With the maelstrom of conflicting news and opinions surrounding everything Nintendo, how can you know if Nintendo is putting out a good financial report or a bad one? You know should Nintendo announce a new product or price drop, there is bad news in the financial report.
Apparently, investors didn’t take the bait. Nintendo’s stock is down around 10%. Like the investors, I will not be distracted by the 3DS price cut.
There is bad news all around in Nintendo Land. Nintendo is actually taking a loss. This is not due to foreign currency exchange rate. Nintendo isn’t selling enough to cover the costs of the company.
Nintendo’s financial crisis (not selling enough to cover the costs of the company is a crisis) is due to two reasons.
No one in Nintendo knows how to sell in a recession-
Ever since the early 80s, the United States enjoyed healthy economic expansion up to near the present. Japan, also, had a massive economic boom in the 80s that ended in the 90s. Ever since that time, Nintendo made most of its sales in the United States, not the ‘Americas’ despite NOA trying to say that sales of Nintendo products in South America or Canada are on an equal level as the United States. They simply aren’t comparable at all. And then there is the economic up and downs of Europe which I am not as familiar with due to how Europe’s up and downs are more localized within their nations.
Nintendo’s rise paralleled the rise of Japan and the economic boom in the United States in the early 80s. When Japan’s boom ended in the mid 90s, Nintendo sales came mostly from the United States (handheld sales were still strong globally). The N64 and Gamecube (and even the Wii) sales were most concentrated in the United States. The economy has to be a factor.
Shigeru Miyamoto has never sold a video game in a recession streaked market. Donkey Kong and the NES came out in the early 80s.
Satoru Iwata has never sold a video game in a recession streaked market. Aside from the Nintendo handhelds, which had no competition until recently, Iwata’s career parallels Miyamoto’s as he hasn’t seen steep economic decline.
Reggie Fils-Aime, whose career has been totally in the United States, rode success from Vh-1 and selling pizzas due to economic expansion.
It is easy to be successful when economic trends are growing. It is the test of a businessman to sell when economic trends are reverse. No one in Nintendo has this experience or expertise.
Hiroshi Yamauchi, the previous president of Nintendo, had this experience. When you look at the shoestring budget and how hard people had to work in NCL and even the first days of NOA, much of this seems forged from this prior experience of recessions. The infamous ‘conservative’ nature of Nintendo’s finances is due to Yamauchi’s experience and understanding of how wobbly the gaming market is.
The point is that Nintendo has been acting that the year is 2006, not 2011. The 3DS at $250-$300 with $40 software might have sold in 2006 (I don’t think it would). But in 2011, at the edge of economic depression, it cannot.
“But how can you predict the economy?”
Very easily. People will recall how in the Blue Ocean articles I wrote back in early 2007 said ‘crazy’ things such as confident there would be a depression environment in the very near future, that in 2012 I wanted to not be in the United States, and that I was going around buying games, selling games, stocking up as if I was preparing for some catastrophe. It did sound crazy, but there was a very sound financial reasoning behind all of it.
Economic decline occurring around 2012 is the most persistent and prevalent financial prediction made. I have finance books published in the year 2000 that read, “I do not want to be president of the United States in 2012,” the author says. Why? Because of the demographic time bomb. Baby boomers will be retiring. Aside from the Social Security and Medicare ruptures this would cause (when people get older, their medical bills go up fast), there would be tons of experienced workers leaving the work force. In the United States, there is the law called the Employment Retirement Income Security Act (or ERISA) passed in 1974. It changed how Americans can retire. But essentially it is about when people reach a certain age (I think it is age 78?), their ‘investments’, by law, must exit the stock market so the government can get their taxes. It is inevitable that as more and more baby boomers reach this age, there will be more money coming out of the stock market than entering it. And all the additional spending, printing of money, Obamacare, has not helped the financial situation. It has put the pedal to the metal as the car speeds up to the cliff.
