Nintendo: the Wii Fits Us All

Nintendo: the Wii fits us all!!!

In a few years, Nintendo has regained supremacy of the videogame industry, a position the firm had handed over to Sony in the mid-nineties. Indeed “Big N”, as its fans affectionately call it, leads the two parts of the console market: handheld devices (Nintendo’s DS, Sony’s PSP) and lounge consoles (Sony’s PS3, Microsoft’s Xbox 360, and Nintendo’s Wii). Yet, very few people would have bet on the Wii’s success…

Late 2006: a new game begins

In November 2006, two new consoles entered the videogames market. Following Microsoft that has launched the Xbox 360 a year earlier, Sony and Nintendo respectively released the PS3 and the Wii on the lounge consoles market (Appendix 1). Even though these three consoles were supposed to belong to the same generation, one was very different from the two others: the Wii.

Indeed, the PS3 and the Xbox 360 shared some common characteristics. Both were far more powerful than their predecessors (the PS2 and the Xbox). They displayed the most realistic graphics ever in console videogames, and offered a far greater sound experience. These characteristics particularly appealed to hard-core gamers, i.e. players who are very fond of videogames and play a lot. Moreover, both were connected to the internet, enabling the consoles to download movies or games trailers, browse the internet, buy videos and music, and of course play online with people all over the world. In truth, Sony and Microsoft wanted to sell actual home entertainment centres, not only consoles. That is even more the case with the PS3, described as delivering “the next generation of interactive entertainment” (PlayStation website), in particular thanks to a High-Definition Blu-Ray player that the X360 does not possess. Finally, both exist in multiple versions, which can easily confuse customers (Appendix 2).

Another common trait between the two firms was their pricing strategy. Both consoles were very expensive when they first hit the shelves. The suggested retail price of the X360 was €399 i, whereas the PS3 was €599. Yet, despite these high prices, neither company was making money with the consoles. In November 2006, iSuppli (a firm specialized in market intelligence) revealed

1 that Microsoft was losing $120 per console sold, whereas Sony was estimated to lose from $240 to $300 on each PS3 it sold. This kind of business model was not new since it has existed in the console sector since the end of the seventies (mainly with the Atari VC-2600). In fact, money is usually made with games. Indeed, any games editor who wishes to develop and sell a game for a console has to pay a licence, which generates royalties for consoles manufacturers. Hence their willingness to sell consoles at a loss in order to make money on the resulting games purchases.

However, by 2009, the Xbox 360 had 29.6% of the market, with 29.68 million consoles sold worldwide, while the sales of the PS3 are a mere 21.60 million, i.e. a 21.6% market share ii. Despite a one-year earlier release, the X360 cumulated sales were overtaken by the Wii in September 2007, with the PS3 selling the least. Despite its huge reserves of cash supporting its console, Microsoft has failed to become the sector’s world leader even though the X360 was released a year earlier than its competitors. This strategy did not even enable the firm to get a foothold on the Japanese Market (more than 3 years after its launch the X360 had barely sold a million units on this market). Furthermore, the X360 encountered some technical problems. In particular, it overheated, which turned its starting button red – a phenomenon labelled RROD, i.e. Red Ring Of Death, and relayed by many videogames websites, blogs, and video sharing websites (e.g. YouTube.).

The situation was even worse for Sony, which used to be the leader of the market with its PS2 (more than 100 millions sold between 2000 and 2006, and more than 120 million by early 2009), and burnt a lot of cash to develop and promote the PS3. It appears that only a few customers are interested in the High-Definition Blu-Ray player. This is all the more disappointing as the Blu- Ray diodes are most expensive, and largely accounted for delaying the launch of the PS3 (its release was delayed two or three times, which tarnished Sony’s reputation). And only a few very good games are purely exclusive to the consoleiii, meaning that they are also available on the X360, or even on the Wii. However, Microsoft has some strong exclusive games (e.g. Halo 3), and so has the Wii (see below).

