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Of Hedgehogs and Plumbers:

An Investigation of Marketing Strategies in the American Home Console Industry

By:

Daniel DeMaiolo

Michael G. Pontikos

ADVER 3711 Marketing Research

April 23, 2008

Daniel DeMaiolo

Michael G. Pontikos

ADVER 3711

23 April 2008

Of Hedgehogs and Plumbers:

An Investigation of Marketing Strategies in the American Home Console Industry

From rescuing damsels in distress locked away in castles, slaying foul monsters in mythic

lands, zooming through loop-de-loops in bizarre environments to realistic of

everyday , the American home console industry emerges vibrant as ever. Even

more interesting is the ability of such tiny pixels and sound bits to capture American and

wallets. Through examination of the of the industry and the subsequent targeting, pricing,

and positioning strategies, a portrait of the lucrative game console industry emerges.

Although many of the major home console manufacturers over the years share a similar goal

of selling home consoles to consumers, most of the corporations began in a completely different

industry long before the birth of the gaming business and the subsequent console . To

illustrate, Co., Ltd. initially manufactured playing cards in 1889 “called ‘Hanafuda’

[which were] tenderly hand crafted using the bark from the mulberry and mitsu-mata trees” and

later expanded to “love hotels” and “instant rice” (N-Sider , “Nintendo”). In addition,

Sega Corporation, formerly known as Honolulu-based Standard in 1940, “began

importing jukeboxes to supply American military bases in Japan…[and] eventually expanded

into amusement game imports [with the slogan] ‘service and games’ ” from which their name is

taken (Pollack, “”). In 1965, Sega merged with Rosen Enterprises which “dealt in

everything from instant photo booths to mechanical arcade games” (Sega Corporation, “Sega

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History”). Even newer home console makers such as Corporation and

Corporation began in the unrelated industries of transistor and operating systems

respectively before entering the gaming market.

Although many of the previously mentioned corporations were destined to enter the video

game home console industry eventually, which generation of the seven home console wars they

would enter would be decided in time. To create the First Generation, Ralph Baer in 1967

“design[ed] the first video-game console that works on a standard …known as the

Brown Box” which would ultimately illustrate the origins of the Odyssey (Time

Magazine). After a successful First Generation which would also see and Sears

Corporation partner to release “” for home consoles, the Second Generation’s continued from simple devices such as the that resulted in a booming home console industry; however, “the glut of unlicensed games and new home systems…lead to a major video-game industry in 1983-84 in which many of the gaming companies [went]

bankrupt” (Time Magazine). Inevitably “the crash [of the Third Generation] was caused by too

many derivative or poor-quality game cartridges from too many manufacturers” (Miller,

“History”). During the Fourth Generation from 1985-1989, improved as well as game

quality; the competed (and lost) to the Sega and the Nintendo

Entertainment System. Ultimately Nintendo “sold more than 3 million NES units in its first two

years of release; [and] it is estimated that, over its entire product life, more than 65 million NES

consoles were sold worldwide, along with 500 million cartridges” (Miller, “History”).

Generation Five of the console wars, 1989-1995, “featured 16-bit processors, more detailed

graphics, and more imaginative games” (Miller, “History”). Although new consoles such as

NEC’s TurboGrafx-16 tried to grab market share, Generation Five was dominated by a brutal

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console war between beloved character from Nintendo’s Super Nintendo

System and from the System. Generation Six of the console

wars from 1995-1998, characterized by “high-powered and dedicated graphics

processors that enabled extremely realistic graphics and game ,” introduced the first three- dimensional characters and environments as well as a new competitor for Nintendo and Sega in the form of Sony’s PlayStation (Miller, “History”). In an interesting turn of events, “the

PlayStation unseated both Nintendo [64] and [the] Sega [Saturn] to become the leading home system” which would go on to sell “50 million units worldwide” (Miller, “History”).

