Threat Level

Satoru Iwata's warnings of a threat to the industry ring hollow - this is evolution, not collapse.

Nintendo's Satoru Iwata isn't just one of the most successful executives in the games industry - or, indeed, in any industry, having steered his company from the brink of irrelevance to global market leadership in the space of a few short years. He's also a rather wonderful speaker whose event keynotes, even when they haven't been laden with the announcements craved by the press and gamers alike, have generally been full of warmth for the games business and its creative process, and wisdom regarding Nintendo's rise to power and future strategy.

As a rule, I find it hard to disagree with Iwata when he speaks - bluntly, it would take a fair bit of persuasion for me to want to drop my chips on a different square to a man on such an extraordinary winning streak. However, while his widely reported talk at GDC in San Francisco this week unquestionably called the present state of play in the games business accurately, it's tough to agree with his conclusions - or the stark warning they seemed to present.

A core theme of the talk was a theme which has been widely explored in many different places, including these columns, over the past couple of years - namely the downward price pressure faced by videogames as cheaper competition bubbles up from the bottom of the market, in the form of smartphone and online titles utilising everything from cheap price points to freemium or ad-supported models.

"The people who make business decisions on the mobile side are smart people, and the price points they've reached aren't arbitrary."

Iwata's concern is that where the existing retail games market is, in his view, somewhat over-saturated with titles - whereas the app store markets are "drowning", with tens of thousands of options available to consumers. The low prices of those titles reflect lower development budgets, he conceded, but he fretted that they still suggest very small revenue flows, painting a nightmare scenario of game developers being unable even to pay themselves wages with the money they make.

It's not a huge logical stretch that he's making, of course, but Iwata generalises too much. For a start, you couldn't tell it from the rhetoric, but he's talking about a threat to the business model Nintendo has adhered to in recent years, not a general threat to game development or the wider industry. For another thing, he laid the blame at absolutely the wrong door in his speech - accusing the proprietors of app stores of cultivating this kind of market in order to sell smartphones with no interest in game quality or revenue streams.

Of course, that's true in an absolute sense - Apple (and Google, and Nokia, and RIM, and Microsoft's mobile side, and everyone else running an application store) doesn't really care about games in the way that a massive software publisher like Nintendo does. However, neither has the company exactly had to push developers to lower price points. It created an open pricing model - developers themselves set the pricing, and they've almost universally settled low.

Why? Is it because, as Iwata's talk seems to suggest, they're all intent on running lemming-like off the edge of a cliff (not that lemmings actually do that, but you know what I mean), hurtling headlong into bankruptcy for the want of a decent cashflow spreadsheet? Is the smartphone gaming market really a financial disaster in the making, one whose repercussions threaten to engulf the rest of the industry? Iwata didn't put it in quite those terms, but that's the logical endpoint of the argument he was making.

However, that simply isn't the case. The people who make business decisions on the mobile side are smart people, and the price points they've reached aren't arbitrary - they're based on exactly the same projections regarding costs, unit sales and supplementary revenue streams that every other successful business in the world employs. It just happens that on a platform that's wonderful at generating large-scale sales of low-priced content and absolutely excels at post-purchase revenue through DLC, in-app purchasing or advertising, as well as having a low cost of development, the required price tag for profitability is low.

Iwata doesn't like that, and that's fine. His company's business, like the business of a great many people reading this, involves selling more expensively developed software at more expensive price-points, and they don't like seeing downward price pressure or the spectre of customer attention being grabbed by cheaper experiences. It's a clear and obvious threat, and plenty of people have observed that the 3DS, as an extremely relevant example, is going to have to face up to some tough competition from iOS in the coming years. That doesn't, however, mean that it logically follows that the smartphone gaming business isn't making money, or is a threat to gaming as a whole.

