Turning the Tanker

It's not just the 3DS that Satoru Iwata needs to turn around - it's Nintendo's whole business strategy

It's not been a good week to be Satoru Iwata. Ever since the launch of the Wii, he's been the CEO who can do no wrong - from his company's soaring sales and borderline ridiculous market capitalisation, through to his personal performances as consistently one of the most interesting, insightful and passionate speakers at GDC each year. Yet in the wake of the 3DS price cut, the shine has definitely worn off the Nintendo boss.

In recent years, certainly, he's been Teflon-coated - accusations of abandoning core gamers were easily rebuffed by pointing to sales figures (and the reality of the company's line-up, at that), while regular claims that the Wii market had collapsed were met with the hard reality that for a long time, "collapsed" Wii sales were still higher than rival consoles at their peak. However, I'd argue that Iwata started to lose his lustre significantly before the failure of the 3DS.

For Iwata to grasp the nettle and bear the pain of this U-turn is a demonstration of strength, not weakness

I'd peg the start of the real concern about Iwata's leadership to his GDC keynote last March. As ever, it was a fascinating speech - but where previous years had seen Iwata deliver extended love letters to game development creativity, this year's talk revolved around a stark warning regarding iOS gaming, and more specifically, the very low price points of iOS software compared with traditional handheld games.

There were two ways you could look at what Iwata said at GDC. The charitable interpretation, which most Nintendo fans chose to follow, was that Iwata was recognising the threat of iOS-style markets and encouraging developers to focus on developing high quality games for high price points, in confidence that consumers would recognise the difference and be willing to pay.

The less charitable interpretation, which was rather more widespread within the games industry itself, was that Iwata was doing a credible turn as King Canute - standing on the beach and commanding the tide not to come in. Up to this point, Nintendo hadn't shown the slightest interest in selling anything other than retro titles at price points lower than the traditional full-price level for its handhelds, which had made quite a few people a little nervous in the face of the enormous changes taking place in handheld devices. Now it seemed like people's worst fears were confirmed - Nintendo's strategy wasn't going to be to change, adapt and embrace, it was going to be to shout (very politely) at people for ruining the market with their cheap games. Cathartic, perhaps. Constructive, perhaps not.

In the wake of last week's painful and humiliating admission of the company's disastrous missteps with the 3DS, you might expect Iwata's tune to have changed. I say painful and humiliating here in the most positive light possible; I fully believe that the Nintendo of old would have borne the 3DS' sales figures in stoic silence, stuck to their guns, kept their chin in the air and calmly walked into another decade of near-irrelevance. For Iwata to grasp the nettle and bear the pain of this U-turn is a demonstration of strength, not weakness.

The tune, however, is eerily familiar. In the briefing accompanying the company's financials - the same financials which precipitated the 3DS U-turn itself - Iwata turns briefly to the matter of smartphone gaming, but only to deny that it's got much to do with Nintendo. The company's research apparently shows "no causal correlation" between the fact that increasing numbers of consumers are carrying around game-capable phones with vast libraries of cheap or free software, and the fact that consumers don't seem to want to buy Nintendo's new, expensive, dedicated handheld device, whose software is all very expensive.

Okay, it's a cheap shot, but it's easy to be snarky about market research and polling like this - my experience of it in most countries, but especially in Japan, has been that it's primarily aimed not at finding the right answers, but rather at finding the right questions which will deliver the answers that your bosses want to hear. However, while the substance of Iwata's short statement might look like exactly the same party line which was being peddled at GDC, the phrasing and context has changed my mind, at least a little.

Bluntly, after GDC, I thought Iwata had lost sight of reality. His company is an enormous oil-tanker, and he had blanched at the idea of turning it around from the decades-old model of producing expensive, monolithic software onto a new course which would be more competitive with the market emerging around him. Easier to be blind to the dangers ahead than to try to make a huge, conservative Japanese company act like a small, nimble one - so by accident or design, Iwata just didn't get it.

Now, tentatively, I think I want to retract that sentiment. Taken away from the context of his wider attack on App Store markets and smartphone gaming (and really, "attack" isn't a fair word - Iwata is a gentleman, and as such it wasn't so much an attack as a damning with faint praise), his statements in the financial briefing take on a slightly different tone, one that's rather more in line with the charitable interpretations of his GDC speech.

The core message now seems to be that Nintendo does really recognise the threat of smartphone gaming - and that it understands that it's an external threat which can't be driven away by shouting at developers, much less by shouting at consumers. Rather, if Nintendo wants to retain its present business model, it's got to fight for it, and the only way to do that is to create software that's so obviously, demonstrably better than anything in the smartphone ecosystem that consumers will be willing to pay the higher price.