Regardless, the situation is still much better than what Europe or Japan face. The US is still growing in terms of population. Europe and Japan are not. The population pyramid is upside down. When those old people retire, I cannot imagine the economic devastation that will occur.
The point is that it is very predictable for an economic downturn and very predictable for the economic downturn to remain steady as this demographic timebomb goes off. If anyone doubts me, just look at the current news. All the ‘drama’ that is going around with these budget plans and all is actually revolving around this demographic timebomb.
Nintendo already had the solution to sell in an economic wasteland. The Wii, by design was going back to the NES roots, and part of those roots, either realized or unrealized, was selling to an economic uncertainty.
The Wii was originally imagined to sell around $100 at launch. The price went up as things like a solid-state harddrive was included.
The Wii also had the mission to lower development costs. Development costs were rising exponentially with the move to HD and ‘more powerful’ systems. Costs were out of control. The Wii was about keeping the costs under control and improving the interface.
Most importantly, the Wii was set to the Blue Ocean Strategy. The Wii was to make new gamers and to sell to lapsed gamers as well as current gamers. The reason why this is important is that the Game Industry has been taking growth for granted (as Reggie Fils-Aime said in latter 2005). The ‘growth’ the Game Industry has seen has not been actual growth but growth in population and more disposable income as gamers grow up to become adults (and can spend five times as much to play games five times as less). ‘Growing the market’, a common term used by Nintendo back in 2006, meant actually spreading gaming beyond the current gamers.
Believe it or not, much of the Wii philosophy came about due to Nintendo’s business side seeing this highly predictable upcoming financial calamity. They KNEW Japanese population was aging. Therefore, it makes business sense to make more games for this aging population. Games like Brain Age make sense.
The reason why someone like myself was so excited about Nintendo then was not just because they became interested in making games I want to play, but Nintendo saw the big picture. They knew the future of the macro environment and were taking steps to get gaming in line with that and to fight off the disinterest ravaging the gaming market.
In the 8th Generation, we are witnessing a complete abandoning of the Wii philosophy from Nintendo. In a recession market, the 3DS makes no sense. Instead of trying to make a game console for ‘everyone’, Nintendo appears to only want to make a game console for ‘people who like 3d’. This is not aiming for the mainstream market.
There are various hypothesis I’ve given about why Nintendo abandoned the Wii philosophy. There is no need to go into them here, the point is that Nintendo abandoned the philosophy of what made the DS and Wii successful.
I projected, years ago, that with Nintendo focusing on ‘keeping prices low, cutting production costs, staying near the bottom of the market’ and ‘focusing on making new gamers’, that Nintndo would inherit the future (i.e. have a 90% control over the market like the NES). Why? Sony and Microsoft had high prices, kept increasing production costs, and stayed near the top of the market, and did not focus on making new gamers. So when the economic calamity came (and we’re only experiencing the first wave), Microsoft and Sony consoles could be pushed out of the market entirely while Nintendo remains steadily growing.
I never imagined Nintendo would abandon the philosophy of the DS and Wii to re-adopt the failed philosophy of the Gamecube and Virtual Boy. But then again, I never imagined Nintendo would abandon Super Mario Brothers after Super Mario World.
All these ‘3d experiments’ and ‘Gamecube philosophy’ have no future. Nintendo could pursue them, despite how poorly they performed, in the past decade because economic times were healthy enough to prop up mediocrity in gaming. However, we are in very different economic times. The Gamecube would fall apart at the seams if released today. Nintendo will financially self-destruct if it tries to go a Virtual Boy or Gamecube type direction. Before anyone says, “That’s not possible. Gamecube made money. Nintendo cannot sink,” let me point that people said the same of the Titanic. Nintendo is a business and without customers, it most certainly can sink. The Gamecube direction is not sustainable. It wasn’t really sustainable in economic good times. In economic bad times, it is corporate suicide.
