James Surowiecki’s In Praise Of Third Place discusses Nintendo’s success and offers an interesting look at arms races, simplicity, and why companies should focus on profit over market share.
Sony and Microsoft’s quest to “control the living room” has locked them in a classic arms race; they have invested billions of dollars in an attempt to surpass each other technologically, building ever-bigger, ever-better, and ever-more-expensive machines.
Nintendo has dropped out of this race. The Wii has few bells and whistles and much less processing power than its “competitors,” and it features less impressive graphics. It’s really well suited for just one thing: playing games. But this turns out to be an asset. The Wii’s simplicity means that Nintendo can make money selling consoles, while Sony is reportedly losing more than two hundred and forty dollars on each PlayStation 3 it sells—even though they are selling for almost six hundred dollars. Similarly, because Nintendo is not trying to rule the entire industry, it’s been able to focus on its core competence, which is making entertaining, innovative games…
Nintendo’s success is not an anomaly, either. The business landscape of the past couple of decades is replete with companies that have flourished as third wheels, and with companies that have struggled to make money despite being No. 1 in their industries. (Today, would you rather be Honda or G.M.?) And while it’s true that in many industries there is a correlation between market share and profitability, one doesn’t necessarily lead to the other.
A recent survey of the evidence on market share by J. Scott Armstrong and Kesten C. Green found that companies that adopt what they call “competitor-oriented objectives” actually end up hurting their own profitability. In other words, the more a company focusses on beating its competitors, rather than on the bottom line, the worse it is likely to do. And a study of the performance of twenty major American companies over four decades found that the ones putting more emphasis on market share than on profit ended up with lower returns on investment; of the six companies that defined their goal exclusively as market share, four eventually went out of business.
Markets today are so big—the global video-game market is now close to thirty billion dollars—that companies can profit even when they’re not on top, as long as they aren’t desperately trying to get there. The key is to play to your strengths while recognizing your limitations.
Related: Build Less: Underdo your competition [Getting Real]
Sammy
on 28 Nov 06Of course, history tells us that the picture isn’t always so rosy for companies which proclaim that Threedom = Freedom.
Eric Mill
on 28 Nov 06I’m not content, and I don’t think Nintendo is content, with Nintendo coming in 3rd place. Nintendo makes statements about how they are not competing with MS and Sony, but that’s marketing speak to reinforce their different, disruptive image. Reggie Fils-Aimes still refers to Sony and MS as his “competitors” in interviews, and Nintendo is not foolish enough to pretend that the actions of Sony and MS don’t affect Nintendo’s success. Their console’s pricing and attitude are in a completely different direction from Sony/MS, but in large part as a reaction to Sony and MS’ choices to not push the industry to innovate in any areas besides graphics and online play.
I’d be interested in hearing 37signals comment yourselves on the Wii, as its a pinnacle of studied, mature design choices, and takes a ton of risks. It’s probably the most important thing to hit gaming since Sony made a disc-based medium succeed and games could incorporate arbitrarily high-quality movies and music (and suffer proportional load time costs). Instead of just linking to another person’s opinion, what do you think?
Angelo
on 28 Nov 06you’re much more likely to prosper focusing on what is real instead of what could be ideal.
that, and nobody has been shot over a wii, yet anyway.
Jamie
on 28 Nov 06I wholeheartedly agree. When I heard that Microsoft and Sony were selling their consoles at a loss of up to $300 per unit I couldn’t believe my ears. I haven’t bought a Wii, but I’ve been thinking about it. I’m not into first person shooters, but I am intrigued by “family gaming” and mini games.
Martin
on 28 Nov 06Well, who in their right mind would buy something with the ambitions of controlling their living room? I’d rather control the living room myself, thankyouverymuch.
GM
on 28 Nov 06The other funny thing about this whole comparison is, unlike the PS3, if you want a Wii, you’ll probably be able to get your hands on one this holiday season.