Wii succeeds because Wii can…

2 With 48.95 million units sold, the Wii has 48.8% of the market, and is by far the leader of this generation of consoles. This success has been a total surprise for most of videogames analysts and professionals, who had deemed it unable to measure up to its two powerful competitors. “We didn’t realise the Wii was going to come on so strong”, acknowledged for instance Kaï Huang, co-founder of RedOctane (a videogame editor), in April 2009.

Indeed, Nintendo’s strategy for this console raised many questions. From a purely technical standpoint, the Wii is far less powerful than the PS3 and the X360: no high-definition graphics, and no exceptional sound experience (which made it possible to create a smaller console than the PS3 and the X360). In fact, the quality of the Wii’s graphics is roughly equivalent to the quality of the Gamecube that preceded it. Due to these characteristics, many hard-core gamers have looked on the console with disdain.. However, it is differentiated by a revolutionary gameplay, thanks to a new kind of controller developed by Nintendo. Called the Wiimote, it has motion sensing capabilities which allow the player to interact with and manipulate items on screen by moving. Here, technology in itself is less important than the way it is actually used. It is interesting to note that Sony had created something similar in 2002. Back then, Sony was selling the Eye Toy, a mini camera that captured the gamers’ motions to include them in the game. But the firm did not really advance any further, and missed the opportunity of developing a real new business.

Thus, contrary to the other consoles, the Wii player is active, and actually makes the moves when playing tennis or bowling, for example. This provides more fun and gives videogames a social dimension they are usually deprived of. It is reinforced by the possibility offered to gamers to create their own personalized avatar (called “Mii”) usable in many games. The Wii also provides many web services (weather, news, a “Virtual Console” service that allows to buy and download games from older consoles, and social networking services).

Since it differed greatly from traditional devices, such a cutting edge technology needed to be heavily promoted so that customers understood its advantages. That’s why Nintendo spent more than $200 million in the communication campaign that supported the launch of the Wii (never had “Big N” invested so much to launch a console!). TV ads showed players having fun with the console, alone or with friends and family, rather than just showing the graphics of the

3 game. In other words, the players themselves were at the heart of TV ads, internet videos or other promotional support, which was totally unusual in the sector. Nintendo has retained this strategy ever since, and new games for the Wii are still promoted the same way.

At the same time, Nintendo has worked really hard to make sure that people would try its console. As Satoru Iwata (Nintendo’s CEO) said in 2007: “We want as many people as possible to touch and use a Wiimote”, since it is the best way to communicate the console’s advantages. This is all the more important as this gameplay enables new ways of playing, which has attracted people who initially were not interested in videogames at all. Thus, more and more females and elderly people are now equipped with a Wii (or a DS). For example, many retirement homes have announced the purchase of Wiis for their residents, who enjoy it and use it to keep fit. This trend has continued with Nintendo releasing the Wiiboard and Wiifit on which people can practice many sports at home (gym, fitness, ski simulations… even yoga). This has meant that Nintendo has expanded the games market beyond its traditional frontiers by targeting non-players (called “casual gamers”), which largely explains its tremendous success. Yet, since sales have exceeded Nintendo’s most optimistic forecasts, the company has frequently suffered from many stock shortages.

Another advantage of Nintendo over its competitors is that it has developed over the years its own universe, with exclusive characters, and thus exclusive games. Zelda, Mario, Pokemons, Donkey Kong are actual videogames legends that can only be played with Nintendo’s consoles. This explains why Nintendo is the first developer on its own games, which generates considerable revenues.

Eventually, since it does not rely on state-of-the-art technologies, the Wii’s production costs are lower than its competitors’, and Nintendo has been profitable from the very first Wii. These differences give Nintendo two other advantages. Firstly, its price is far lower: in Europe, it costs €249 (£179.99) with one Wiimote and the game WiiSports. Secondly, developing a new PS3 or X360 game costs nearly $20 million, versus around $5 million for a Wii game (accordingly, the Wii games retail price is usually lower as well). Though this should have attracted many developers, only a few of them (e.g. Ubisoft or Sega) believed in the potential of the console

4 and decided to support it from the beginning. However, this situation is changing, and the biggest developers (e.g. Electronic Arts) have recently announced many new Wii games.