Since the history of video games is so short, and the ceased economic good times so long, we have a very small pool of gaming to look to in what sells during recession. The success stories are…
Arcade games (late 70s and very early 80s)
Atari Era and NES (late 70s and all of the 80s).
Pre-3DS Nintendo handhelds (all sold well in recession regions like Japan and areas in Europe).
What is this form of gaming? The common spirit in the above is that they are all arcade-esque. Arcade games are, by nature, arcade-esque. Atari Era was defined by arcade games at home (home versions of PONG, Space Invaders rocketing the Atari 2600, Donkey Kong rocketing the Colecovision). The NES games were arcade ports or grew up with the arcade skeleton like Super Mario Brothers. And the pre-3DS handhelds from Gameboy to DS all shared a similar spirit of ‘pick up and play’ games of reflexes, arcade-esque.
You can’t point to the PS2 in Japan and say, “See? That sold well in recession Japan,” because it didn’t. The Japanese gaming market was in decline until the DS. Now, the Japanese gaming market is in continued decline.
Why did the arcades come about in the first place? Perhaps, due to the recession, people could only afford to put in a few coins to play a video game. I remember the Atari 2600 being seen as ‘costly’ at the time.
The NES in America, while America was entering an economic revival at the time, the NES did have to restart the entire console market over again. The NES did have to sell to hostile retailers and to a public cold on game consoles.
Look at what Nintendo offered:
Above: All that came in the box.
“But that was then, Malstrom. That robot wasn’t included with the NES later on.”
True, but look at all that was included with the console back then.
Above: The most common NES package.
The NES came with two controllers, two games, and a light gun. Today, all you get is a controller. Under the Wii Philosophy, this changed to a controller and one game (Wii Sports). While console manufacturers have tried to bundle a game with their console for a long while, the Wii did so in the fashion that the Old School consoles did. Wii Sports wasn’t the ‘flavor of the month’. It was the philosophy for the system. Just as Super Mario Brothers defined the philosophy of the console for the NES.
The Power Set was what I thought was the coolest NES package. Check it out:
Two controllers. Light Gun. Power Pad. And three games (Super Mario Brothers, Duck Hunt, and World Track Meet). Duck Hunt was a proto-Wii Play. World Track Meet could be argued to be a proto-Wii Fit. There was something extremely cool about the Power Pad and light gun then. I fondly remember playing NES games (with regular controller) sitting on the power pad. I do not know why I did that. It felt cool. Like I’m being all ‘technological’ or something!
The ‘Action Set’ with Super Mario and Duck Hunt cost $150. The ‘Power Set’, with the Power Pad and World Track Meet, cost, I believe, $200.
“But inflation! How much would that cost today!?” You can’t point to inflation because computer part prices have decreased faster than inflation. And aside from wireless technology, there is nothing that has made the fundamental game controller more expensive today than it used to be. Yet, only one controller is included in the box for whatever reasons.
Check out the Gameboy.
The Gameboy cost $89. Included in the box was Tetris, the Link cable, headphones, and batteries. Essentially, it was a ‘pick up and play right there’ type of package. If I came from survival camp, with only $89 plus tax and nothing but the clothes on my back, I could buy a Gameboy and immediately start playing.
Let’s look at Atari:
Above: You don’t want that Pac-Man…
Atari 2600 came with two joysticks, two paddles, and a game (Combat).
It appears the start of the evil trend of only including one controller began with the Sega Genesis. (I know Atari and NES had one controller, but those were the el cheapo bundles no one bought). At least the Genesis still came with a game.
Super Nintendo came with two controllers and Super Mario World. At the time, I was disappointed that there was no Duck Hunt or light gun type game.
One of the reasons why I could never get into current gaming was because of the console packages. No game was included. And then only one controller. It is a rip-off. These console companies can do better. They did during a recession period. If Nintendo seeks to sell during a recession, they need to go back to these high value packages. And no, digital games do not count as ‘included games’. This is why no one thinks the 3DS comes with games even if it does.