Amazing what shipping upwards of 4 million consoles can do for availability.
Another interesting bit I read from a gaming blog was that, when asked, a fair number of people on line to purchase a PS3 were there to make a buck on eBay, rather than, you know, actually PLAY the video game console they just purchased.
The opposite appeared to be the case with regards to the Wii.
Jeff Coleman
on 28 Nov 06I was wondering when SvN would comment on the Wii, as it seems to embody a lot of great design decisions that would be of interest around here.
Nintendo are doing a lot of things right the last couple of years,and it’s a fun time for gaming!
Jeff
Dan Boland
on 28 Nov 06Another interesting bit I read from a gaming blog was that, when asked, a fair number of people on line to purchase a PS3 were there to make a buck on eBay, rather than, you know, actually PLAY the video game console they just purchased.
As soon as I heard that people were selling PS3s on eBay for $1000 and higher, my first thought was how stupid Sony is for putting money into other people’s pockets instead of their own. (The second thought, of course, was “shit, why didn’t I do that?”)
cjcurtis
on 28 Nov 06I’m not sure I agree with the idea that Nintendo is “discontent” with being in third place.
My question is why are they considered to be in third place rather than first (as far as gaming systems goes)??
If 1) Sony and MS have to charge twice the money of Nintendo, 2) they’re so “popular” that noone can find one, and 3) they lose money on every unit they sell, that’s what I would consider a business disaster.
UNLESS they just use their gaming systems as marketing campaigns for everything else they do…similar to how Nike has 50 of the coolest microsites on the planet.
If Sony and MS are truly losing millions in gaming, yet they continue to compete for market share, I tend to think it’s about image…not money. After all, what does $50 million really mean to a company like Microsoft?
As far as Nintendo goes, they are a gaming company. To my knowledge that’s all they do. If they don’t make money at it, they go bankrupt. Nothing wrong with making a solid product that happens to be a low-cost alternative to the “ultra fancy” competitors.
DHH
on 28 Nov 06While I agree that the Wii is doing many exciting things, it’s been a long tradition that console makers loose money on the hardware in the first years. They make it up on software and failing hardware prices, if they’re successful, though.
Sony sold more than 100M PS2’s in the last generation and made an absolutely killing. That’ no guarantee that they’ll be successful this time around, just that loosing money on hardware isn’t a completely irrational business strategy.
Caleb Buxton
on 28 Nov 06Saying Nintendo is 3rd is a misnomer.
You are measuring them against a market that they are not competing in.
They are focusing on the GAME experience. They are focusing on play. They are looking at human interactions and focusing on that.
When you focus on human interactions and design for that you do not chance success on the uptake of a new digital format. You don’t chance success on cpu manufacturing.
Because all of that and more is totally arbitrary when I plug it in, turn it on, and it just works.
Matt
on 28 Nov 06You didn’t do that because you didn’t want to get shot standing in line.
Drew Pickard
on 28 Nov 06Meanwhile, Microsoft hasn’t made a single cent in net profit with the Xbox group . . .
Chris Carter
on 29 Nov 06Actually, the XBox 360 looks to be incredibly profitable for them, picking up the slack where the Zune is failing:
http://www.news.com.au/dailytelegraph/story/0,22049,20653533-14305,00.html
Numbers I’ve heard range from $78 to $120 margin on each XBox sold, plus licensing, royalties and other revenue from Live, and all the peripherals and games.
Sounds like things are doing alright with the XBox right now.
Mike Swimm
on 29 Nov 06To say Nintendo is 3rd is to totally forget about the GameBoy and DS which Nintendo spends a TON of energy developing. If you factor portable gaming into the equation Nintendo is definitely in the lead.
I don’t have time to dig around for a lot of info but here is a link to sales in Japan for last week: http://www.1up.com/do/newsStory?cId=3155412
It is pretty amazing that the DS lite sold nearly twice as many units as the PS3 6 months after its release. Actually 2 years after the release of the first non-lite DS. That is amazing.