2010-2012: two years with profound changes!

Major changes happened on the lounge consoles market between 2010 and 2012, and Nintendo’s not exactly in the same shape anymore. First, it appeared that the Wii was the least- used console of its generation (Appendix 3) – even less used than the PS2 and the first Xbox. Then, Nintendo and Sony started a price war, releasing cheaper, yet less advanced consoles (Appendix 2). Thanks to reduced production costsiv, Microsoft and Sony have dramatically decreased their prices, which also obliged Nintendo to sharply diminish the price of the Wii as well. Appendix 4 illustrates three different yet comparable bundles that are proposed to customers by April 2012.

Moreover, Microsoft had started to position differently in the market as early as 2008. The firm strived to reach casual gamers in addition to the hard-core gamers by promoting heavily such exclusive games as “Lips” or “You’re in the Movies”, that emphasize both fun and social interactivity. This competitive move went one step ahead in November 2010, when Microsoft released its new controller called Kinect, which enables to interact with the console and the games only by moving and talking (see http://www.xbox.com/en-GB/kinect for some demonstrations). This was a risky move, since it could have reinforced Microsoft’s image as a follower rather than a real innovator, but that wasn’t eventually the case. Indeed, January 2012 sales figures provided by Microsoft revealed that Kinect was a huge success as it sold more than 18 million! This means a brand-new life for the console, and enables Microsoft not to consider the release of a new console before 2013 or even 2014 (while usually consoles are renewed along a 5 years cycle). The American company also launched specific bundles that included both a Xbox 360 and a Kinect. Sony also launched a new controller with motion sensing capabilities in September 2010, but with a lesser success (only 10.5 million units sold from its release, according to the figures given by Sony in March 2012). Moreover, the PSMove had to be bought separately, as no permanent bundle including it plus the PS3 was released.

5 By combining the best of the two worlds (high-tech graphics and sound + motion sensing capabilities), both Microsoft and Sony considered that they would easily get a competitive advantage over Nintendo. However, the latter also improved the technology of its console with a new controller, called the WiiMotionPlus, which improved the quality of the Wii’s gestures recognition. Yet, this was apparently not enough, as the sales of the Wii have sharply decreased. In 2011, the world sales (in volume) of the Xbox 360 increased by 23%, followed by the PS3 (- 2%), while the Wii was the last one, with a 40% decrease due to its relative obsolescence, to a high level of equipment by the customers, and of course the launch of Kinect and the PSMove. In 2012, even though the Wii’s cumulative sales were higher than the ones of the Xbox 360 and of the PS3 since their commercial launch, the PS3 led the sales (by April), followed by the Xbox 360 and finally the Wii. As a result, Nintendo announced that its turnover had decreased by more than 1/3 in 2011, and that the company had a -685 million € loss.

To change this situation and come back on track, Nintendo announced in June 2011 that the Wii would be replaced within a year (commercial release planned before the end of 2012) by a brand-new console – codename WiiU. Once again, the main innovation will rely in the gameplay which should be (according to Nintendo) considerably changed and enhanced thanks to a 6.2- inch touchscreen built directly into the controller, which will feature a microphone, a gyroscope, an accelerometer, dual analog controls, two shoulder buttons and two triggers, a front-facing camera and a stylus. While not a handheld device, this new controller should provide a new perspective in the games, and it will enable people to play videogame even though a TV. In addition, this new console will, of course, be far more powerful than the current Wii. However, rumours report that it would be less powerful than the current Xbox and PlayStation, which could eventually be an issue for Nintendo given the improvements made by its competitors. So Nintendo seems to keep the same competitive strategy, the question being: will it keep working and enable Nintendo to find a renewed path towards growth? That is, for sure, a fascinating question!

Discussion Questions

6 1. Explain how the analysis of its competitors has helped Nintendo to develop the Wii.

2. How would you describe Nintendo’s competitive strategy?

3. Based on the marketing mix, identify the sources of Nintendo’s competitive advantage in the lounge consoles market.

4. How do you analyse the competitive moves of Nintendo, Microsoft and Sony between 2010 and 2012? How would you then consider Nintendo’s future on the lounge consoles market?

