Business Innovation Strategy Case study

Nintendo Wii: A Game-changing Move

The Microsoft investor could not believe the news. Seven years after entering the video game console business, Microsoft was still losing money in its video game business. Its Xbox, launched in 2001, had lost billions, and the sophisticated Xbox 360 did not appear to be making much money. Sonys even more sophisticated PS3 was also losing money. In contrast, demand for the Nintendo Wii had been so strong during the 2007 Christmas season that Nintendo had been forced to issue rain checks to customers. In fact, it was not unusual for eager Wii customers to pay prices well above Nintendos suggested retail price of $249 in live online auctions. Why had the Nintendo Wii performed so well? Why had Microsoft done so poorly in video games? Why had Sony started doing so poorly following its initial success in video games? The Microsoft investor wondered if Microsoft had learned from the Nintendo Wii.

Competing for Gamers: The Early Years

Although the invention of the video game may date to as far back as 1947 with the patenting of a Cathode Ray Tube Amusement Device1 by Thomas T. Goldsmith Jr and Estle Ray Mann, Atari is usually credited with introducing the first successful video game to the home. In 1975 it offered a dedicated home version of its popular arcade Pong called the Sears Tele-Game System and 150,000 units of it sold that Christmas.2 Many other firms entered the home video game console business but Atari reigned until Nintendo introduced its Nintendo Entertainment Systema so-called third generation systemin 1985. Nintendos leadership position would be challenged by Sega when it introduced its Sega Mega Drive (called the Sega Genesis in the USA) in 1989. The Sega Genesis was a so-called fourth-generation console. Although Nintendo fought back, Sega would emerge as the new leader until Sonys entry.

The Market that Wii Would Face

The Products Sony entered the home video game business by introducing the Playstation in Japan in 1994 and in the USA in 1995. Sega and Nintendo fought back but Sony emerged as the winner. Sonys success would attract Microsoft, which introduced the Xbox in 2001, one year after Sony introduced the Playstation 2. The worlds number one software company was rumored to have spent $2 when the Xbox was introduced, Microsoft officials knew that they were going to lose money on each console but hoped to make up for the losses with software (game) sales. It was expected that each Xbox customer would buy three games in his/her first year of owning an Xbox console, and buy one game per year thereafter. Exhibit 12.1 shows Xbox forecasted sales, costs, and prices when it was launched. In November 2005, barely four years after introducing the Xbox, Microsoft introduced the Xbox 360 in the US market. One year later, Sony introduced the Playstation 3. Riding the Technological Progress Envelope The microchip technological revolution that put a cell phone in most hands, a computer on many laps and desks, an ATM at most corners, etc., and that gave us the iPod, iPhone, Blackberry, etc., was the same technology that drove the video game industry. Microchip technology pushed the technology envelope and video console makers exploited the frontier. Each new generation of consoles was driven by a new generation of faster microprocessors and graphic processors with even more graphical detail. For example, the Xbox was powered by an Intel microprocessor that ran at 733 megahertz and graphics

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Business Innovation Strategy Case study processor that delivered about 300 million polygons per second, more than three times the graphics performance of the Playstation 2, the previous generation console that Microsoft hoped to displaced.3 The Xbox 360, which Microsoft introduced four years after the Xbox, used a 3.2-gigahertz processor, an order of magnitude faster than the Xbox while delivering 500 million polygons. The PS3 also used a 3.2gigahertz processor and the firms new much-touted Blu-Ray DVD technology. These advances in technological innovation also created more options for software (game) developers to design games for each generation of consoles that were even more lifelike and appealing to core gamers than those designed for previous generations. However, in tracking the technology frontier, console makers incurred very high console costs. Console makers had to develop custom chips dedicated to their consoles or use the fastest and best chips available in the market. The result was that each console cost so much that its maker sold it at a loss, and hoped to make money from the royalties collected on software sales and from selling accessories.