Just because Nintendo doesn’t focus like a laserbeam on the graphically intense “high-end” of the market doesn’t make them in last place.
Jim Johnson
on 29 Nov 06I think it’s worth pointing out that Nintendo is also still focusing on market share. However, they are focusing on the untapped market of gamers out there. People who would probably enjoy a video game but are turned off by the complexity of controllers with 10+ buttons.
They started to tap into this new market share with their DS and games like Nintendogs which appeal to a whole generation of young girls that normally wouldn’t be part of the gaming demographic. They also market titles like Brain Age to adults/senior citizens who have 10-30 minutes of downtime a day.
I also believe all the testimonials online right now that people have of bringing their Wii home for Thanksgiving and having their parents and other non-gamer family members jump right into a game of Wii bowling and instantly “get it” speaks volumes for Nintendo’s gaming vision.
I for one hope they pull it off.
Eric
on 29 Nov 06The Wii is the first game console that has interested me ( for more than just modding to play SNES games ). I never really cared for the consoles since they were expensive and never really improved on the original gameplay; sure they got more pretty graphics, but they also got more and more buttons and complex.
Next year I’ll pick up a Wii and be very happy to play games with friends and family.
People also fail to realise that Nintendo will probably continue to drop the price of the Wii over time as the price of the hardware falls, as opposed to the PS3 which will probably never budge in price as it will certanly be a loss leader for years. Nintendo’s profitable console could really do some damage to the loss leaders as both MS and SONY profit on game sales. If Nintendo can really food the market with a console that people WANT that is cheaper and profitable MS and SONY could loose their economies of scale.
Dennis Eusebio
on 29 Nov 06The big thing Nintendo has done for me in this generation is made me excited about video games again. For awhile there, I really stopped liking video games as much and pretty much moved on with little glimmers of greatness here and there bringing me back.
The minute I heard about Nintendo’s new system and finally got a chance to play one, I instantly remembered what it felt like playing video games when I was a kid. It just brought back that feeling of just pure “fun” that got lost after playing the 15th world war II fps in a row or umpteenth madden iteration. It shook up the industry and if anything, will make everybody rethink how they’re going to make games.
So even if it actually turns out bad in the long run financially, they made their mark many times over and the industry will be better for it.
Mike
on 29 Nov 06Sounds like a friendly framework I know.
Mike
on 29 Nov 06The Wii is Nintendo’s iMac.
Like Apple, Nintendo is the game industry’s R/D. They brought the first portable, first vibrating controller, first analog controller, etc. Now they’re the first motion-sensitive.
And like Apple, Nintendo is pulling itself out of a several year slump with something radical and Jobsey.
Kyle
on 29 Nov 06I read this article early in the morning and thought “wonder when SVN will pick this article up”. Funny.
I love what Nintendo is doing right now. I think I read somewhere that they’ve sold 600,000 Wii’s in the first week, and their key launch title(Zelda) had an attach rate of over 75%.
Good stuff.
Ziad Hussain
on 29 Nov 06Its funny to even call Nintendo ‘Third.’ Third in what? They are quickly becoming number 1 in a whole new category. We are entering a period where we have quite a bit of commoditized technology, but are just barely seeing application and long term effects of this.
Technology will become (and is becoming) more like fashion. Sure payless sells shoes for $20 dollars, but Adidas are so much cooler. I could do most of my work on a PC, but i’ve always been a Mac user and I’m willing to pay the premium.
Is it the awesome feature set of the shoe? Doubtful. Is it the great design of the Macbook? Partially.
It is less about being awesome or great, and more about being about something, anything coherent. Now that Apple has shown that a computer company can be succesful with calculated risk taking and innovation, I expect to see another powerful ‘household name’ computer to emerge. One that doesn’t run Windows out of the box. Rather it will take after the success of Apple and cater to a particular audience, and do it well.