One can't help but wonder if this week Iwata's rediscovering some of the fire in his belly that drove the creation of the DS and Wii in the first place

In this, I think Iwata does actually "get it". He knows that what Nintendo faces in the smartphone market is not just a threat from a rival game maker, which is what it faced down when Sony (and Sega before them) pushed into the handheld space. Rather, it's an existential threat to the entire dedicated handheld market.

Iwata understands something that many commentators have failed to grasp - that smartphones don't have to take 100 per cent of the handheld market in order to kill dedicated systems. There's a percentage point of the present market below which it just won't make commercial sense to release handheld games on dedicated platforms, no matter how enthusiastic the remaining percentage of users may be. I wouldn't risk a bet on what that percentage point may be, but I'm pretty sure that it's a logarithmic scale - with users switching to smartphones on one axis, and developers abandoning dedicated handheld devices on another.

So Nintendo fights back, and initially it does it in the way it best understands - by manipulating the price points of its hardware, and trying to get killer apps out onto the market in software terms. That's the kind of strategy that has won console wars for years, after all.

Yet this isn't a console war - it's a war of competing business models, and that, I believe, is where Nintendo's present strategy would fall short in the end. A lower price point and a better line-up of software will do wonders for the 3DS, especially now that PlayStation Vita is going to miss Christmas in most of the territories where Christmas actually matters, but it won't be enough to keep the enemy away from the doors forever.

Nintendo needs to embrace change - and that doesn't necessarily mean having to take drastic steps from the outset, or abandoning the hardware market (as some commentators have suggested for decades), but it does mean having to do more than just pay lipservice to the emergence of new markets. Vitally, it also means embracing online services - something which the 3DS has improved upon, but which is still a huge hole in Nintendo's armour. The "normal users don't care about online" argument was totally valid five or ten years ago - today, it's outdated and plainly wrong.

For all that, I think the fact that Iwata is recognising Nintendo's need to react to the emergence of iOS is a positive, and I think that the trouble faced by the 3DS will give him the mandate he needs to make big internal changes at the company in order to face this threat. I'm not sure he quite knows what those changes are just yet - and I'd be a little dubious of anyone who claims to have all of those answers right now - but I'm not willing to write off Nintendo, no matter how humbled they may now look after the events of last week.

Most of all, I'm not prepared to write off Satoru Iwata, because I remember the position that Nintendo was in when he took the helm, and I've seen how he turned the entire company around. He's obviously a CEO who performs astonishingly well when his back is to the wall - and one can't help but wonder if this week he's rediscovering some of the fire in his belly that drove the creation of the DS and Wii in the first place. If so, what happens next will be fascinating to watch.

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Latest comments (19)

Lewis Middleton Studying Game Design and Production Management, University of Abertay Dundee6 years ago
Come on Ninty! Show us that you still got it!
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Klaus Preisinger Freelance Writing 6 years ago
Anyone of us could, no doubt, name at least five games being currently sold on XBL, or PSN, or Steam which cost between $10 and $15 and we would die to play on a mobile system. We wouldn't necessarily buy a $40 version of it.

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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
Just want to point that they sell far more than just retro titles at low prices in their consoles respective download services. Especially the 3DS which has many iOS style titles on it for $1.99...yeah, I know, that's not .99 cents.

Also, the $40 game price appears geared toward keeping the 3DS in a separate pricing tier from the DS but that leads into the whole name and design issue between the 2 consoles.

Nintendo and Iwata are known for making doubters regret their dubiety. I don't any reason to suggest the some won't apply again.
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Show all comments (19)
Patrick Williams Medicine and Research 6 years ago
I disagree with this article because the comparison of expensive vs inexpensive games doesn't work. You can't compare games that are at the 3DS' price point vs the iOS price point when there aren't any games on the 3DS that people want to buy. In that context, it is obvious why people will spend a dollar or 2 here and there on iOS games and not the 3DS.

The real challenge will not occur until the 2 markets actually face each other.

The part that I agree with this article is that Nintendo is an oil tanker and that they don't get it. I say this because as was referenced to in this article, the N64/Game Cube years were years of irrelevance for Nintendo as Sony soared ahead of them and Microsoft jumped into the fray. What is happening to the 3DS is what happened to do those consoles, and somewhat to the Wii once the phenomenon started dying down: Nintendo and 3rd party developers simply aren't making the games.

