Shifting to a Blue Ocean


Copyright: ZogDog


Blog: RL

[url=]Varian[/url] said:
What new market is Nintendo headed for?

This question is strangely avoided by observers and, most importantly, Nintendo's fans. Nintendo has triumphantly declared that they are not competing with Sony and Microsoft for the market. But what is the market? The video game console marketshare. Nintendo has said it is not competing for it and entering a new market. I don't think the gravity of this has yet penetrated people's minds.

Nintendo has said they are leaving the video game console market (as traditionally known). Nintendo is going to let Sony and Microsoft fight over the video game console market. "We are not competing," Nintendo insists.

"But Varian," the fan would say to me. "Surely you realize what Nintendo meant by that. Nintendo means they intend to 'grow' the market by attracting a wider demographic instead of just the hardcore gamer. When they say they are not competing, they mean technologically. The Revolution will not have the same horsepower as the PS3 and xbox 360."

But the fan is wrong with this assumption. Nintendo meant exactly what they said. They are not competing for the video game console market anymore. The Gamecube will be Nintendo's last traditional video game console. Video game journalists, themselves caught in the circle of hype, keep looking at the consoles as a three horse race. But it is a two horse race. Sony and Microsoft are racing to win the console video game market. Nintendo has taken its horse and left.

Let me ask the fan this question: why do analysts leave out Nintendo entirely in their 'predictions' of the Next-Gen console war? "Because they are biased against Nintendo!" No. It is because the market analysts know that Nintendo is not interested in that market.

Our current console generation, the sixth generation of consoles, had four major players (Sony, Sega, Microsoft, and Nintendo) with two producing their last video game consoles as we know it. The Dreamcast was Sega's last console because of financial troubles. The Gamecube will be Nintendo's last video game console (as we see them today) because Nintendo is ready to define a new market. The Nintendo's fans greatest fears have become true, but it'll be the best thing to happen to Nintendo. If Nintendo didn't jump into new markets, it would still be making trading cards. Did you actually expect Nintendo to be in the video game console market forever?

I don't expect you to believe me. But I will prove that not only is Nintendo getting out of the video game market, I will put forth some plausible ideas of the new market Nintendo is aiming for, one in which everyone will be a part.

Nintendo's Chief of Marketing, Reggie, outlines Nintendo's business philosophy:

The first is a first the concept of "Blue Ocean Strategies." I don't know how many of you might have taken a look at this book. I've read it and I'm a big fan of the thinking. Really what it talks about is how, from a company perspective, you ought to focus on expanding your market boundaries versus singularly being focused on your competition. The thought being, if all you do is focus on your competition, imagine it's like sharks in the water, dealing with blood in the water, constantly going at each other. Take a wider view, look at broader opportunities out there in your marketplace.

What's important about that is if you do it successfully, you're able to create new demand -- demand that never existed in that way before. Part of this is thinking about what can be versus what is. Thinking about broader horizons, broader opportunities.

Most people paying attention to the news in this industry already are aware of Nintendo aiming at wider demographics including females, elderly, lapsed gamers, along with bringing the 'hardcore' and their fanbase along.

The DS is a trial run of Nintendo's new business philosophy. Games like Nintendogs and Braintrainer are bringing in females and older adults. But let us go to the second pillar of the Nintendo Philosophy this next generation cycle.

The second book is "The Innovator's Dilemma." I actually had the opportunity to meet the author of this. The thinking is similar, slightly different bend. What this focuses on is the concept of disruptive technologies. There's a lot of examples in history that touch on this. The thought being that if you are a market leader, you focus on doing what you are doing a little bit better.

And then out of nowhere, some one comes with a disruptive technology and impacts your marketplace. A great example is one of our competitors. You look at how Sony was so focused on creating a better Discman, a better disc-playing portable device, MP3 players came out of nowhere and impacted their marketplace. And then, out of nowhere, came Apple with IPod and ITunes and further disrupted their marketplace.

What this talks about is creating new definitions of performance, new definition and what the consumers wants and delivering on that in new and provocative ways. These disruptive technologies typically appeal to new customers, people entering the category for the first time, but done successfully really blow open a marketplace and bring all types of consumers -- new, existing -- into the marketplace.