Generation Seven of the console wars, 1998-2006, consisted of amazing graphics, improved

game play, solid storylines, and record breaking sales in an established industry with competition

from Sega’s , Nintendo’s Gamecube, Sony’s PlayStation 2, and the introduction of the

new by Microsoft. In terms of competition, Sega, due to financial woes, bowed out of the

industry. In addition, Sony, in 2005, boasted “101 million PlayStation 2 units sold…[while]

Microsoft's Xbox was second with 24 million…[and] Nintendo's Gamecube came third with 22

million” (The New Zealand Herald, “Nintendo”). Currently the Next-Generation home console

war, characterized by high definition graphics and innovation, is being fought by Nintendo’s

Wii, Sony’s PlayStation 3, and Microsoft’s . Although it is much too early to declare a

winner, it would seem as if Nintendo’s will emerge dominant followed by Microsoft’s Xbox

360 and finally with Sony’s PlayStation 3 losing all advantageous market share as projected by

“total numbers for 2007 (rounded up to the nearest 1,000) [that] show the Wii leading with

3,958,000 consoles sold, Xbox 360 in second place with 2,589,000, and the PS3 following in

third with 1,294,000” (Quirk, “Game”). Through a massive history of over seven generations of

home console wars, it is clear that the is thriving in America.

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After glimpsing into the past successes and failures of many home consoles throughout the industry’s rich history of console wars, it becomes evident that a firm’s marketing strategies related to targeting, pricing, and positioning determine survival in this cutthroat industry.

In terms of targeting, one of the reasons home consoles failed in the beginning was because several companies spread their targets too thin. This is evident by corporations such as Atari partnering with Sears, a mass retailer, to distribute “Pong” for home consoles. Despite these major setbacks, the first real successful targeting occurred when Nintendo in 1989 and 1990 focused on “children and a substantial part of the culture as a whole…[that were] more influenced by interactive electronic media---in their simplest form, video games---than by television” (Sheff 8). To confirm this, “a study by Nielsen Media Research, showed that within a particular age group more kids were playing Nintendo than were watching the major children’s

TV network, , at certain times on certain days of the week” (Sheff 8). Following

Nintendo’s lead, “in 1990, Sega aimed its products at a slightly older market than its main competitor, Nintendo” (Sega Corporation, “Sega History”). Specifically, American home consoles were targeted at consumers in “Generation Y [which] includes the 72 million

Americans born between 1977 and 1994…[that] exerts influence on music, , ,

[and] videogames” (Kerin, Hartley, Berkowitz, and Rudelius 76). In particular more males have been targeted for home console sales as exhibited by evidence that there has been “lower use of video games than computer and games by women” (Kerin, Hartley, Berkowitz, and

Rudelius 80). Although males have been primarily targeted more, a study of eight hundred people by Market Data Corporation in the early 1990’s revealed that “more girls between the ages of six and fourteen were becoming primary players, and their of satisfaction was intensifying” (Sheff 399). With rapidly diversifying consumer markets, companies such as

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Nintendo realized “segmentation was a …[and they] would have to market specific products

to specific groups” in order to maintain dominance with their market share (Sheff 399).

Although targeting has been rather consistent over many generations of consoles, new trends in

targeting range from Sony expanding “its user base by developing PlayStation 2 video games for

children under 13 years old” and adding a built-in DVD player to appeal to older audiences,

Microsoft’s Xbox 360 targeting more hardcore, mature, and older gaming audiences, and

Nintendo’s Wii targeting everyone from the experienced male , untested newcomer, and

the elderly Baby Boomers (Kerin, Hartley, Berkowitz, and Rudelius 297). Without successful

targeting, American home consoles would fail to even exist.

After evaluating potential consumer targets, an effective pricing strategy must be

implemented to even begin attracting attention. As the past has illustrated, if a corporation

employs an unrealistic skimming strategy that establishes a price that is too high such as with the

3DO Interactive Multiplayer and PlayStation 3, which both sold for $699 each at one point, the

system’s sales can struggle and cause the product to rapidly shift from an introductory to a

decline stage. In contrast, consoles such as Sega’s Genesis, Nintendo’s Wii, Microsoft’s Xbox

360, and Sony’s PlayStation 2 that have aimed in the $150-$399 range have all enjoyed much success. Although a penetration pricing strategy that involves lowering prices may result in increased sales and market share, such a practice doesn’t always translate into profit. In fact, “a tear-down analysis by market researcher iSuppli of the high-end Xbox 360 found that the materials…cost Microsoft $525 before assembly…[while] the console sells at retail for $399, for a loss of $126 per unit” (Horngren, Sundem, Stratton, Burgstahler, and Schatzberg 219).