If anything, this is an exercise in picking your battles. I'd draw your attention to another story that's been bubbling away this week - the release of the first gameplay videos from EA's upcoming Battlefield 3, along with some pretty strong rhetoric about taking on Activision's Call of Duty franchise. These are multi-million-dollar games in their development phase which have the potential to turn into multi-billion-dollar games at retail - and there's seemingly plenty of space for them to duke it out in the market.

Meanwhile, we're being inundated with fresh information about gigantic, sprawling RPG title Dragon Age 2, and teased with the first trailer for another dragon-sporting RPG epic, Skyrim. Some of the first hands-on previews of Sony's The Last Guardian, five years in development, have hit the Internet in the past couple of days. Killzone 3 and Bulletstorm are doing just fine in terms of sales, and Nintendo itself is about to drop the undoubtedly gigantic Pokemon Black and White on the UK.

"Iwata is dead right on one point - one answer to this is to innovate and to progress the science of games design."

Is the top end of the market in crisis? No, it's not. Break-out hit titles are still doing what break-out hit titles have always done - selling lots of units and making lots of money - and they're doing it in a host of genres and demographics from "core gamer" right out to the kids market.

The threat of smartphone and online downstream gaming has never been to those games, and it's disingenuous to suggest that that's the case. Certainly, any new form of entertainment - especially a cheap one - is never going to be welcomed by the existing media, but are shooter fans really going to eschew Bulletstorm because they're too busy with Angry Birds or another iOS treat? That audience exists. It's there. It's being served. It's not going away.

Rather, the threat is to the segment of the games space that can't quite justify itself in the face of 99p App Store offerings. It's not, ironically, Nintendo's key titles that are most likely to suffer, although the company will have to join the rest of the industry in re-examining how it handles development and pricing in the face of this new pressure. Rather, it's the countless shovelware titles which have made their way onto the DS and Wii that are seriously going to suffer when consumers cast a critical eye over where their gaming money is being spent.

It's a rough shout for the developers who are involved in working on those kinds of titles - because, let's face it, nobody joins this industry dreaming of making short-cycle shovelware - but ultimately, if your £35 Wii title doesn't entertain consumers as much as a 99p iPad application, then it's not some wicked conspiracy that's putting your job at risk. It's pure economics. If another company can make a solid income out of entertaining consumers for a fraction of the price that you're charging, then in a purely evolutionary sense, they're fitter and they're going to survive.

Iwata is dead right on one point - one answer to this is to innovate and to progress the science of games design. Make better games, and do it in smarter ways that reduce cost and risk, so that you can tap into developers' creativity and pursue break-out hits rather than safe mediocrity. That's going to be vital in the years to come - because with the absolute best online, smartphone and tablet titles being priced much cheaper than the absolute worst console games, the ability to launch something mediocre and make a return is going to dissipate rapidly.

Iwata's true concern is that with it will go a fairly sizeable chunk of Nintendo's third-party catalogue and licensing income. How he steers his company through this challenge will be a major test of the creative thinking and business intellect that he has demonstrated so often in the past.

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Latest comments (8)

Nicholas Lovell Founder, Gamesbrief10 years ago
I only partially agree Rob (unusually for me). The danger that Nintendo faces is one faced by all companies with high operational gearing.
It is expensive to make any of Nintendo's games. It needs to sell a lot of copies to cover that initial outlay (and the associated marketing/distribution costs). Once those costs are covered, however, the games become very profitable very quickly.
The threat to Nintendo is not that it will lose its entire audience. There are far too many Nintendo fans for that to happen. It's that it loses *enough* players that it can no longer make a profit on its expensive, well-crafted epics.
How many players is that? 20%? 30%? The answer depends on the game. But the threat to Nintendo is not the departure of the hardcore, but the departure of enough of the casual market to make Nintendo's investment in high quality games unprofitable.
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Dominic Clarke Programmer, Slightly Mad Studios10 years ago
I agree with pretty much all the points Rob.
I really think all these platforms can exist independently with minimal overlap or price pressure being exerted from one to another. As a developer, I'm not as worried about the industry future as I might have been a few years ago.

