Case Study: Implications of Nintendo’s Disruptive Strategy For the Video Game Industry

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The video game market has traditionally consisted of a young male demographic. However, many industry analysts assert that Nintendo has irreversibly altered the market by pursuing a disruptive strategy. Introducing the Nintendo Wii, an innovative console that breaks from the traditional controllers used by competing for video game consoles, Nintendo increased the appeal of video games to non-traditional demographic groups. Yet, as this case study will reveal, while Nintendo’s strategy was a success, it will not necessarily secure the Wii as a top console. Because technology is continually changing the video game market, competitors Sony and Microsoft also possess the opportunity to take advantage of emerging gaming trends in the video game industry, such as the growth of online gaming communities and the popularity of mobile gaming to effectively compete with Nintendo.

Analysis of the Video Game Industry

Though overall video game sales vary each year, the video game industry is a relatively robust market. In 2008, amidst recessive economic conditions, the video game industry still reported record levels of growth (Bulik, 2008, p. 6). The video game industry recorded a 31 percent increase in sales over the year 2007, even after the price of video games increased to $50 on average (2008, p. 6). The video game industry reaches markets worldwide, with a total of eleven countries reporting annual video game revenue that exceeds $1 billion (Research and Markets, 2009, p. 59). In 2009, the revenue of the industry was forecasted to reach $57 billion from the sale of video game hardware, video game software, portable video game systems, and online games (2009, p. 59). Yet, while video game sales are traditionally resilient to economic downturns and price increases, leading competitors face fierce competition to capture the video game market.

The battle to release the leading console is a primary aspect of industry competition. As Farhoomand (2009) notes, the video game industry emerged during the 1970s and expanded during the mid-1990s when Sony introduced the PlayStation gaming console (2009, p. 3). Considered innovative during the period, the PlayStation utilized the CD-ROM to store video game data rather than the traditional cartridge-based systems that defined older gaming consoles (2009, p. 2-3). As a tradition, competing video game manufacturers release the latest versions of their consoles every five to six in order to determine which technological innovations will win out in the market (2009, p. 4). Because the consoles that consumer purchases will also impact the types of games and accessories they purchase, the success of console releases and overall console sales determines which gaming system will take the lead in the market. Based on unit sales of video game consoles, the top video game manufacturers are Nintendo, Microsoft, and Sony (2009, p. 22). As of 2009, Nintendo led both Microsoft and Sony in sales with the introduction of the Wii console.

The technology adopted by Sony can be understood by examining the history of the two companies. Before entering the video game market, Sony was a successful manufacturer of electronic gadgets and was recognized for the introduction of the Sony Walkman during the 1970s (2009, p. 6). Though Sony initially partnered with Nintendo in implementing video game technology, the company initiated the development of its own console after reaching a disagreement over the viability of utilizing CD-ROM technology in gaming consoles (2009, p. 2). In 1995, Sony introduced the CD-ROM-based PlayStation to the United States market and become the leading console manufacturer by attracting teenagers and young adults with disposable income to this new technology (2009, p. 6). However, in 2006, Sony’s lead was compromised with the launch of the PlayStation 3. Because of the high price and supply problems, Sony failed to achieve 10 percent of its target sales and lost its dominant position in the console market (2009, p. 8). As the case of Sony reveals, merely introducing an innovative brand is not enough to secure the lead in the video game market. The failed release of a new console can reverse a company’s dominant market position.

Though Microsoft is a latecomer to the video game market, it has established itself as a leading competitor. In 2001, Microsoft entered the market as a part of its diversification strategy (2009, p. 8). With the success of the CD-ROM console system, Microsoft recognized that console games could threaten Microsoft’s dominance over the PC game market (2009, p. 3). Thus, in 2001, Microsoft introduced the Xbox console, and in 2002, Microsoft introduced Xbox Live, an online video game community that attracted two million subscribers within a three-year period (2009, p. 8). However, having only sold 21.3 million units, in comparison to the 83.5 million units sold by Sony, Microsoft’s initial performance was lackluster (2009, p. 8). The overemphasis on technology can be attributed to the failure of the original Xbox. Because Microsoft was insistent on incorporating an Intel processor and Nvidia graphics cards into its system, it lacked the flexibility that was needed to reduce costs and efficiently deliver the product to the market ahead of competitors (2009, p. 8). Thus, an analysis of Microsoft underscores that merely capitalizing on technological innovation is inadequate in achieving a competitive advantage.

Impact of Nintendo’s Disruptive Strategy

While PlayStation and Microsoft have temporarily emerged as leading console manufacturers, the Nintendo has enjoyed the success that is remarkably enduring. Though Nintendo traces its origins to 1889, as a company that focused on card games, it focused on electronic toys and video games between 1975 and 1985 (Farhoomand, 2009, p. 2). Nintendo secured its lead in the United States video game market in 1991 when it introduced the SuperNES, a cartridge-based console system (2009, p. 2). Further, Nintendo permanently captured the handheld game market with the 1989 introduction of the handheld game console, Gameboy (2009, p. 6). Since its introduction to the market, Nintendo has received the highest total sales of all manufacturers and has sold over 2 billion games in the United States alone (2009, p. 2). Thus, in contrast to the temporary dominance of the PlayStation, Nintendo is still the hegemonic company in the video game market.