Tl;dr: Nintendo needs to stop the hemorrhage of titles for the 3DS and release more titles of their own, preferably not just remakes / old franchises. This is the real problem.
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James Prendergast Research Chemist 6 years ago
To be honest, i thought that many DS games were already overpriced for what they offered compared to similarly priced static console and PC games. Having more expensive titles for the 3DS, no doubt for similar offerings but with added 3D makes no sense to me. It always struck me that either DS titles were making ridiculous returns or were using the wrong business model and thus failing. I don't remember seeing any numbers but i don't remember anyone apart from Ubisoft and maybe THQ boasting about the returns on their DS offerings...
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Maybe one should wonder if the failure isn't also down to the lack of interest in 3D. Most kids don't really care about it as much as we assume they do, and a lot of parents are worried about the effect on their kids.
The 3D effect is fading in cinemas. 3D TVs aren't selling as well as they'd hoped (not to mention 3D blurays, abysmal).
I think there is still a lot of place for higher price point handheld, I certainly can't get my fix of gaming with my iPad and my Android phone when I'm on the move.
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Gary Lucero QA Analyst, Advanced 6 years ago
I am not a Nintendo fan -- I don't play their games. At all. But I realize they are a greatly loved company and that there are people who will ALWAYS buy their consoles, handheld gaming systems, and games. Even if those people claim they will skip the 3DS or the Wii U, they will end up buying them because they won't be able to resist a new Mario or Zelda game. As a gamer, I can understand and appreciate that.

But as someone who has very little need for on-the-go gaming, my iPod touch and its cheap games are perfect. I can play little arcade titles like Tiny Wings or big RPGs and strategy games. I can buy lots of 99 cent games, play some, forget about others -- I can experiment. I could never do that on my Xbox 360 or on a PS3 or any of Nintendo's platforms. Sure, there's XBLA, etc, and they are awsome, but iOS has literally thousands and thousands of games that I can easily download and try.

So while I agree that Nintendo can find a niche and make a lot of money with their platforms, they might not have a cash cow like the DS or the Wii any time soon. They might find their profits down, and the fight for relevency questioned by everyone except their fans. I just don't see the 3DS or the Wii U as something the casual or core gaming crowds embraces unless they need their Mario fix.
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Gregory Keenan6 years ago
Only people I know who own a 3DS are people who didn't own a DS.

Those who own a DS dont see the point in upgrading until more games come out for the 3DS.

Lack of distinction between the consoles! I fear the same may happen with the Wii U
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Kevin Patterson musician 6 years ago
It's so odd to hear anything regarding Nintendo being in trouble, as the Wii sold so well for them, and did astonishingly well. However, that $250 price point was terrible, not enough great games at launch, and i believe calling it just 3DS was a mistake. I have talked to a few DS owners who didn't even realize that the 3DS is a major difference in hardware compared to the DS. Nintendo hasn't helped themselves in this matter with releasing all those prior DS models with a slightly different name.
Nintendo is very very lucky that the Vita isn't launching for Christmas, that should help them. I'm more excited about the Vita than the 3DS, and i never owned a DS or a PSP, the dual stick controls alone are so exciting for me. I own a 3GS iphone and use it for minor gaming, but i hate the touch screen controls. If Sony can create an App store for the vita where i can buy cheap games as well as high end ones, the vita sounds great.
Nintendo sticking with the one joystick ruined me wanting a 3DS.
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Dominic Jakube Student 6 years ago
First the 3ds was way overpriced to begin with, 20 years ago I bought an atari lynx at luanch for almost the same money then, 400 aussie dollars that the 3ds launched at 20 years later A$350 and the lynx came with a proper game, and the lynx was on a tech level greater than its main console rivals nes/master system and used the new tech of colour l.c.d..
Add the no good game syndrome of the 3ds luanch and you see the disaster, I see the 3ds falling between 2 stools adults with smart phones and kids that cant use it for fear of going blind.Ad to this the specter of the ps vita and it could go the way of virtual boy.
On the console front to little to late, the wii u looks good but if microsoft and or sony wow e3 next year with new hardware before the wii u luanch it will be a very hard sell to the core market.
Worst case scenario nintendo goes back to wilderness or the n64/game cube days or gets bought out by apple/microsoft.Either way if I had nintendo shares I'd be selling as I think their days at the top are done.
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Stephen McCarthy Studying Games Technology, Kingston University6 years ago
I have a bet going on to see if Nintendo goes out of Business (or very close to that)
Until they see that the hardcore end is the better part to shoot for (there less hardcore gamers but they will keep coming back if they like what they are getting) I just do not see how they are going to get out of this.
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Eliot Lloyd Studying Computer Games Design and Production, Northumbria University6 years ago
Iwata's right in respect to the fact that there is no evidence of causation between people buying smartphones and less people buying dedicated handheld gaming devices. The reason that the DS and Wii were such big hits is because they were bought by a LOT of non-gamers. The people who bought them just aren't that interested in buying a new, expensive model with not a lot new on it. Most of the people who bought the 3DS are already gamers.
This is anecdotal evidence by the way, but the only people I know who bought the 3DS were people who already have smartphones. They also happen to be big gamers, and a lot of them never had a DS. A lot of the people I knew with DS's were kids and people in their 30's to 50's, and weren't traditional gamers. None of them happen to have a smart phone at this point in time (that I know of).
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
Stephen, you are betting that Nintendo will go out of business? This is a 110 year old company that has never once in its entire history had a negative fiscal year. And remember, they've only reduced their profit forecast, which means they aren't projecting a loss, just less "profit" than before. Companies that make a profit don't usually go out of business. Especially not ones with nearly $20 billion in reserve cash.
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Kai Oehler Game Designer 6 years ago
> Stephen
It seems you study game design, but are betting on a platform holder to go out of business? If you're in hopes of entering the development industry, you'd be best to exit a bystander's mentality, because the industry's predicament is also your problem.