Again, using the DS as an example, the 'disruptive' technologies of the DS would be the two screens for visual, the touch pad and microphone for input, along with wi-fi. The DS outselling the PSP may very well be a forerunner of things to come.

Mr. Iwata has been focusing on these key thoughts truly for about the last three years. These are excerpts from a variety of these speeches whether its at Tokyo game show, GDC, even our own E3 events. They are all focused on creating disruptive technologies, approaching the market in a different way offering new news and innovation to the consumer.

Now listen carefully to what Reggie says next:

We can't simply expand the market. If that's all we try to do, slowly this industry will die. It is our responsibility to make games for all skill levels. Technology can't advance the business. The idea that Revolution doesn't follow the conventional path of game systems. That's what we're about; disruptive technologies, new ways to think about the market place, and driving the industry forward.

I bolded it to drive home the fact that Nintendo is not interested in expanding the existing video game market. Nintendo wants to enter a new market.

But why is Nintendo getting out of the traditional video game console war? Why is Nintendo ceding the war to Microsoft and Sony?

A Playstation/Xbox fanboy might say, "Because they can no longer compete! LOL!!1!" Ahh, but fanboy, listen to what Reggie says next.

There are a lot of examples that I can speak to that show how we are bringing this into practice today. But certainly we ought to step back and look at why we are doing this. I think many of you have seen this data. This is the Japanese marketplace in the gaming industry. Certainly not a pretty picture. This is a downward trend, and they have had this for years. Interesting tidbit. This year software sales are actually going to be up in Japan. Why? Nintendogs, Brain Training, key games and key innovations that we have brought to the marketplace behind DS. You're all saying "That's Japan, that's over there… that's not here."

Here are a couple things to think about: This is fresh data; current marketplace. Last 2003-2004 decline years. This year it will probably be up on a year over year basis. It has taken two systems in the handheld place: DS and PSP. Plus we have Xbox 360 to drive growth in a year over year basis. Three systems to drive that. "But c'mon Reggie, still that is it really a good example?" You tell me. Was September a fluke? Down 24% software sales year over year. The entire third quarter down year over year. Was it still a fluke? You tell me.

Let's look at the install base for the last four generations. First thing to note: As recently as about a year ago, projections were made that the current generation would reach 60 Million household penetration: Ain't gonna happen. Ain't gonna happen. Another couple tidbits: So this chart is pure number of units sold. It doesn't take into account duplicate ownership, and doesn't take into account population growth. You overlay those two facts to get a percent population with a console in the household, and that's what it looks like. 8 Bit years, 31% of households had a gaming system. This year, where is going to end up? Somewhere between 31-32%. The growth we have seen has been driven by population growth, and by duplicate ownership.

What Reggie is saying is that the video game console market is dying. November sales numbers have come in and the sales are in free fall.

"Haha, Varian, this shows how much you know. This drop is because of lack of blockbusters like GTA: San Andreas and Halo 2!" But GTA: Liberty Stories came out along with the highly anticipated Perfect Dark Zero. An entire new console launched that month. Yet, sales are down. (In fact, seven of the top ten best selling games for 2005 were the same exact games of 2004! And the three new games? Sequels like Madden and Gran Turismo.)

"It is because we are at the tail end of a console cycle. Everyone is saving their money for the upcoming Next-Gen systems." But we are already in the Next-Gen. Xbox 360 is out. The 'next-gen' handhelds of the DS and PSP are out.

Whether you believe the video game market is slowly dying or not, Nintendo does believe it. This is why Nintendo is leaving the video game market. Iwata said, "We are not competing not because we can't, but because we don't want the prize." Why battle over a shrinking market?

So what is Nintendo's new market? No one is quite sure. But based on Nintendo's past actions and statements, I would have to say they are interested in being the first console on the Virtual World Market.

The video game market has been around for a little bit more than twenty years. In that time, we have seen video games evolve into deeper, more complex, products. Now, like it or not, video games are ascending into a new media. Why buy a video game when you can, instead, buy a virtual world?

Nintendo is not competing in the video game market. Nintendo is transcending the video game market.

From Sunrise to Sunset, how video games created this brave new market.

Before we look at this blossoming new market, let us see how it was created.