Effectively, each new generation of consoles delivered outstanding technological performance, images that were more lifelike than those from previous generations, and appealed to core gamers. Each new generation was also more complex than previous generations and many games took hours, if not days, to play. Virtual violence also became more common with each generation. Moreover, playing many of these games required players to master complicated combinations of buttons on each consoles complex controls, and lots of gaming know-how and expertise.4 Each new generation of consoles rendered the previous generation technologically obsolete and out of style as far as core gamers were concerned. Additionally, most games developed for new consoles often rendered previous games obsolete. The product cycle timethe time from when the first product in a new generation was introduced to the time when the first product in the next generation was introducedwas also decreasing.

The Wii
Nintendo introduced its Wii video console in the Americas on November 19, 2006, only about a week after Sony had introduced its PS3 console on November 11, but one year after Microsoft had introduced its Xbox 360. The Wii had a simpler design than the Xbox 360 and PS3 to appeal to the casual or lapsed gamer, or noncore gamers who had neither the time (hours or days) to dedicate to a game, nor the expertise to handle the complexity of existing console controls and games.5 It had easy-to-use controls and its games sought to offer reallife, rather than escapist scenarios. According to Jeffrey M. OBrien of Fortune, the Wii differed from the Xbox 360 and PS3 in other ways:

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Business Innovation Strategy Case study Nintendo used off-the-shelf parts from numerous suppliers. Sony co-developed the PS3s screaming-fast 3.2-gigahertz cell chip and does the manufacturing in its own facilities. Nintendo bought its 729megahertz chip at Kmart. (Not really. But it might as well have.) Its graphics are marginally better than the PS2 and the original Xbox, but they pale next to the PS3 and Xbox 360. Taking this route enabled the company to introduce the Wii at $250 in the U.S. (vs. $599 for the PS3 and as much as $399 for the 360) and still turn a profit on every unit.6 The Wii also had no hard disk, no DVD, and no Dolby 5.1. Its video RAM was 24 MB compared to 256 MB for the PS3 and up to 512 MB for the Xbox 360. However, the Wii had some innovative features that its high-tech competitors did not.7 It had a remote (motion) wand-like control that resembled a TV remote control compared to the complex button-strewn controller carried by the PS3 and Xbox 360.8 The wand-like control enabled a gamers movements and actions to be directly mapped into the video game. For example, to swing a tennis racket or golf club, the player literally swung the remote controller as if it were a racket or club. The swing would be remotely detected by the Wii processor and the player would get some exercise and more of a sense of playing tennis or golf from the swing. Contrast this with having to be adept and knowledgeable enough to hit the right complicated combination of buttons on the PS3 or Xbox 360s control at the right time. The other distinguishing feature was the Mii. A Mii was a digital character that a player could create on the Wii. Once a character had been so created, it could be used as participating characters in subsequent games. It allowed players to capture different personalities and caricatures including their own. According to Saturo Iwata, president of Nintendo when the Wii was introduced, the idea for the control and shorter simpler games had been developed and tested on Nintendos handheld device called the Nintendo DS. The Wii was also connectible to the DS so that the latter could be used as the input to the former. Beyond the remote control stick and the Mii, the Wii had other features such as backward compatibility with all official GameCube software, and the Wii-Connect24 which enabled the Wii to receive information such as news and weather over the Internet while in standby mode. Despite the initial success of the Wii, some incumbents did not see it as much of a threat to Sony and Microsoft. Remarks such as the following from Sony Computer Entertainment of Americas Jack Tretton, were not uncommon:9 You have to give Nintendo credit for what theyve accomplished . . . But if you look at the industry, any industry, it doesnt typically go backwards technologically. The controller is innovative, but the Wii is basically a repurposed GameCube. If youve built your console on an innovative controller, you have to ask yourself, Is that long term?10 The Microsoft investor wondered how long the Wii would continue to do well. Should he have invested in Nintendo instead of Microsoft? Why hadnt Microsoft followed a Nintendo-type strategy when it entered the video game console market in 2001? Was it too late to follow a Wii-type strategy? The estimated costs, wholesale prices, and suggested retail prices for the Wii, Xbox 360, and PS3 are shown in Exhibit 12.2, while the forecasted number of units are shown in Exhibit 12.3.

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Business Innovation Strategy Case study

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