not only because of the company’s prominence in the video game industry, but because of its business model which is shared among Japanese games developers.

Shin Kiyoshi, the Japan Vice Coordinator of International Game Developers Association (IGDA), pointed out that the gaming industry has undergone dramatic changes in recent years.

The spread of social networking websites spearheaded by Facebook, coupled with the popularization of smartphones and their ensuing networking software, have created an open environment of cross-platform service-based applications as well as casual gaming. Nintendo, on the other hand, has since the very beginning adopted a close-knit business structure.

Shin argues that, while Nintendo put emphasis on product quality and created various innovations with titles such as “WiiFit”, “Brain Age” and “English Training”, its success was short-lived since the company confined itself to a decrepit business model – that of selling products instead of services.

Though it is certainly too early to write off the future of Nintendo, the video game giant will have to do much more than merely “leave luck to heaven” - as the company name suggests - in order to stave off the storm it is now facing.