Similarly, the Nintendo DS had a “penetration price likely at or below its cost, but the price of its video games (complimentary products) was set high enough to cover the loss and deliver a profit

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for the Nintendo product line” (Kerin, Hartley, Berkowitz, and Rudelius 372). Throughout the

generational console wars, corporations in this industry have started to find that although a

skimming price strategy seems effective in generating hefty profits, penetration pricing and

eventual price slashing have been the most effective strategies in introducing the product into a

stable market.

With an established target and price in , marketers finally utilize a

variety of tools to position the consoles in widely different ways. Given that a product life cycle for a typical home console moves “from the introduction stage to maturity in five years,” marketers in this industry are challenged with a brief amount of time to position their products

(Kerin, Hartley, Berkowitz, and Rudelius 294). One method of positioning a new console is through a strong brand name, which according to Nintendo Co., Ltd.’s SWOT Analysis, “gives the company an edge over its competitors” (Datamonitor). Similarly, positioning is directly affected by corporate strategy and image as illustrated during Generation Five when “Nintendo, supremely sure of itself, tends not to introduce a new game until it has compelling ready for it…[while] Sega, being the underdog, has been more willing to out new hardware, even if only a little software is available” (Pollack, “Sega”). Image also allowed

Sony, a leader in products, to easily integrate its successful PlayStation consoles into

the market simply based on the credibility of the firm in related multimedia industries. From a

competitive standpoint, brand names, although often effective in generating sales, have been

reversed against companies with limited target markets such as Nintendo during Generation Five

and have led to successful positioning for competitors like Sega. After seizing the opportunity

by spending “$10 million in advertising, Sega attacked Nintendo head-on…[with a slogan of]

‘Sega Genesis does what Nintendon’t’ ” (Sheff, 353). Inevitably this offensive strategy helped

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position the Genesis in a much more competitive position when “Sega began to embody

cool…[as] younger kids and girls liked Nintendo, but the trendsetters in the video-game world,

young teenage boys, were talking Genesis” (Sheff, 354). By aiming at a slightly older market,

Gilman G. Louie, chairman of Spectrum Holobyte, in a 1993 New York Times article noted,

“Sega has succeeded in positioning itself as the cooler machine. The MTV generation plays

Sega and your little brother plays Nintendo” (Pollack, “Sega”). Comparatively speaking, even

Sega’s mascot, Sonic the Hedgehog, was positioned as a much “cooler” character than

Nintendo’s Mario. What seemed to work for Sega carried on throughout the other generational

wars when both Sony and Microsoft grabbed valuable market share by targeting older audiences

and conveying a message of “coolness” for more mature games. Only recently has Nintendo

combated these shifts in the industry by increasing target markets to a much wider range with the

Nintendo Wii. Another method that corporations have positioned their products is through

public endorsements. Throughout the home console industry history, public endorsements have

led to successful positioning as illustrated by Sega signing Joe Montana and Michael Jackson for

Genesis games to maintain the “cool” image as well as an obvious Nintendo enlisting an endorsement by for the SNES (Sheff). Similar to endorsements, sales promotions and promotional tie-ins also have helped position consoles. During recessionary periods in the American economy, the industry often found itself without many ways to introduce newer more expensive consoles until companies such as

Nintendo began bundling games such as “Super Mario World,” an extremely coveted game based on the success of previous installments, “like the prize in a box of Frosted Flakes” (Sheff,

11). By including premiums or “merchandise offered free” of charge in the promotional

strategy, “companies encourage customers to return frequently or to use more of the product”

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(Kerin, Hartley, Berkowitz, and Rudelius 516). Bundling software with each console soon

became a vital tool for positioning in the industry as illustrated by Sega’s response in bundling