This case was written by Loïc Plé, Associate Professor, IÉSEG School of Management, France ([email protected]), and Head of the New Educational Technologies. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

7 Appendix 1: Chronological release of the current-gen consoles

Xbox 360 (Microsoft) PlayStation 3 (Sony) Wii (Nintendo)

November 22th 2005 (USA) November 11th 2006 (Japan) November 19th 2006 (USA) December 2nd 2005 (Europe) November 17th 2006 (USA) December 2nd 2006 (Japan) December 10th 2005 (Japan) March 23rd 2007 (Europe) December 7,8,9th 2006 (Europe)

Source: Compiled from diverse sources

Appendix 2 : The multiple versions of the PS3 and X360

PS3

80 GB 160 GB 20 GB 40 GB (PAL – 60 GB Feature 60 GB (PAL*) 80 GB (NTSC*) (PAL, (PAL, (NTSC*) NTSC*) (NSTC*) NTSC*) NTSC*) CECHGxx - CECHAxx CECHCxx CECHExx CECHKxx CECHPxx Model Number(s) CECHBxx CECHHxx - Piano Black - Ceramic White Colours (glossy (U.S., Asia and Piano Piano Piano Black Piano Black Piano Black Piano Black finish for all) Japan only) Black Black - Satin Silver (Asia and Japan only) USB 2.0 ports 4 2 4 4 4 2 2 802.11 b/g Wi-Fi No Yes Yes Yes Yes Yes Yes Flash card No No Yes Yes Yes No No readers Chrome trim No Yes Yes Yes Yes Yes Yes SACD support Yes No Yes Yes Yes No No

8 PS2 retro Yes (Hardwa Yes (Hardw Yes (Software Yes (Software No No No compatibility re) are) emulation) emulation) November November August October First available October 2007 March 2007 August 2007 2006 2006 2008 2008 In production No No No No No Yes Yes Plus: all models include Blu-ray/DVD/CD drive, HDMI 1.3a, Bluetooth 2.0, Gigabit Ethernet, PlayStation One backward compatibility through software emulation, and a glossy finish * NTSC and PAL are two analog television systems.

Source: adapted from http://en.wikipedia.org/wiki/PlayStation_3 (retrieved 16th April 2009)

Xbox 360

Features ELITE PRO ARCADE CORE In Production Yes Yes Yes No US $279.99 Suggested retail price US $399.99 US $299.99 (60 GB) US $279.99 GB £199.99 (as of November 18, GB £229.99 GB £169.99 (20 GB & 60 GB) GB £159.99 (until 2008) €2999.99 €239.99 (20 GB & 60 GB) €199.99 discontinuation) October 2007 First Available November 2005 August 2007 November 2005 (replaces the Core) Matte black, chrome disc Matte white, chrome disc Matte white, matte Matte white, Appearance drive drive disk drive matte disk drive Included storage 120 GB HDD 20 or 60 GB HDD 256 MB Flash No Ethernet cable Yes Yes No No Xbox 360 Headset Yes Yes No No HDMI 1.2 (HD) Hybrid Included audio/video Component/Composite Hybrid Component/Composite Composite Composite cables/adapters Digital/Analogue audio dongle Yes HDMI port Yes Yes No (From July 2007 onwards) Xbox Live Arcade Bundled games Hexic HD Hexic HD Region specific compilation disc

9 Original Xbox No (requires hard No (requires hard Yes Yes Compatibility drive) drive) Source: Adapted from http://en.wikipedia.org/wiki/Xbox_360 (retrieved 16th April 2009)

Appendix 3 : Monthly average use of the current-gen consoles (December 2008)

Average usage session Usage trend (Jan 2008- Console Average usage Days (Mins) Jan 2009) PS3 64 6.8 Downward Xbox 360 78 7.1 Upward Wii 58 5.0 Upward Source: The Nielsen Company – Gameplay Metrics (full report available at http://blog.nielsen.com/nielsenwire/wp- content/uploads/2009/04/stateofvgamer_040609_fnl1.pdf)