Which brings me to an aside about this site, I can't believe how many commenters make statements that don't bode well for their careers.
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Stephen McCarthy Studying Games Technology, Kingston University6 years ago
If they do make a a U turn then I will take it back and say they started to do the right thing.
the betting thing was partly a joke on the number of bombs they are walking on right now.
(+the world is not doing so hot in the money area)
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Rick Lopez Illustrator, Graphic Designer 6 years ago
The only reason people have so many smart phones is not because they use it for gaming, but as an utility. Like the water and electricity in a household, a phone was also part of the main utilities. They just happen to have evolved to a point were they can be used for gaming. So mostly everyonehas a device capable for gaming. But as a gamer I usually look for a dedicated gaming device. At the end of the day my phone is primarily for necessary things like work and keeping in touch with my family and friends. And i think a dedicated gaming device will always be a step above when it comes to gaming. And if your a gamer, then it would be a proper choice to purchase a 3DS or VITA. And I think the problem with dedicated gaming machines is simply that the cost of consoles and games has skyrocketed to a point that is absurd. Even without the low cost of smart phone and android games, the cost of gaming is too high for anyone. I think Nintendo and SONY's competition is themselves. i bet if they lower there prices more people will buy. Its like with the NEO GEO when it came out years ago. A game cartridge would cost 200$... and honestly I dont think a game like Angry birds would be succesful if it came out at 40$. And yes, smartphone devices have shifted the playing field by introducing non gamers to gaming, Nintendo and SONY are scaring these potential customers away with there HIGH costs. they have only themselves to blame in the end for people turning to cheaper ways to play.

Edited 1 times. Last edit by Rick Lopez on 8th August 2011 8:21pm

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Sergio Rosa "Somewhat-Creative Director", Domaginarium6 years ago
I have to say I don't agree with the statement about smart phones killing dedicated gaming systems. Unless smart phones become gaming devices that appeal to the "hardcore gamers" or "casual gamers" that play whatever games on a console (meaning, unless smartphones get some really good killer apps), I find hard to believe someone would stop playing Zelda whatever in favor of Fruit Ninja (or something like that).
And that part about the iPhone being a better gaming device because it has more games than the DS (as Steve Jobs said on one of his Macworld keynotes) is not a valid argument. Around 90% of those thousands of games available on the iPhone would be forgettable for those gamers playing on dedicated devices.

Edited 1 times. Last edit by Sergio Rosa on 9th August 2011 6:48am

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John Blackburne Programmers 6 years ago
I agree that most people with smart phones have them for reasons other than playing games: for their design, for their overall performance, because they take nice pictures or for one or two particular apps such as Facebook or Twitter. But I think many people buying smart phones, and almost all buying iPhones and iOS devices, are doing so for the many apps, especially games. If you're a gadget or games enthusiast in the market for a new phone you are much more likely to get one that plays games, after which you are much less likely to shell out another $169, $249 or more for a console which plays far fewer, much more expensive, games.

The problem is phones have destroyed the consoles traditional model. In the past the console was subsidised by the games, so a subsidised console was paid for by overpriced games. But phones have advanced so much that you can get now an Android phone for less than a 3DS, even without a subsidy. And phone companies have turned subsidies into an art so you pay little or nothing for a phone worth even hundreds of pounds on a contract.

Game price and choice is more important than the console price. Nintendo and Sony really need to embrace pricing and distribution more like the iTunes store and the Android store and open it up to all developers. Given its poor launch the 3DS needs to persuade users and developers it will still be competitive in two years, and the best way to do this would make it a much more open platform. Sony too, with the now delayed PSV.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.6 years ago
No, if we keep opening the flood gates on low priced games, a new crash will come about. Too much capital going to games that do not turn a profit and few major blockbusters (Angry Birds) among thousands of games no one ever hears about.

The 2 markets can and need to co-exist. You will not have 1 market serve the needs of the other by itself. Simply cannot happen. And 1 market alone under serves the whole.

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