The predecessor to video games was pinball (a spin-off from pool).The arrival of the microprocessesor furthered pinball's obsession with lights and other technological marvels to draw attention (similiar to how video games today keep updating its graphics to draw attention). Games like pinball and, its cousin, the ping pong tennis table, were cheap entertainment and were embraced by the masses.

Atari's Pong was not just the first commercially successful video game, but the ascension of pinball and ping pong into a higher form of media. Bouncing a ball on a TV was truly incredible back then. The first video games were modeled after its predecessor market: forms of table tennis, pinball, even re-filling beers made it to the TV screen.

The pinball machines began to be replaced by its successor, the arcade machines. The arcade machines used the same coin-op that pinballs did. Instead of bouncing balls, the games used their limited technology to create some form of new environment. Space Invaders immersed people in thinking they were in a spaceship fighting off aliens. Missile Command immersed people in thinking they were fighting off future Russian assault. Defender created the first 'virtual world' where things occured in the game that was not on your screen. The game environments did not change though. The only difference from one level to the next would be faster and more numerous enemies. You could not beat the game. You could only die and your 'score' was the yardstick of your achievement.




Ironically, the Atari 2600's first controllers were called paddles due to their use in Pong. This is no doubt in reference to the 'paddles' of table tennis. As table tennis declined in popularity, the 'paddles' became known more for being controllers to the Atari 2600 than for the table tennis game they originated from. What is ironic is that the Revolution's controller resembling a TV remote will be remembered in the future as, "Ahh, that is the original controller for the Revolution!" rather than what it was based off of: a remote for televisions (yes, the use of televisions are in steep decline and, perhaps twenty five years from now, be seen as a relic).

So far, the 'world' video games could make was practically non-existant. Super Mario Brothers was the massively popular game that defined platformers but introduced to most people the concept of 'stages'. No longer would levels be identical to each other where you can only die. After beating the stage 1-1, you went to 1-2, then 1-3, and so on. Unlike most of the Atari era games, you could actually beat this game. The linear stages greatly increased the concept of a virtual world as other platform games of the time adopted them.

Other games at the time, on PC and consoles, would adopt the overworld that represented towns and dungeons with a symbol, which lead to a new map when entered. When Miyamoto designed the first Legend of Zelda, his interest was solely in immersion. The caves he visited as a boy, with that sense of exploration, would return in this game. Zelda had an overworld with entrances to dungeons that led to new maps. This made the game appear to have much more of a 'world' than the linear stages of Super Mario Brothers. Other games were increasing the connections to represent a 'world' such as games like Metroid where there were no stages (you could scroll left and right and the game forced you to backtrack to emphasize this 'world'). The next incarnations of Mario contained the free scrolling effect but placed an overworld to connect the stages as can be seen in Super Mario Brothers 3 and Super Mario World. The mode 7 chip was a signal that games were creeping closer to 3d.




With 3d, games could finally play in a world with all dimensions. The early 3d games, of course, were crude and blocky. But they became smoother and better animated. The shift to 3d demanded the return of stages. But that barrier eventually broke away. Games like GTA 3 wowed everyone with how much of a full 3d world was shown seamlessly.


And while this was all happening, games began to go online. Soon, entire vast 3d game realms would go online and be populated by hundreds of thousands of real people. The virtual realm was beginning to come alive. Today, it is very close to becoming a world unto itself, a Virtual World that resembles very little to a 'video game'.

This twenty year transistion from Pong to virtual worlds contains many players and many details. Due to space and time, there is no point in going through them. But there is one long running game series that easily shows the spirit and evolution of this trend to become a Virtual World.

Now, the video game industry is in a 'sunset'. The sales for games in Japan have been in a steady decline for a decade. That decline is now spreading to other markets. Game sales keep dropping each month now. Will as many people buy the new consoles as last generation? This is doubtful due to the higher console prices, the addition of HD TV (very few people have it), and the increase to the price of games.

Some say this is a fluke. After all, we paid $70 for Final Fantasy 4 and 6, right? But is Final Fantasy 12 going to be as brilliant as 4 or 6? We paid half a grand for the old PCs in the early 80s. But are these new consoles going to equal an amiga? The sales numbers don't lie. Audiences are drifting away from video games. As more and more casual users go away, the more and more hardcore players are left. This is why Iwata says that if we keep going the road we are on, "all we can do is wait for the industry to die."