10 Appendix 4 : Three relatively comparable offerings from Nintendo, Sony and Microsoft in April 2012

Console + game + Controller Price

Wii with Wii Sports + Wii Sports Resort, 139 € / 114.99£ including Wii Remote Plus

Xbox 360 4Go + Kinect + Kinect adventures! 269€ / 279£

PS3 160 Go black + PS3 Dual Shock 3 269€ / 199£ Controller – PS Move to be bought separately

Source: prices in £ from Amazon.co.uk / in € from Amazon.fr (April 2012)

Appendix 5 : Comparing the total sales of the 3 consoles since their release and their 2012 sales (by April 2012)

Cumulative sales since their release Cumulative 2012 sales (by April)

Source: www.vgchartz.com

11 Sources

1. http://www.journaldugamer.com/tag/isupply/ (retrieved April 3rd)

2. http://www.nintendo.com/whatsnew/detail/eMMuRj_N6vntHPDycCJAKWhEO9zBvy PH (retrieved April 3rd)

3. http://www.gamesindustry.biz/articles/third-parties-misjudged-the-wii (retrieved April 3rd)

4. http://www.gamalive.com/Date-de-sortie-du-Wii-MotionPlus.html (retrieved April 3rd)

5. Plé L. (2009), “Sony’s PlayStation 3: the fall of the king?”, in Jobber D., Fahy J., Foundations of Marketing, 3rd edition, Mc Graw-Hill, pp. 211-214.

6. http://www.journaldugamer.com/2006/11/18/la-ps3-coute-cher-pour-sony/ (retrieved April 3rd)

7. http://www.liberation.fr/economie/0101559915-le-raz-de-maree-du-casual-gaming (retrieved April 15th)

8. http://www.gamesindustry.biz/articles/consumers-to-be-hit-by-ii-price-rise (retrieved April 15th)

9. Joffre O., Plé L. (2007), “ Nintendo : Une DS à laquelle tout le monde dit Wii ! ” in Joffre O., Plé L., Simon E. (coord.), Cas en management stratégique : Autour du diagnostic, Éditions EMS, pp 46-61.

10. http://www.gamesindustry.biz/articles/wii-tops-us-february-hardware-sales (retrieved April 3rd)

11. http://www.gamasutra.com/blogs/DonDaglow/20090323/966/The_Four_Stages_of_ Wii.php (retrieved April 15th)

12. http://www.gamasutra.com/php-bin/news_index.php?story=22087 (retrieved April 3rd)

12 13. http://www.ft.com/cms/s/0/d5adbcfc-229d-11de-9c99-00144feabdc0.html? nclick_check=1 (retrieved 8th April 2009)

14. http://www.liberation.fr/medias/0101310298-ps2-la-replay-station (retrieved 8th April 2009)

15. http://blogs.lesechos.fr/en-direct-du-ces/kinect-tire-les-ventes-de-la-xbox-et-s-invite-sur- les-pc-a8463.html (retrieved April 2012)

16. http://www.generation-nt.com/ps-move-playstation-sony-unites-vendues-actualite- 1553811.html (retrieved April 2012)

17. http://www.gamescharts.fr/2012/03/bilan-monde-2011-ventes-de-consoles/ (retrieved April 2012)

18. http://www.pcinpact.com/news/68565-nintendo-pertes-wii-u-ds-3ds.htm (retrieved April 2012)

19. http://www.engadget.com/2011/06/07/the-wiiu-controller-revealed/ (retrieved April 2012)

20. http://www.nintendolife.com/news/2012/04/developers_wii_u_less_powerful_than_ps3_ and_360 (retrieved April 2012)

13 i This is the price of the Xbox 360 Elite. We do not consider the X360 Core as an actual competitor of the PS3, because of its many limitations. ii These figures come from www.vgchartz.com (accessed April 16th 2009). iii This situation has been changing when this case study is written. In particular, some strong exclusive games seem to explain a sharp increase in the PS3 sales on the Japanese Market (Yet, it is not the case at all in Europe or in the United States). iv Late December 2008, Sony was supposed to lose $50 on each console sold $400.