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Prelude case
PS3 blues and X-box 360° turn as
wee Wii wins
In the games machine market life is even more challenging
characters move fluidly about cleverly animated screens. The
than Tomb Raider, more aggressive than Grand Theft Auto and
most popular games involved sword-and-sorcery conflicts, or
more brutal than Resident Evil. In the early 1980s, no home
the series of Super Mario fantasy worlds, where young heroes
could be without a video game console and a dozen cartridges.
battle to save endangered princesses or fight the evil ruler, Wart,
By 1983 Atari, Mattel and a dozen other companies offered
for peace in the World of Dreams.
some version of a video game system and industry sales topped
By differentiating itself through superior products and
€3.6bn worldwide. Then, by 1985, home video game sales had
service, and by building strong relationships with its customers,
plummeted to €100m. Game consoles gathered dust, and
Nintendo built a seemingly invincible quality position in the video
cartridges, originally priced as high as €40 each, sold for €5.
game market. But it soon came under attack. New competitors
Industry leader Atari was hardest hit. Atari sacked 4,500
such as Sony and Sega exploited the opportunities created as
employees and sold the subsidiary at a fraction of its 1983
Nintendo junkies became bored and sought the next new video
worth. Industry experts blamed the death of the industry on the
thrill. Sony beat Nintendo at its own game – product superiority –
fickle consumer. Video games, they said, were a passing fad.
when it hit the market with its PlayStation machine, an advanced
However, Nintendo, a 100-year-old toy company from Kyoto,
new system that offered even richer graphics, more lifelike
Japan, did not agree. In late 1985, on top of the ruins of the
sound and more complex plots. Nintendo countered with the
video game business, the company introduced its Nintendo
Nintendo 64 and a fresh blast of promotion, but the competition
Entertainment System (NES). A year later, Nintendo had sold
has intensified and, while Nintendo were being discounted, the
over 1m NES units. By 1991 Nintendo and its licensees had
PlayStation was the Christmas hit toy of 1997.
annual sales of $4bn in a now revitalised €5bn video game
Meanwhile the computer games world is attacked for being
industry. Nintendo had 80 per cent share of the world market.
‘violent, destructive, xenophobic, racist and sexist’. Sega Europe
Forty per cent of Japanese households and about 20 per cent of
has also been attacked for marketing gruesome games such as
US and EU households had a NES.
How did Nintendo do it? First, it recognised that video game
Mortal Kombat and Murder Death Kill. The industry has been
criticised for cultivating a generation of ‘Video Kids’ for whom
customers were not so much fickle as bored. The company sent
30 seconds without scoring is boring; moral zombies hooked on
researchers to visit video arcades to find out why alienated
worlds where the rules are shot or be shot, consume or be
home video game fans still spent hours happily pumping arcade
consumed, fight or lose. In Japan, where many of the games
machines. The researchers found that Nintendo’s Donkey Kong
come from, consumers are more broad-minded than in most
and similar games were still mainstays of the arcades, even
western countries. Nintendo needs to extend its customer
though home versions were failing. The reason? The arcade
range beyond the terminally fickle teenage males. Sega spon-
games offered better quality, full animation and challenging
sored road shows with teen magazines, and put girls in its TV
plots. Home video games, on the other hand, offered only crude
ads after complaints from schoolchildren on its ‘advisory board’
quality and simple plots. Despite their exotic names and intro-
about sexism in advertising. Sega Europe created a new toy
ductory hype, each new home game was boringly identical to all
division to target ‘housewives with children, instead of 14-year-
the others, featuring slow characters that moved through ugly
old boys’. The first product was Pico, an electronic learning aid
animated scenes to the beat of monotonous, synthesised tones.
for kids that has taken a ‘significant’ share of the Japanese
Kids had outgrown the first-generation home video games.
high-tech toys market. The €9m European launch included TV,
Nintendo saw the fall of the video game industry as an
press and posters with a full below-the-line campaign. Next
opportunity. It set out to differentiate itself by offering superior
came an ‘electronic learning aid that thinks it’s a toy’ for three-
quality – by giving home video games customers a full measure
to seven-year-olds. At the older end of the market more cere-
of quality entertainment value for their money. Nintendo
bral ‘stealth games’ are taking hold in Japan. Metal Gear Solid
designed a basic game system that sold for about €100 yet
and Theft reward silence, concealment and strategy more than
boasted near arcade-quality graphics. Equally important, it
bang and blast. Is this new thrust making gaming more
developed innovative and high-quality Game Packs to accompany
civilised? No way.