Michael
on 29 Nov 06Question to each 37signals’ team member: Did you already buy a Wii ?
JF
on 29 Nov 06Question to each 37signals’ team member: Did you already buy a Wii ?
I’ve never owned a game system in my life, actually.
warren
on 29 Nov 06it’s a very different domain, but i think you can learn from game design: things like rewarding users and giving feelings of accomplishment/power/control; steering them away from incorrect paths that will frustrate them and probably won’t result in the computer Doing What They Mean.
then again, world of warcraft has an extremely complex user interface (albeit out of necessity due to the nature of gameplay) but it’s phenomenally popular so you kind of have to have a taste for what’s instructive and what’s not. also the usage characteristics of games and business applications are very different. but still.
James Head
on 29 Nov 06I thought Sony’s PS2 was the “Third Place”? ;)
Rob H
on 29 Nov 06The Wii Rocks! And I agree with one of the comments that its iMac of consoles. It’s like no other console on the market and yes its profitable.
ML
on 29 Nov 06Amusing: Watch attempted capture of The Help Cat in Wii [via ZK].
Gayle
on 29 Nov 06The Wii is the first and only console I’ve even considered buying in my entire life. We had an original Nintendo when I was a kid, and I think there was an SNES of my brother’s once; but games since then don’t interest me. The Wii interests me.
Aaron Blohowiak
on 29 Nov 06Hey Gayle, did you know that the Wii can play SNES and NES (‘original nintendo’) titles? You can easily download them for 5-10 bucks.
The gamecube did almost as well as the xbox worldwide, and was superior to the ps2 graphically (matter of debate) but was not pushed as far by most of the developers. Look at resident evil for an example of what it could do.
I am waiting for smash and mario cart to pick up a wii.
Gayle
on 29 Nov 06I did NOT know that. You mean I could have Tetris back?
Life is good again!
MI
on 29 Nov 06Michael: I have all three of the new generation consoles. I just can’t help myself.
ChadL
on 30 Nov 06I can second what others are saying; I’m interested in gaming again, purely because of the Wii.
So, I purchased a Wii on the weekend, and I can honestly say it’s in first place in my books.
IMO it’s broken through some traditional boundaries, and I hate to say it, but the sky is the limit here.
This thing is just too much fun. And it’s shot us closer to virtual reality than Xbox or Sony ever will with their superior performance, graphics and DVD variants.
Ben Darlow
on 30 Nov 06Firstly, I’ll say I agree with the comments that Nintendo isn’t content with third place. They might be third based on market figures, but they very much still aspire to being the leading videogame entertainment company. They simply have a different approach.
It’s also wrong, in my view, to say that the Nintendo Wii lacks ‘bells and whistles’. If anything, I think Nintendo is the most innovative videogame hardware company out there, since the majority of Sony and Microsoft’s tickbox featurelist is at least inspired by their competitors (and not necessarily competitors in the videogame industry) rather than genuinely innovative. Let’s see, a motion-sensitive controller? Do I hear Ken Kutaragi scribbling furiously in the background?
There is an article I heartily recommend people read by game developer Dan Cook, where he discusses Nintendo’s wholely different approach to the videogame market. It’s enlightening, as it not only makes a very firm case for the pursuit of innovation as a business need, but it shows just how Nintendo differ to Sony and Microsoft, with their ‘me too’ hardware and software.
Tripp Fenderson
on 04 Dec 06Maybe Nintendo has been reading from the Porsche playbook and intends to do the same.
-> Focus on a smaller, more profitable audience and build excellent products, which over time, increases marketshare.
“Porsche’s net income as a proportion of sales is the highest in the industry at 19 percent. That compares with 7.5 percent at Toyota Motor Corp., the world’s second-biggest carmaker, for the year ended March 31, according to data compiled by Bloomberg.”
This discussion is closed.