“Sonic the Hedgehog” with each Genesis; moreover, such a move allowed for continued success

as “a test conducted by a market-research firm [indicated] seven out of ten kids preferred ‘Sonic’

to ‘Super Mario World’ ” (Sheff, 363). In terms of promotional tie-ins, well-known examples include Pepsi and Kool-Aid partnering with the SNES and Mountain Dew coupled with the

Xbox 360 (Sheff). Finally, advertising campaigns serves as a vital portion of the console

positioning strategy. During the Generation Five war between Sega and Nintendo, Nintendo

“stepped in with a marketing blitz [of] twenty-five million dollars…[in] TV commercials for the

September 1991 launch” while Sega’s “television commercials, which vied for airtime with

Nintendo’s massive ad blitz, showed a kid resisting a pushy salesman’s attempt to sell him the

more expensive SNES;” in addition, the ads “featured the ‘Sega advantage’ ” and depicted

‘Super Mario World’ [as] timeworn compared to ‘Sonic the Hedgehog’ ” (Sheff, 362-364). At the time, “Sega was quickly recognized by its fast-paced, ‘in-your-face’ marketing and advertising campaigns, putting the company in the ranks of Nike® and Levi’s® as favorite

brands among America’s youth” (Sega Corporation, “Sega History”). As Sega successfully

illustrated, to remain competitive in this industry, a firm needs to employ several marketing

campaigns that constantly remind consumers of the console’s presence. Today, Nintendo

continuously pushes the Wii through a “Wii would like to play” ad campaign that can be seen

throughout the major television networks. Although advertisements for the home consoles can

be seen virtually anywhere, history shows that ad blitzes in gaming magazines and television serve as two of the most effective mediums for communicating a new console. Collectively brand name, corporate image, target market, public endorsement, sales promotions, promotional

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Although the American home video game console industry is relatively new and will continue to evolve, any corporation considering entering the market should strongly analyze the history, appropriate target markets, relevant pricing strategy, and most effective positioning tools if any shred of success is to be achieved. After properly analyzing these facets of the various console wars, it becomes evident that this cutthroat industry isn’t a game for all players. Without a continuous and thorough analysis, industry players may find themselves with a .

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Works Cited

Datamonitor. Nintendo Co., Ltd. SWOT Analysis. 2007. Datamonitor Company. 31 March

2008.

Horngren, Sundem, Stratton, Burgstahler, and Jeff Schatzberg. Introduction to Management

Accounting. 14th ed. New Jersey: Pearson, 2008.

Kerin, Hartley, Berkowitz, and William Rudelius. Marketing. 8th ed. New York: McGraw-

Hill, 2005.

Miller, Michael. “A History of Home Video Game Consoles.” InformIT. 1 April 2005.

Pearson Education. 31 March 2008.

http://www.informit.com/articles/article.aspx?p=378141&seqNum=6

N-Sider Media. “Nintendo History Lesson.” N-Sider Media. 31 March 2008. http://www.n-

sider.com/articleview.php?articleid=45

Pollack, Andrew. “Sega Takes Aim at Disney World.” 4 July 1993.

Online. 31 March 2008.

http://query.nytimes.com/gst/fullpage.html?res=9F0CE6DD113FF937A35754C0A96595

8260&sec=&spon=&pagewanted=4

Sega Corporation. “Sega History.” Sega Corporation. 31 March 2008.

http://www.sega.com/corporate/corporatehist.php?item=corporate_history

Sheff, David. Game Over: How Nintendo Zapped an American Industry, Captured Your

Dollars, and Enslaved Your Children. New York: Random House, 1993.

Time Magazine. “Video Game History.” Time Magazine Online. 2005. 31 March 2008.

http://www.time.com/time/covers/1101050523/console_timeline/

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The New Zealand Hearld. “Nintendo aims to get back in play.” 23 June 2006. The New

Zealand Hearld. LexisNexis Research . 31 March 2008.

Quirk, Gregory A. “Game Market Still up for Grabs.” Electronic Engineering Times.

10 December 2007. LexisNexis Academic Complete. 31 March 2008.

http://www.lexisnexis.com/us/lnacademic/auth/checkbrowser.do?ipcounter=1&co

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