The reason why everyone must respect these early game consoles is because they had to sell gaming to a population who knew nothing about gaming. Atari had the unique problem of trying to sell a console where people would realize you could switch games, you didn’t have to just play only PONG on it. NES had the problem of selling a game console when everyone said game consoles were obsolete because of personal computers (exactly what people are saying today that handheld game consoles are obsolete because of smartphones).
In order to sell in a recession, Nintendo must completely overhaul its entire console strategy. The Wii philosophy is a start on the right direction. But only a start.
Nintendo has divorced itself from its Arcade soulmate
This is the second big reason why Nintendo is facing dramatic decline.
When gaming was born, games could only be sold in two ways. The first was in the arcade. The other was on the home computer (began with zip-lock bags and graduated to boxes).
The origin of both arcade gaming and computer gaming came from Atari. Atari invented the arcades. And an Atari employee, Steve Jobs, and a huge gamer, Steve Wozniak, founded Apple and began selling Apple IIs. Atari began making computers to compete with Apple. Atari was eventually split up into a gaming side and a home computer side. This is the origin of the arcade/PC gaming.
Companies like Sega and Nintendo were businesses involved in tactile entertainment. For Sega, it was a sort of carnival machines. For Nintendo, it was cards and toys. Both Sega and Nintendo became arcade game companies. Sega and Nintendo never made PC games.
The DNA of Nintendo is the arcades. The DNA of Nintendo is NOT ‘surprise’ or ‘funky experiments’. Super Mario Brothers, Legend of Zelda, and Metroid were console successes built heavily on the arcade gameplay. The more Nintendo distances itself from its arcade past, the more these franchises decline.
The reason why Nintendo should be in the console business has been said because they are the last hardware/software integrated company on Earth. But what is a game hardware/software company? An arcade company. By removing ‘arcade’ from the integration, you lose sight of the mission. And this loss of the mission is why Nintendo keeps going the wrong direction.
The Wii was designed to imitate the NES and the early sports games. Without realizing it, Wii Sports has a high ‘arcade-esque’ spirit to the game which is a huge reason why the game ‘exploded’. Other games with high ‘arcade-esque’ spirits also sold extremely well: Mario Kart Wii, NSMB Wii, and Wii Fit. The games without that arcade spirit performed badly like Metroid: Other M, Wii Music, Super Mario Galaxy 1 and 2 (yes, it didn’t perform how Nintendo hoped), and Modern Zelda (any of them).
Microsoft and Sony are computer companies. Nintendo is an arcade company. Differentiation must come by embracing that arcade side, not throwing in goofy hardware because it might, or might not, be a ‘developer tool’. Nintendo without its arcade spirit is Nintendo without its heart. Nintendo becomes a shell of a company. The hardware suddenly ‘sucks’. The games suddenly ‘suck’. And Nintendo becomes confused at what is going on.
But the gamers are not confused. We know what we want from Nintendo. We want the quality and craftsmanship that was presented in Super Mario Brothers and Legend of Zelda. We don’t want ‘creativity’. We don’t want ‘sequels with hardware gimmick’.
Nintendo making games that are not arcade is like Blizzard making games that aren’t multiplayer. It is contrary to Nintendo’s DNA. And it is not Iwata or Miyamoto who gets to define the Nintendo DNA. It is the original Donkey Kong customers. It is people like myself.
These financial results are proof that Nintendo does not understand why the DS and Wii were successful and are unable to replicate the success. It is time for Nintendo to reject the ‘surprise’ mentality it has been on and, especially, reject the ‘3d-is-the-only-future-of-gaming’ dogma. It is time to re-examine what creates a Nintendo customer. And should Nintendo investigate what makes a Nintendo customer, everything points to the tactile experience, i.e. the arcade.
Malstrom's Articles News 