Is Nintendo Playing The Wrong Game? Its competitors are turning their consoles into home entertainment centers. But Nintendo is sticking to games, a play-it-safe strategy that threatens to reduce the once-mighty company to irrelevance.
(Business 2.0)
By Geoff Keighley
August 1, 2003
If you want to see the future of videogames, there's no place like the annual Electronic Entertainment Expo. Each May the industry's heavyweights roll out their latest marvels, displaying their visions for the next year and beyond. This year's E3 was no exception. In one corner, J Allard, vice president for Xbox, took the wraps off Xbox Music Mixer, a karaoke system for Microsoft's game console. In another corner, Sony entertained the crowd with its new EyeToy, a camera that will add videoconferencing to the PlayStation 2. But that was just the beginning for Sony. Videogames chief Ken Kutaragi soon dropped the real bomb: Sony will take on Nintendo's mighty Game Boy with a new handheld. Finally, with anticipation at a crescendo, Nintendo CEO and president Satoru Iwata faced the crowd to meet his rivals' news with some of his own: Nintendo would soon release a four-way version of the arcade classic Pac-Man.
You could almost hear the air being sucked out of the room. This was a moment for vision and drama, a chance for Nintendo to dazzle the industry with its genius. Instead, Iwata served up four-way Pac-Man. The idea struck everyone as breathtakingly backward.
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If ever there was a time for audacity, this is it. Nintendo once owned the videogame business. It was reputedly Japan's single most profitable company in 1991, with its game console in one of every three American homes. In fact, a 1994 book about the company was titled Game Over: How Nintendo Conquered the World. Now the company is on the ropes. In just a decade, its share of the U.S. console market has shriveled from 90 percent to just 15--nowhere near striking distance of Sony's dominant PlayStation 2. Though Nintendo is still profitable, nearly half of its earnings now come from the handheld Game Boy (see "Another Crisis on His Hands," page 114). And those earnings have taken a nosedive, plunging 37 percent from 2002 to 2003. The worst part? Nintendo managed all this in the midst of a videogame explosion--in the past seven years, worldwide sales have doubled, to $27 billion. In the United States, about half of all homes now have a videogame console; 30 percent of those have at least two.
How could Nintendo have let Sony devour its lunch? The short answer is that it stopped paying attention. The videogame business has changed, but Nintendo hasn't. In 1990, two-thirds of console players were younger than 18; today the opposite is true, and the average player is 29. Yet Nintendo has continued to serve kiddie fare almost exclusively. It resisted the transition from cartridges to CD-ROMs, which are far cheaper to produce and fatten the bottom line much faster. (Nintendo's GameCube now uses minidiscs.) And while its hardware competitors were making nice with third-party developers in order to expand their all-important game libraries, Nintendo continued to treat the developers as rivals. Now Sony and Microsoft are expanding the scope of the entire videogame business, morphing their consoles into all-in-one home entertainment devices in their battle to dominate the long-trumpeted but slow-to-arrive world of PC/TV convergence. Nintendo, meanwhile, is still a game company--and only a game company. Which is precisely the problem, according to most people in the industry. "The battle is over entertainment. Period," declares Jack Tretton, executive vice president at Sony Computer Entertainment America. "If you don't have that vision, you are forever going to be a niche player."
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Some of Iwata's resolve to stay the course may come from the cautionary tale of Sega, the gamemaker that posed such a threat to Nintendo a decade ago. After a protracted period in third place in the console market behind Nintendo and Sony, Sega shut down its hardware division altogether in 2001 to focus solely on software. It has steadily lost market share ever since. Haunted by that specter, Iwata repeatedly vows he'll never give up the console business.
It's possible that convergence could backfire and create an opportunity for Nintendo. Consumers could get turned off by rising console prices as Sony and Microsoft pack more functions into their boxes. Or consumers might not really want an all-in-one entertainment machine. "Name all the hybrid consumer-electronics devices that have been successful," notes Michael Pachter, an analyst at Wedbush Morgan Securities. "There's just one: the clock radio."
But that's a minority view. Most in the videogame industry agree that Sony and Microsoft are on the right track. "I'm not sure there's room for a stand-alone game machine," says Brian Farrell, CEO and president of THQ, the independent publishing giant responsible for such hits as SpongeBob SquarePants and WWE Wrestling. Jeff Lapin, CEO of Take-Two Interactive, which created the blockbuster Grand Theft Auto franchise, agrees. "I think Nintendo is going to have to redefine its hardware if it wants to compete," he says. "The simple fact is that people are looking for extra features."
Iwata is betting that the rest of the industry is wrong. But that doesn't mean he isn't willing to hedge. "Another company could certainly take our game platform and use it in their products," he hints. In other words, Nintendo is willing to consider the TiVo model, building a stand-alone machine while making its technology available for incorporation in other kinds of hardware.
That opens up a world of possibilities. There are plenty of companies that want a piece of the convergence business and don't want to cede the living room to Microsoft and Sony; they include consumer-electronics giants such as Panasonic, Samsung, and Sanyo, as well as PC manufacturers like Dell and Apple. If Apple, flying high on its success with the iPod, wanted to introduce a set-top box, gaming technology from Nintendo would give the machine a fighting chance against the PlayStation.
There's already some precedent. In Japan, Panasonic sells a device called the Q, which combines a DVD player with a GameCube. Could there be a Q in the offing for the U.S. market? "Panasonic is one partner we would definitely be interested in working with again," Iwata says, cryptically. Panasonic admits that it has a "strong relationship" with Nintendo, but refuses to say anything more.
A joint venture or partnership may be Nintendo's only hope of reversing its decline. But all hinting aside, Iwata couldn't pull off a dramatic rescue without fundamentally shifting the company's values. Nintendo isn't likely to take any genuine risks that could jeopardize its existing business (it's still the world's second-largest game publisher) or dramatically deplete its reserves. So no matter what kind of partnership Nintendo forms, its main business will likely be videogames--still profitable, but shrinking in relation to competitors. A humbling fate, indeed, for a company that once conquered the world.
Geoff Keighley is a contributing writer for Business 2.0.