So the fan says to me, "Exactly, Varian. This is why Nintendo unleashed the new controller. The game industry is suffering from lack of innovation. The controller will spark new innovation which will attract new audiences."

If this were true, that would mean Nintendo would still be competing with Microsoft and Sony for marketshare. Nintendo is not competing. Nintendo doesn't want the market Sony and Microsoft are after.

It is amazing to me that people think the 'revolution' is all about the controller. Do you actually think Nintendo would lay out all their aces now with no other surprises later on? This is Nintendo; they like to keep secrets.

But as Nintendo has continually stated, the purpose of the hardware is to service the software, not vice versa. The big revolution is not going to be what hardware the Revolution finally is but what the software is. The video game market has seen its run from its humble Pong and Space Invaders to what will probably be its triumphant ending with Zelda: Twilight Princess, GTA 4, and perhaps Unreal Tournament 2007. The Pinball market passed the torch to the video game market and now it is time for that torch to be passed again...

A Birth of a New Industry

How do you define a video game? 'Video' means TV (or monitor). And the 'game' usually consists of being given a set of objectives where you challenge is merely memorizing and reacting to patterns. This makes playing and mastering video games almost like a computation. This will target only the left hemisphere of the brain.

As games become worlds, your own creativity will be used. Instead of memorizing patterns, you will be interacting with others and feeling the game's immersiveness. You will be able to 'create' games inside these worlds. This will target the right hemisphere of the brain.

What are the most popular video games now? They are the games that are very close, if not already, ceasing to be video games and budding into virtual worlds.

-World of Warcraft (appropriate name)
-Sims (which females love)
-Grand Theft Auto sequels
-And more!

Even the 'traditional games' such as Age of Empires III had to incorporate a type of online community. Civilization IV had to re-invent itself, forcing itself to be multiplayer and mod friendly to become an online community. But games like Quake and Half-Life fully showed this trend as their mods and online communities became more popular than the original games!


But what about Nintendo's games? Nintendo has not put any in-house software on the Gamecube for quite a while. The most recent Nintendo software has been on the DS. While Nintendo continues existing franchises like Mario Kart, its new games cannot be defined as games.

Is Nintendogs a game? What about Animal Crossing? Both are hugely popular, tearing up sales (and are system sellers). Both were recieved very highly from females. Games like Brain Trainer was recieved very highly from older adults.

The best description for these games is to describe them as 'worlds'. Nintendogs is a 'virtual puppy' while Animal Crossing is a 'virtual village'. These are very crude worlds but the point is that the game has its own world inside the cartridge or Internet. Whether you play or not, changes will occur in Nintendogs and Animal Crossing. This is the clear difference between a 'virtual world' and a 'video game'. And with any MMORPG, we know that the game world lives and evolves whether we play or not.



"We will attract casual gamers better than anyone, using consumer-friendly content, control, and the internet. We will even draw non-gamers to the revolution, showing them how much fun there is. We call this all-access gaming. It is my job to run a global company."
- Satoro Iwata (E3, May 2005)

Reggie:"I hope [massively multiplayer online games] are really explored on this system. That's a genre, from the home console standpoint, that really hasn't been explored very well."

Nintendo wants to embrace the MMORPG. The software of the Revolution will not be 'video games' as we know them but more and more like 'virtual worlds'. This is where all the money is.

Ultima Online quickly made more money than all of the Ultima games put together. Game analysts believe World of Warcraft is crashing the PC game market because people would rather pay an extra $15 to stay in that world which keeps changing than $50 for a traditional video game that can be beaten. And everyone knows how phenomenal the sales were for the Sims. How many expansion packs does that series have? I lost count.

Business managers are trained to see trends before they arrive and to 'ride the wave' so to speak. Microsoft 'rode the wave' of the rise of personal computers. Google 'rode the wave' of the increasing dominance of the Internet. Nintendo once 'rode the wave' with the NES. This time, Nintendo plans to hop onto another wave and leave poor Sony and Microsoft in the old stagnating market with their expensive machines.

