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Games Business 101

by Rick Powers - February 27, 2003, 11:20 pm PST

There’s a new game that everyone is playing; run your favorite company, correct the “mistakes”, and make the company successful. But what does it really mean to run a successful company?

It seems like everyone with an Internet connection seems to know best how Nintendo ought to be running their business. “Nintendo needs to advertise more!” “Nintendo needs to be aggressive!” “Nintendo needs to buy more exclusives!” Ironically, I sit here typing this as one of the same armchair quarterbacks analyzing Nintendo’s business and offering my insights, while decrying you for doing the same. But there’s a difference: I’ve been there. While I’m certainly not an expert, I do have more experience than the average gamer, in both the games industry and business in general. Coming from that position, there are a few things that you need to know before you comment on your favorite Internet forum that Nintendo (or any company, for that matter) is going about things all wrong.

First and foremost, it’s easy for anyone to jump in front of a keyboard and say how he would have done things differently. In fact, that seems to be the new American past-time, and it is quickly approaching being a worldwide phenomenon. However, it’s an entirely different situation to have the helm of a multi-billion dollar, multi-national corporation and make the decisions that will not only keep your employees paid, but also keep your shareholders happy. To that end, there is only one thing that gets the job done, and that’s profit. While gamers like to think that every company wants to have the most market share and be “Number One”, there’s little point in doing that if it costs you money. Nintendo is a public company, and like any responsible public company, their number one goal is to be profitable. And not just profitable, but as profitable as possible, which means looking at every aspect of your business, from development to marketing, and looking for ways to widen your profit margins.

This might sound a bit odd, as those who follow the games business from the sidelines have always been told that the way you make money as a hardware manufacturer in the games industry is to sell the hardware at a loss, and make up the difference in licensing fees. Even Nintendo has acknowledged it, but if you look to the past, you’ll see that Nintendo has rarely followed that philosophy. GameCube was the first console that Nintendo lost money on at launch, and even then, only in the single digits, and that loss was erased in six months. This is in stark contrast to both Microsoft and Sony, who lost nearly $100 per console at launch, and analysts claim Microsoft is still losing that today in order to remain competitive. Nintendo developed a console that is low-cost, but still competitive in terms of performance. Not including a network solution in the box, or a hard drive, or DVD movie capability may have cost Nintendo sales, but staying focused on their core business has helped them make money. So why does Nintendo keep perpetuating the myth that you have to sell at a loss? It amounts to business strategy. Let your competitors throw money at their problems. Never tip your hand.

It’s not just in hardware design that Nintendo looks to make a profit. Nintendo carefully analyzes every move they make, in an attempt to ensure that every piece of hardware they sell and every game they develop will not just make money, but will maximize profits on everything. Have you ever noticed that Nintendo seems to do some very interesting marketing tactics? Nintendo knows how to use the media to do a large part of their marketing for them, so holding events like “Yoshi Day” can get the company media coverage much cheaper than paying for TV commercials. Nintendo looks to new directions and “guerilla marketing” to as ways to increase awareness of products without having to run an expensive advertising campaign. How expensive is traditional advertising? A full-page ad in the Seattle Times, black and white, in the Sunday edition, costs $20,000 a day, and that doesn’t even count the development costs of making the ad; that’s just buying the space. Guaranteed placement costs even more. And television advertising is even more expensive. Thirty television spots a week, mostly non-prime time, mixed between 30 and 60-second spots, costs upwards of $1.5 million for one quarter. That is a bare-minimum, shoestring campaign, and all of these costs are accrued before you even launch the game. That’s why you see Nintendo running movie trailers more than you see television advertising; it’s less expensive, and the bang for the buck is a great deal higher. In fact, one of Nintendo’s best marketing ideas in a long time are the “Cube Clubs”. They are relatively cheap to hold, they whet the player’s appetite, and they can be held in any area where Nintendo thinks sales could use a boost, specifically targeting weaker markets.

Companies like Microsoft can get away with huge marketing budgets and minimal profit margins because games are not their core competency. They have other businesses to fall back on; Microsoft specifically has its Windows and Office products to subsidize everything the company does. They can afford to advertise with high frequency in prime time, because they’re building a brand from scratch. That’s actually Microsoft’s business strategy…build product recognition with the first version of any new product line, then extend that market with the next version. Nintendo, while having a great deal of money in the bank, needs to be more frugal, because losing money on a product with no way to recoup those costs could turn into a major financial setback. Sony needs to advertise heavily and minimize profits because they are already the market leader, and they are aggressively defending that position against Nintendo, a savvy company who has been in the business for decades, and an 800 lb. gorilla like Microsoft.

