Last week we talked about the potential ending for Blu-Ray DVD players which was largely the result of execution problems with the PlayStation 3. Since then NPD has indicated, in terms of sales, the PS3 will fall well short of the numbers we used in our analysis and will not only be behind Microsoft (which had a year lead) but behind Nintendo as well. Nintendo, which had dominated this segment before Sony, had done so poorly with the Cube they weren’t expected to even be a real threat to Sony’s dominance.
This is not to say that Microsoft and Nintendo didn’t also make mistakes (they did and we will talk a little about them in a bit) but that Sony’s were catastrophic almost knocking them out of the segment strategically and causing an increasing number of us to call Blu-Ray, another Sony strategic technology, early road kill.
We will start with Nintendo and end with Sony and take a look at how each vendor approached the market.
Nintendo-Apple like Pure Play
While both Sony and Microsoft seemed to feel that a game console needed to also be a full multimedia device, Nintendo focused on gaming, and by doing so was able to keep costs down, hit their delivery date, and come up with something unique that gave them an additional advantage at launch.
Another company that has been very successful by staying focused on the basics is Apple. Their iPod, at least until recently, was a music Pure-Play and even though Microsoft’s products could do more, Apple’s focus and execution allowed it to both initially dominate their segment and hold off Microsoft. In the most recent attempt where Microsoft went after Apple with the Zune (which targeted some of Apple’s weaknesses) Microsoft’s lack of experience with hardware still resulted in a clear Apple win. Palm’s strategy was initially similar (yielding similar results) and it was only the collapse of the PDA market with a shift to phones, and lousy execution by their software arm that shifted that dynamic.
Nintendo’s focus allowed them to think through differentiation and they realized that the problem with parents and gaming was the lack of physical activity. This was helped by the success of games like Dance Dance Revolution which were both popular and provided an aerobic workout. By designing their controller to promote physical activity, they are not only popular with their young target audience they are also popular with parents. It is interesting to note that women seem to like the related games more as well which suggests they may have actually expanded the market and benefited from that expansion.
Game systems tend to sell in vastly higher volumes as they drop below $200. This is because they are traditionally bought as gifts and the break points of $300, $200, and $100 play incredibly strongly with a near 10x potential volume increase for each price point if the product is still seen by the buyer as current (as opposed to obsolete which is often the case when you drop below $100).
By holding the price point down, they are more attractive as gifts and the low price point also allows for more game purchases. This last point is important because the consoles are sold at a loss while the games are highly profitable (containing royalties) and you want a high game-to-console ratio if you are to maximize profitability.
Nintendo did make two mistakes. The name to the Western World is a synonym for a slang word for urinate and is a good reminder as to why naming products is seldom good for anyone’s career. In addition, they didn’t build enough consoles to meet demand. This last will come back to haunt them because the game console business is a 4th quarter business and sets the foundation for the following year’s game sales. They will sell about a million units but they probably could have sold over 3 million and that means royalty revenue will be less than a third of what it otherwise might have been. In short, while 2007 will be a good year for Nintendo, they could have delivered what amounts to a killing blow to Sony and they missed.
Microsoft – MultiMedia that Works
Microsoft’s biggest advantage is that they were able to get to market a year earlier than either of the other two vendors and will have a near 10x installed base advantage against Nintendo and a near 20x installed base advantage against Sony in terms of next generation consoles by the end of 2006. This advantage also allowed them to have a dramatically higher number of games at launch than either Sony or Nintendo now do. This is largely because game developers, in that time frame, had only one console (the 360) to target while this year they have three and two of which weren’t going to be in sufficient volume to drive much game revenue.
Unlike Nintendo, and consistent with past Microsoft practice, they turned the Xbox 360 into a multimedia platform and you can even download high definition movies and TV (from an incredibly limited catalogue) to the device in addition to streaming music from a PC. In addition, the 360 integrates well with the Microsoft Media Center PC platform and is a reasonable, though expensive, media extender.
Finally, and this may become a killing blow, Microsoft integrated their game development tools so that developers could develop games for both the Xbox (10M) and PC (600M) at the same time. Granted a fraction of the PC market will play them, but a fraction of 600M still exceeds by a substantial margin any potential numbers from any other game system.
This last point won’t become really pronounced until Vista ships. Vista can use Xbox wired controllers (interesting that no wireless option has yet been demonstrated) out of the box and a Vista Premium system is actually a good gaming platform for console level games. I could argue that to really push this where it should be pushed, gaming should be better integrated with the Media Center component of Vista but it is still a good strategy, even if incompletely executed.
Microsoft also went heavy after online gamers and is the most aggressive here. Their Xbox Live service is easily the most advanced and while it still requires a good broadband connection, it provides a level of cooperative gameplay that leads the segment. Still, the majority of gamers play consoles as standalone offerings and this service may not truly shine until the PC gamers (which are more likely to play connected) can join in.
Finally, in what was clearly a slap at Sony, Microsoft came out with a $200 HD-DVD option and promptly sold out in many markets. While considered a movie only player, this virtually nullified Sony’s perceived advantage in the battle for the follow on to DVD for movies and enhanced the Xbox as a media device.