the system. New games constantly appear and mature titles are
weeded out to keep the selection fresh and interesting. The
While Nintendo and Sega chased the new markets, Sony’s
PlayStation blasted the 1997 Christmas market with the ‘arcade
games contain consistently high-quality graphics, and game
feel’ of Ridge Racer and Crash Bindicoot and ‘scary, tension
plots vary and challenge the user. Colourful, cartoon-like
building’ Doom. It is the kids who drive the games market and
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Part 3 Core strategy
Exhibit 10.1 Peak sales of games consoles
Peak sales year
Format
Games consoles
Peak annual sales
1982
1989
1993
1997
2003
2006
Atari
8-bit
16-bit
32/64-bit
128-bit
256-bita
Atari
NES, Master System
Megadrive/Genesis, SNES, 300
PlayStation, N64, Saturn
PS2, X-box, Nintendo Game Cube, Dreamcast
PS3, X-box 360, Nintendo Wii
10 m
11 m
14 m
32 m
45 m
34 mb
a
The new processors use new technology so the 256-bit description does not really apply. The PS3 has a ‘cell processor’ which boasts
35 times the power of the PS2.
b
Estimate based on cumulative sales to mid-2007 of PS3, X-box 360 and Wii.
what they want is power and the latest cult machine. Three
Nintendo argues that it has expanded the market to non-
years after PlayStation blasted the competition, their €450
gamers who were put off by the complexity of modern games.
PlayStation 2 (PS2) was aimed to do the same again for
Sceptics argue that the Wii’s novelty will wear off, that the Wii
Christmas 2000. With Internet access, CD and DVD playability,
lacks the ‘high-definition’ graphics of its rivals and has only
the PS2’s 128-bit microprocessor had twice the power of then-
rudimentary online features.
current PCs. So powerful was the PS2’s processor that its export
Sony’s claim to leadership is based on its PS2 sales; the PS2
had to be specially licensed by the Japanese government since it
actually outsold both the X-box 360 and the Wii in America
had the performance necessary to guide a cruise missile.
during December 2006. Its maker insists that the PS3’s rela-
However, Sony did not have it all their own way. Sega launched
tively modest sales – 2m units since November – are the result
their Dreamcast a year before PS2 but sales were lacklustre and
of supply shortages, though anecdotal evidence suggests that
the machine and its games were soon discounted. The market
PS3s are far easier to find than Wiis. Despite the PS3’s high
also attracted the mighty Microsoft whose X-box appeared in late
price – $499 (€368) and $599 (€442) in America, and €499 and
2001. Unlike other games machines, the X-box is intended for use
€599 in Europe – Sony had to slash jobs as it posted record
in a living room using the family TV and operating Microsoft’s PC
losses. Concerned that the high price was putting buyers off, or
products. Nintendo, too, is fighting back with their Game Cube.
prompting them to wait for price cuts, it cut price by 20 per cent
The battle between Sony, Microsoft and Nintendo pushed
world games console sales to new heights in 2003 (Exhibit 10.1)
in Japan and $100 in the US.
Yoichi Wada, chief executive of Square Enix, one of Japan’s
but worldwide sales for 2006 were forecast to be less than 10
leading game developers, thinks Microsoft and Sony have got it
million. But that forecast did not stop an even bigger investment
wrong. ‘Powerful next-generation consoles such as Microsoft’s
for even better machines to gladden the hearts of game
X-box and Sony’s PlayStation 3 are mismatched to the gaming
players. The latest round began in 2005 with Microsoft’s X-box
environment,’ he says, ‘and handheld game devices are set to
360. Then, in 2006 Nintendo’s Wii appeared while Sony launched
dominate sales.’ He explains, ‘the demographics of gamers
the PlayStation 3 (PS3). With the battle started, Microsoft, Sony
have undergone a sea change in the past few years . . . There is
and Nintendo all claim to be on top.
a new breed of gamers in the market – we have to make games
Microsoft boasts that it has sold the most consoles: 10m
for all kinds of people.’1
X-box 360s since its launch. The 360 is popular in America and
Europe, but is doing badly in Japan. The head start means that
Questions
the 360 has the best line-up of games, an important reason for
choosing a console. Microsoft’s online service, Xbox Live, is also
impressive, offering game and video downloads and allowing
advanced and powerful machines when the market wanted
gamers to play together online.
entertainment?
Nintendo boasts that its new console has taken off the
fastest, having sold nearly 6m units. The low-cost Wii is proving
so popular that it is still hard to come by months after its
460
1. Have Microsoft and Sony gone too far in creating more
2. What are the key ingredients for success in the computer
games market?
3. Using information from the case, and your own knowledge,
launch, and is generating by far the most buzz. In part this is
compare the competitive strengths and weaknesses of the
because the Wii’s motion-sensitive controller means even non-
competitors in the computer game machine market. Who do
gamers can quickly start playing tennis, golf or bowling.
you think will be the long-term winners and why?