Additionally, a company like Microsoft can pay developers ridiculous amounts of money to develop for Xbox, and Sony can pay money for exclusives, or waive licensing costs. Nintendo would look at that and say, “How does this make us money? Would having this exclusive game and receiving no licensing money from it sell us enough consoles to make it worth the time, effort, and money? And would the end benefit to the consumer be worth the expenditure?” In a great many cases, the answer is simply: no. Nintendo makes money on third-party games one significant way, and that’s through licensing costs. As soon as Nintendo waives those fees, the only way Nintendo can make money is in any hardware sales that title generates or additional software sales. The fact is, third-party games rarely move hardware units, and it’s nearly impossible to predict any impact a single third-party title might have on sales of other games. The same can be said for the end experience on the consumer end. Nintendo wants to portray their consoles as unique and different, and of course, leverage their handheld in that space as well. If a third-party exclusive is not going to benefit the gamer by being only on a Nintendo console, Nintendo isn’t likely to spend the money. This all explains why Nintendo is more likely to create software development houses (or buy them) like Nintendo Software Technology and Retro Studios than they are to simply hand money over to anyone with no guarantee of return on investment. Sony managed to snag a great game in Grand Theft Auto 3 (and Vice City), but it was a huge risk at the time. It was a risk that Sony could afford to take, and that Nintendo, realistically, can not.

So the burning question is this: if Nintendo wants to become the market leader in sales again, what do they need to do, if advertising and buying exclusives aren’t going to solve the problem? The answer is … nothing, at least, not right now. Nintendo could never overcome Sony in sales in this generation, and it would be folly to throw money at the problem trying to achieve that goal, like Microsoft seems happy to do. People are quick to point out Nintendo’s tenacity and aggressiveness in the 80’s with the NES, saying that is the answer. Back then, Nintendo was not just trying to launch a console, but re-launch an entire industry. Plus, many of the tactics Nintendo used back then weren’t entirely legal, and trying those methods today would put the company in a lot of hot water. Look at Microsoft’s recent legal woes with how it tried to protect and extend its market share with Windows.

To “win” in the future, Nintendo would need to focus on the next generation of consoles, and meeting or beating Sony and Microsoft to market. Sony’s head start is a large part of the reason for their dominance today, since they jumped in early and already had a dominating position with the PlayStation. Nintendo needs to negate that advantage and force the consumer to pick a console based on either brand loyalty or software selection.

Secondly, without an installed base to measure, developers need a reason to write software for Nintendo, rather than for the competition. While Nintendo isn’t likely to simply write out checks, they could make sure that the hardware is competitive and attractive in the performance arena, as every developer wants to write for the “coolest” console. This is likely to be tricky, since Sony and Microsoft will think nothing of throwing hardware or non-gaming additions to their consoles and losing $100 per console or more just to grab buyers. Nintendo will need to make sure they get great performance at a good cost, but not be afraid to compete at the same price point. Nintendo needs to further the distinction that Nintendo is about quality gaming and not about being an entertainment appliance. While there are many consumers that will pass up a Nintendo console in favor of a “do-it-all” box, Nintendo isn’t likely to win those consumers anyway. Sony is more well-known in that space right now, and Microsoft is determined to be in that space at all costs.

Nintendo also needs to overcome the stigma of being the “family”, or I daresay, “kiddy” console maker. They need to be aware that Sony and Microsoft will be more than happy to try to shoehorn them into that mold once more, and Nintendo will need to be on the defense somewhat. That means abandoning the idea that having a recognizable “Nintendo color” is the way to go. You can’t go wrong with basic black and shiny platinum. Those are the two most popular colors of GameCube for a reason. Price is a factor here as well, because when you price yourself too low (even if you’re making money), consumers will view your product as a toy, rather than a machine. Price the machine to match your competitors, but throw in something extra to illustrate the value.

Nintendo needs to remember what got the Nintendo 64 all the cheap pre-launch press … and that is an absolutely stunning launch title. While it’s unlikely that they can re-create a franchise the way they moved Mario from 2D to 3D again, they do need to make sure that they have at least one “mature” title to grab media attention (something like a Metroid Prime would be a great start). Even today, people are still talking about Halo like it was the second coming. Nintendo needs to have that attention on them. That means leaving games like Luigi’s Mansion on the back burner and focusing on something more realistic that the media can attach all sorts of buzzwords to. Sony’s launch was pathetic, but with a one year lead (a year and a half in Japan) and backwards compatibility with PlayStation software, they could get away with promising bigger things. They needed to get hardware on the market to protect that market share, and the strategy worked.

Finally, Nintendo needs to leverage the Internet much more than it has been, and not just for online gaming. The Internet is a great advertising medium, especially after the latest Internet advertising crash. It’s much cheaper than just about any other medium now. More than that, Nintendo needs to use websites like this one more to their advantage. The movie industry reportedly creates “fan sites” for movies that aren’t run by traditional fans; they’re paid for by the studios. It’s the feeling of a grassroots “I hear this product is great” site that appeals to consumers. More and more people are doing their research on purchases using the Internet. They are wary of larger sites that they think might have been “bought off” by a company and are flocking to smaller sites to make sure they’re getting the real story. By being more open and more willing to work with fan sites, they are getting in touch directly with the people that are buying their products.

More important that anything, Nintendo needs to keep doing what it’s been doing all along, and that’s making quality software, outstanding hardware, and a healthy profit. Those are the things that have kept Nintendo in business this long, and will keep Nintendo in business for years to come. Even in the games business, it’s not a popularity contest. A lot of great companies with great products loved by the masses went out of business because they couldn’t find a way to make money at it. Nintendo has outlasted the likes of Sega, NEC, Atari, and others because rather than trying to be the best, they focused on what they DO best. Make great games and hardware at a decent price, give yourself a healthy profit margin, and ignore the pundits who all think they can do it better than you.

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