"Rather, it's the countless shovelware titles which have made their way onto the DS and Wii that are seriously going to suffer when consumers cast a critical eye over where their gaming money is being spent. "
This sums up my feelings on the matter. The quality bar will have to be raised in all markets, and this can only be positive for the industry.

As an aside, if Angry Birds was a full priced exclusive DS game, I don't think it would have gotten anywhere near the positive press/public reaction that it has gotten so far. It would be judged much more harshly than a 99p app store game is judged. I'd even go so far as to say that it would never have existed, because a publisher would not allow a game so "light" on features to be released at a full price point. iOS games can afford to be cheap because they have less production values and are made for a very casual market. So it's a great thing that this new type of market exists. It's great for trying out new ideas and opens gaming up to a much wider audience.

In my opinion, the 3DS/NGP will operate in a different market to iOS. One is a gaming device, the other is a smartphone. People will make the distinction, in the same way that they would differentiate between reading a magazine or a reading a book on a train journey. At least I hope this to be the case.

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IMO, the main point Iwata is trying to make, is that of "public perception". Nintendo has been trying to open up gaming to the masses for years (with a reasonable level of success), but this was premised on training people that games cost $20-$50, and that they are worth this amount.

The AppStore has smashed this concept. I doubt Nintendo will suffer that much - their games/hardware are essentially the best, and most people buying the current Nintendo titles will continue - but what about the 3rd parties on Nintendo (and even MS/Sony) platforms? All of a sudden, anything not a AAA-title backed by a strong IP may be scoffed by the (casual?) gaming community.

Maybe its all for the best anyway: the best developers will still stick to console/handheld, as that is where the money really is (the revenue generated by WiiFit alone gets close to 50% of the total AppStore lifetime revenue?). Other developers can stick to mobile platforms where its easier to make a "small" amount of revenue.
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Show all comments (8)
Reco Hasan10 years ago
I agree with Iwata, at least when it comes to handhelds. I think, smartphones are a real threat to the traditional handheld gaming, because a handheld has always been a platform that you're going to play on the go, in a train or while you're waiting on the bus. At least the mainstream (or casual, if you like) gamer. But these are the people, who make a platform (handbeld or console) a success. I mean, 150 mio Nintendo DS systems have been sold and they're not all in the hands of hardcore gamers. So if these people now switch to their smartphones, because they carry them around all day, there is a chance, that far less systems are being sold and developers are taking a higher risk by producing multi million dollar games. But there's more. I consider myself a hardcore gamer, I love high class productions and I'm willing to spend a lot of money on them. But when I look at my NDS collection, there are mostly games like Pokemon, Picross DS and Puzzle Quest. Of course I have a Zelda too... Look at the games, that are announced for Sony's upcoming NGP. Killzone, Uncharted, Call of Duty... All high Quality, high class, multi million dollar productions. I'm really looking forward to them. I know, I want to play them and probably I will. But these are all games that deliver experiences, I don't really want to play on a small 5 inch screen. I want to enjoy such games in my home theater on my 42 inch TV screen and in 5.1 surround sound.
Of course there will always be a market for AAA titles like Battlefield 3 or epic RPG's like Dragon Age 2. The question is, is it big enough to take a million dollar risk? It's the passionate gamer, who stands in line all night, only to be one of the first to get his hands on a long awaited game. The passionate gamer is spending a couple hundred dollars every year on multi million dollar productions.. but it's the mainstream, who makes these games a (financial) success. If the installment base of a handheld is not high enough, developers are less willing to take a risk in spending millions on the production of a game.
I could be wrong, of course.