However, while Nintendo enjoys its position as the dominant manufacturer, its ability to adopt innovative strategies enabled it to reverse its declining position against Sony. While Sony and Microsoft focused on providing superior technology, Nintendo recognized that market trends called for a new strategy. As Nintendo president Satoru Iwata noted, the video game industry was neglecting the interests of non-gamers through its focus on the technological interests of committed video game players (2009, p. 1). Prior to 2006, Nintendo executives noticed that the game market in Japan was decreasing and that the rise of complex video games deterred newcomers from entering the market (2009, p. 4). Thus, Nintendo pursued a strategy that was opposite the strategy of its competitors when it embraced simplicity over complexity in its next console. In order to meet the needs of non-traditional consumers, Nintendo launched the Wii, which introduced a wand-like controller that detected the hand movements of players and enabled them to emulate the actions in games, such as boxing, bowling, or sword fighting (2009, p. 1). After the Wii’s introduction, Nintendo led in sales and the company became the second most valuable company in Japan (2009, p. 1; 22). The sales success of the Wii can be attributed to Nintendo’s success in identifying a new market for its products.

Current demographic data on the video game market confirms Nintendo’s decision to appeal to non-traditional gamers. As Farhoomand noted, video game manufacturers traditionally targeted young men in their 20s and 30s with disposable income (2009, p. 3). However, a 2013 assessment of the video game industry reveals that 45 percent of video game consumers are female and 55 percent of video game consumers are male (Entertainment Software Association, 2013, p. 3). Additionally, with the popularity of online games increasing, 34 percent of online game consumers play puzzles, trivia, or card games, while 19 percent play casual and social games (2013, p. 4). Further, 16 percent of video game players play games with their parents while 32 percent play games with other family members (2013, p. 5). These figures demonstrate that video game manufacturers must broaden their appeal beyond the male youth demographic in order to successfully capture this diverse market.

However, while the Wii is a successful example of disruptive technology, there are challenges to maintaining its position as an innovative console. As the decline of the Sony PlayStation demonstrates, it is not difficult for a gaming console to lose its relevance to consumers in a short period of time. Demonstrating this contention, the 2013 release of the Nintendo Wii U only sold 3.91 million units within one year, which is abysmal in comparison to the 13 million Wii units that were sold during the same time span in 2006 (Molina, 2013) Lagging Wii U sales followed a year of declining sales for all console manufacturers (Seitz, 2012). In 2011, retail sales of video game products declined by 11 percent (2013). In order for Nintendo to capitalize on its disruptive strategy, it must respond to the overall market conditions that have negatively impacted console sales.

An analysis of video game market trends provides clues to the causes of the declined performance of video game consoles. According to a household survey, 68 percent of consumers report playing video games on their consoles while 63 percent report playing video games on their computers (Entertainment Software Association, 2013, p. 4). Yet, the rise of smartphones and other wireless devices present consumers with alternatives to consoles and handheld gaming devices. It is estimated that 43 percent of consumers play video games on their smartphones, and 30 percent play video games on a wireless device (2013, p. 4). Additionally, consumers report that they prefer to play games on their smartphones while they are commuting or traveling (2013, p. 4). Thus, it is necessary for Nintendo to accommodate the growing market for video games that can be played through mobile devices and other preferred wireless devices. As these consumer trends reveal, console manufacturers must utilize disruptive technology in order to adapt to the expanding options that video game consumers possess.

Summary and Conclusion

As the case study of Nintendo demonstrates, disruptive technology can enable firms to secure a lead in the market by attracting new consumers and altering the nature of the technology they produce. By adopting the simplistic Nintendo Wii, Nintendo reversed the trend of manufacturing technologically complex video game systems in favor of a console that appealed to non-traditional video game consumers. Further, by making the Nintendo Wii more friendly to independent video game developers and non-game applications, the Nintendo Wii expanded the functions of the video game console. Rather than being limited to entertainment uses, Wii enabled developers to introduce software that met the lifestyle needs of individuals as well. However, as the history of the video game market demonstrates, innovation is not enough to secure a leadership position in this constantly evolving market. Further, the competition from smartphones and other alternative devices threatens the market position of all three leading console providers. In order to increase the relevance of their brands, Nintendo, Sony, and Microsoft must learn to tailor their products to these market realities.

References

Bulik, B. S. (2008). Despite recession, video-game industry shows massive growth. Advertising Age, 79(20), 6. Retrieved from http://search.proquest.com/docview/208378153?accountid=14068

Entertainment Software Association. (2013). Essential facts about the computer and video game industry. The Entertainment Software Association. Retrieved from http://www.theesa.com/facts/pdfs/esa_ef_2013.pdf

Farhoomand, A.(2009). Nintendo’s disruptive strategy: Implications for the video’s game industry. Harvard Business Publishing. doi:10.1225/HKU814.

Molina, B. (2013, Dec 20). Nintendo's Wii U sales sputtering. USA Today. Retrieved from http://search.proquest.com/docview/1469748621?accountid=14068

Research and markets: Worldwide market forecasts for the video game and interactive entertainment industry. (2009). Computer Weekly News, 59. Retrieved from http://search.proquest.com/docview/198807784?accountid=14068

Seitz, P. (2012, Dec 07). Video game sales fall despite Wii U, 'black ops 2'. Investor's Business Daily. Retrieved from http://search.proquest.com/docview/1223521450?accountid=14068