The big blue ocean

First of all, I highly suggest that you read this article which is actually a speech that Reggie Fils-Aime (aka The Regginator) gave last month during an investor’s conference held by Harris Nesbitt Analysts. I know it’s long, but you’re a big boy now so you can do it =D. And if you’ve thought to yourself lately “Wtf is Nintendo thinking? What is their strategy for the future?”, read the article. I’ll even admit that I have thought this to myself many times and I am probably the biggest Nintendo fan on this site.

In the article Reggie clearly states that Nintendo is not competing with Sony and Microsoft for the next generation crown.

“As we stand here, with a new generation of even more powerful game technology about to be unleashed, there are very different strategies in play. Sony and Microsoft are racing toward the sale goal: shiny new versions of the same old games. And we’re not suggesting that’s wrong. After all, it’s worked in the past. There will always be a market for the ‘Big Bang.’

But it’s not the only way.

Nintendo, as I’ll explain, is taking a second path — the one less traveled, you might say. A path along which we plan to move millions of new players to new kinds of interactive entertainment. And as for current players? For them, brand new ways to play.”

But why? Why take this path? Well, there are a few reasons actually.

Firstly, think of the console wars as an actual war. How do you practically ensure victory in some way or another? Let your two biggest enemies battle it out and then laugh in their faces after they have both battled nearly to the death. After all, the enemy of your enemy is your friend, right? Or in Nintendo’s case, the fact that your enemies are enemies is your friend. Or something like that.

Secondly and most importantly is Nintendo’s “blue ocean” philosophy. What this blue ocean refers to is the idea of expanding an industry. Tapping into its potential and reviving it. Reggie cites many statistics that show that general interest in videogaming is declining, and quite honestly, has not expanded since the 8-bit days.

“But before we start looking too far forward, let’s look at how the current console generation is winding down. We have currently sold through 52 million home systems in this cycle, beating any previous area. Initially many thought we might reach 60 million, but that doesn’t look like it’s going to happen. But scratch underneath that number a little bit and a different reality emerges. In fact, you start to wonder if the popularity of dedicated video games is really increasing.

Look at this generation compared to the first one 15 years ago. Research today tell us that among those 52 million machines already sold, a full 24 percent are part of dual-system households, and eight percent reside under roofs with all three consoles. The math shows that our 52 million systems have only reaches a little better than 35 million discreet American households, about 31 percent of all current U.S. homes. Back in the 8-bit days, there was only one console — the original Nintendo Entertainment System — which meant there were no dual-households. So 31 million systems equaled 31 million homes. And that represented 33 percent of all American homes at the time. It’s unsettling to see that in 15 years, we really haven’t increased the percentage of game-playing homes. He population has grown, but our relative popularity really hasn’t.”

I too will admit that after playing games for 12 years, I am getting bored. Most games seem like the same thing to me these days, which is why I only play a select few games instead of buying everything they put on the shelf like I did 5+ years ago.

But that’s aside from the point. Back to the blue ocean philosophy. Many other companies have also been succesful implementing this strategy. Anybody ever heard of the Ipod? Apple used the same philosophy with this. They recognized a stagnant market and developed ways to expand it and tap its potential.

But is the video-gaming industry stagnant? Well, in some ways, yes.

“This chart is familiar to most industry observers. It’s the trend of the Japanese game industry revenues over the past several years. What use to work, well, isn’t as working as well anymore. The chart speaks for itself. Of course, we want to believe that this can’t happen here. Surely that 16 percent decline in revenues we saw in September, and the 24 percent drop in game sales, were flukes. Likewise, the last two years of sales declines are predicable approaching the back half of a cycle. And just wants — business will be back up this year, maybe by double digits. Of course, a brand new hardware console and two new handhelds are necessary to turn the tide.”

“There’s evidence that our popularity itself is on the decline. In September, Piper Jaffray conducted in-class surveys of high school students across the country. A full 75 percent of all respondents say their interest in gaming is falling. And that number itself has jumped 16 percent in a single year. The same study also highlighted the polarization of the game-playing market. The hardcore is harder than ever. That minority, who say they play games daily, is actually up a little bit. And the hardcore wants harder content. According to the ESRB, the percentage of games sold with a mature rating has grown steadily over the last several years. But at the same time, the casual players may be falling away. More and more respondents who used to enjoy games on a weekly basis now say they’re doing so only monthly.”

This means that there are a lot more people out there like me. People don’t want the game industry to be the same as it was 10 years ago. And because of this the industry is ulimately hurting. Yes, new people are constantly being introduced to the industry, but at the same time people may be leaving the industry, possibly at a greater rate than the former.

“This is particularly perplexing because every year, we imagine millions of 10 or 11-year-olds convincing their parents to buy them their first home systems, while older players carry their game-playing passion further and further into adulthood. In this scenario, the industry should be booming. But instead, we’re left asking, “where’s the growth?”

Furthermore, it looks like we can’t even count on population growth anymore. All through the 20-year lifespan of the dedicated game industry, we’ve seen a steady increase in the number of young boys entering their pre-teen and teenage years. Historically, these are our ‘blue chip recruits.’ But now, for the first time, the number of 10-to-14-year-olds has dropped. And it’s going to get worse because right now the U.S. population of boys aged five to nine years is a full eight percent smaller than their 10-to-15-year-old brothers. And the pipeline is shrinking. In other words, if we just maintain our relative popularity, revenues are going to fall. ”

So Nintendo has its eyes set on the ocean, while Sony and Microsoft are fixated on the pond. And while they fight over who gets the biggest section of the pond, Nintendo will be exploring the wide open ocean.

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