Edited 1 times. Last edit by Reco Hasan on 4th March 2011 3:20pm

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Daniel Hughes Studying PhD Literary Modernism, Bangor University10 years ago
I quite like Dominic's magazine/book analogy, I think that works fairly well. The trick for Nintendo and Sony now is to make sure they capture at least some of that magazine/app casual market. I mean, when Nintendo have turned their hand to WiiWare/DSiWare, I've been really impressed with the results. Flipnote Studio is exactly the kind of content Nintendo should push in the future on 3DS. Hopefully we'll see Nintendo's creative side really shine in the digitally distributed market over the next couple of years. If they can do that, and continue to provide the more expensive, high quality releases such as Zelda and Uncharted, then there should be enough room in the market to support iOS, Nintendo and Sony handhelds. As far as I'm concerned, the tougher the competition between these giants, the better!
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Mario Bros collection on Smart Phone platforms... BOOM! App market pwned! (hope peeps can appreciate the humor, hehe)

Smart phones presents a threat, but it only goes so far. It might be quite the competition for the handheld gaming platforms like DS and PSP, considering that now a days the casual person has an IPhone or Android in their pocket, and in terms of fringe benefits (movies, music, etc...) they pretty much deliver on the same things. Even so, I don't think it will affect the big budget parts of the industry in a severe way; at least not in terms of hardware. Big systems like PS3 and Wii sell much more than just games. Console have gone a long way to develop into entire entertainment systems, so they get casual people buying console for many other reasons besides just the games. Hit titles will always be hit titles... They go the extra mile to deliver an entire experience; you could never get that on a handheld. And things like Call of Duty being on smart phones, well to me that's just like eating a soggy sandwich at an airport terminal; your hungry, and you have to eat something, and even if you don't love it, it keeps you going for another couple of hours; I guess it's just nice to sneak a play of your favorite titles when away from the "command center" (a.k.a. the space in front of my tv, which also includes my tv) :)
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Yiannis Koumoutzelis Founder & Creative Director, Neriad Games10 years ago
Let Nintendo come up with a nice FRESH line of game&watch style games for 200-300 points and we'll see if Mr Iwata changes his tune :) What Nintendo failed to understand with wiiware and dsiware is that you must let the market open and free on that end to encourage creativity and build critical developer mass. A mistake i hope they will not repeat this time around. Even with their model of development you can't avoid mediocre games coming our from companies that just started learning how to walk on the path that potentially leads to blockbusters. It is only natural. If they make an appstore\steam style business environment for 3DSware he'll see that Nintendo has nothing to fear. Only gain!

Everyone would LOVE to make games on on a Nintendo platform. There are so many making games on DS already using illegal means to access the hardware simply because Nintendo didn't allow them. Had they left the door open... It is these people that PSN and Live, and appstore saw. And realised the potential of a market such as this! I totally enjoyed games on my DSi \wii such as the Art.Style series or Bit Trip as well as the Art Academy. I wish there were more like that!!!
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Tony Johns10 years ago
Nintendo are now facing a huge challenge, not from SONY or Microsoft, but from the Social Gaming spectrum of FACEBOOK as well as the iPhone games from Apple.

That is all that I kinda interpreted from his keynote speech when I first heard it.

I also have a few consernes that sometimes people are just getting the free demos from the iPhone instead of paying a cheep ammount like $5 or $10 for a full iPhone or iPad game that they can download.

I was talking to a 50 year old woman that my mum knew who was loving playing games on her iPhone but she only brought the free software that were just game demos...

I can potentially see Iwata's point where if you have a large ammount of people only playing the free demos on the iPhone....and yet the cost of making the iPhone game apps are not turning the proffit they needed...and so few gamers dedicating themselves to download the full game and pay the $5 or $10 for the game app....

This could be the problem that Iwata is trying to talk about, but because of his way of using his language it may not have been communicated enough.

As well as the iPhone games being less in Quality.

As well as the big budget games having been developed at strict time deadlines....

The overall effort to manage the quality of the games themselves is starting to become lost to the demands of a big budget industry that is moving forward way more faster than anyone could have ever predicted.

Or at least that is how I interpreted from his words...

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