Back in the year of PONG, if I told you the video game industry would be in the billions, you would not believe me. But the first entrepreneurs understood and saw something no one else did. They rode the wave.

How big can the 'virtual world' industry become? Let the CEO and founder of the biggest MMORPG company, NCsoft, explain:

Jack Tin Kim:"When I started NCsoft, everybody asked me why I wasn't building NCsoft as an information company, like Microsoft or Yahoo! or Google. But my belief is that something people really want to have is something entertaining. I believe that the future of the Internet is on the entertaining side, not just on the information side."

He compared the advent of massively multiplayer games to the arrival of the Web:

"I think that the number of Internet users, before the Web arrived, was not big. It was very small compared to the number after the Web. Like that, in the games industry, I think we are at the front of the arrival of something new, which will make normal people enjoy gaming."

While he would not be drawn on just how big that market could potentially be, Kim - who is widely recognised as one of the top entrepreneurs in the Asia-Pacific region - commented that

"I'm not sure NCsoft can do it, but I believe that gaming companies will be bigger than Google. Far more people want to enjoy the Internet, not just searching it."

Could Nintendo have itself set to become bigger than Google? Is Nintendo one of those 'gaming companies' that Jack Tin Kim describes?

Almost certainly. Nintendo, one of the oldest gaming companies, has very deep pockets and can deliver such entertainment to the masses. "We are going to re-define online gaming," Nintendo boldly says, pointing that systems like Xbox Live is outdated and only has 10% of its owners using it. "We are going to focus on community building," Nintendo says.

Jack Tin Kim avoids saying how big the new Virtual World market could be, but consider:

-Subscription fees instead of one time purchases (This eliminates most piracy and turns game companies from product oriented to service oriented)
-Appeals to all demographics and ages (Games like WoW really prove to be successful across all demographic lines)
-Virtual Real-Estate (Real-Estate is prized since there is only so much land, right? Virtual real estate is becoming more and more a reality and people pay big bucks to buy and to trade such 'properties'. Imagine game companies becoming the Internet's landlords.)
-Little virtual industries (This is already a reality with Chinese Gold Farmers or others who sell items and gold for real cash. How many little industries could these Virtual Worlds create?)

We need to come to the realization that the Nintendo Revolution cannot be compared to the Xbox 360 or Playstation 3 as they are working very different markets. One market is shrinking and the other is rapidly growing. While Nintendo will continue its franchises and initially make the traditional video games, as will third parties, the focus is to move beyond. When Animal Crossing for the Gamecube came out, Nintendo advertised and got people to try out the new 'little virtual world' with the collection of 'old NES games' that people could find. Many people bought the game solely for this reason in the ambition to create a 'virtual console'. Along the way, they discovered the 'virtual world' and realized the 'old NES games' were a carrot to lead us to that direction.

Is it any surprise that the first software announcement of the Revolution is the Virtual Console where we can play all the NES, SNES, and N64 games once again? Like the Gamecube's Animal Crossing, this is only a carrot to get us to jump into the new direction of software the Revolution will be offering, software without stages and scores, software that lives and breathes whether you play it or not, software for the entire family in which the entire world can play... together.

Sony and Microsoft's new consoles, like overpowered bloated battleships, have already begun firing at one another in the red filled waters. Nintendo has made its console, its ship, sleek and more maneuverable at it sets sail away to a new horizon...

...where a blue ocean awaits.

"The stance Square Enix takes on the new networking plan in relation to Revolution is the most intriguing. "What increased our interest further, is that the next step is already being prepared for Revolution." Nintendo's networking plan is, according to Wada, "not just a portable, not just a console -- it's exactly what we wanted in that it's the birth of a completely new platform."

"I think maybe if I could do anything, I would make it so you don't have to sit in front of a TV and play. If you could have a machine that you just plugged in and played inside a virtual world that - would be just great." -Miyamoto (E3 2005)

Hmmm.....I'm still trying to stomach all this. I'll post back later. Hope you can say something about it too.
I liked this quote: "Iwata said, "We are not competing not because we can't, but because we don't want the prize." Why battle over a shrinking market?"

It's easy to see why Nintendo waited and always said that online play wasn't ready. Free online play is really the key to sucess.