Microsoft however, has made three mistakes. The most critical, and similar mistake to Nintendo, was not having enough consoles on the market last year. They could have sold between 3x and 5x the actual volume (maybe even more) and left 2005 with such a resounding win that neither Nintendo nor Sony constituted a real threat.
Microsoft also missed entirely the aerobic requirement that Nintendo picked up and the 360 does not even support the one aerobic controller that existed for the original Xbox. This may not seem like much, but anytime you can justify a toy for legitimate health reasons, it is not only good for PR, it is really good for sales because it allows for a justification stronger than “I want it”.
Finally they dramatically under-marketed in 2006 and will likely fall short of the projected 10M installed base numbers they have forecast as a result. This last point is also a traditional Microsoft mistake, Microsoft does good launch marketing but doesn’t do well sustaining demand generation marketing for some reason (often makes me wonder if folks there skipped a critical marketing class). With shortages for the other players, Microsoft is benefiting but probably about 50% of what they otherwise would have had they executed a strong demand generation campaign.
Sony – The “S” in Dysfunctional
You almost have to look at the PS3 as part of a horrid year for Sony. The launch strategy was somewhat similar to Microsoft’s but execution fell well short of expectations and Sony seemed to lose track of their market and tried to do too many things with one product.
The Strategy was to come up with a super media device which followed in the Xbox 360’s footprints in terms of broad media support. In addition, they included a Blu-Ray drive which, by specification, gave it a potential advantage both for game richness and as a movie player.
The physical hardware design, while not as clean as Nintendo’s, and looks like it was designed by Apple, is the richest in-class and probably should receive a design award based on how attractive in Black and Silver it is. The matched controllers, on the other hand, didn’t make the cut and even though they are attractive they were also very uncomfortable and Sony had to drop back to the PS2 industrial design for their new wireless controller falling behind both Nintendo and Microsoft (and giving Logitech, which built a comfortable after market PS3 controller, a nice Christmas present).
But instead of being a hit, the PS3 is a showcase for a dysfunctional Sony. As a next generation media device you have to physically load media on to it because it won’t connect to a PC. This is particularly troubling because Sony’s own Media Center and VIAO PCs connect to the Xbox and Xbox 360 just fine.
While they did add motion into their controllers, compared to the Nintendo Wii, it is kind of lame and gets in the way of gameplay. In one game having to rock a controller back and forth to accomplish a task is annoying, not fun and they should have either matched Nintendo, or like Microsoft, just passed. Doing something the other guy does well, badly, just focuses us on the “badly” part.
Finally, Blu-Ray simply wasn’t ready. If anything killed the PS3, Blu-Ray did. By not being able to build enough drives, they sold one tenth the number of consoles they could have sold during the launch week and given the projected 2M (interesting to note that this projection mysteriously got adjusted down to 1M) they were supposed to produce in 2006 will be at about one tenth potential by year end.
Sony had arguably the best marketing campaign of the three systems this year and, even with the other two problems, would have sold out on the strength of its installed base had they been able to build product. But as mentioned above, this market collapses after the holidays and it is the holiday sales that set the foundation for game sales.
With more potential sales for Xbox and Nintendo and game developers trying to cut back on costs (Sony is also the most expensive of the platforms to develop for) Sony may find it near impossible to get the critical mass of good games next year and, in the end, it is games that make or break a game console. Some developers, as we mentioned last week, are already jumping ship and more are likely to follow.
Sony still has the largest installed base of game consoles with the PS2 but a similar situation didn’t help Nintendo or Atari that much. Sony needs to grasp that they just aren’t good at driving cross industry standards and realize that the Memory Stick hurt camera and MP3 sales, Mini-Disk helped give Apple the iPod market, and PSP (which could have done a lot of damage to Apple) is badly hurt by its non-standard media.
Finally, unlike the other two, Sony has a media division, which means there should be more media for Sony devices. Instead they wrap their media with so much DRM that no one wants to buy them. This last point, and I hate to use the “S” word, is just stupid because Sony media now works better on Apple and Microsoft platforms than it does on Sony’s.
Wrapping Up
Nintendo’s long term strength is their sharp, Apple-like, focus while their weaknesses are an inability to take big risks (they missed demand by a mile) and that if the market accepts Sony and Microsoft’s broader media direction they will be flanked and trivialized. Microsoft’s biggest strengths are that they fight as a company (a very big company) and are experts in software (read game) development tools; and their weakness is poor sustaining marketing and uneven (both Nintendo and Sony are typically more consistently good) hardware designs. Sony’s strengths are marketing, and technical and industrial design competence; their weaknesses include corporate dysfunction (they don’t play well with themselves), a misplaced belief they can (or should) drive industry standards, and the resulting inability to create winning plans they can execute.
What is interesting is that only Sony is really to blame for their big miss, both Microsoft and Nintendo missed opportunities to take Sony out at the knees. In some strange way this gives Nintendo, Microsoft, and Sony something in common, all can agree that Sony is the company they have to overcome to achieve (or maintain) market dominance in console gaming.
