The Dilemma

Nintendo has been using Blue Ocean and Disruption terminology and have adapted it as their company’s context. However, confusion rages in the industry over certain terms most notably ‘casual market’ and ‘hardcore market’. It is all about The Dilemma.

What is The Dilemma? Christensen’s first book that defined ‘disruption’ was called “Innovator’s Dilemma”. The underlining rule behind disruption is that technology advances faster than customers adapt or need. What starts off with a crappy product, customers say, “Give us more. Upgrade thyself!” until eventually the sustaining upgrades surpass what customers need in order to do the job they want. For example, Microsoft Word is overshooting its market. Do you really need this year’s latest Word? Of course not. Very, very few people would use all such of the new features in that new Word.

As history shows, there are paradigm shifts in markets where one value falls off and another value becomes front and center. The reason why “Innovator’s Dilemma” was and is a big deal is that the vast changes in the market and technological upheavals have, for centuries, been seen as ‘random’. The invention of the telephone or the automobile radically altered the communication and transportation industries. But it is not so much about the ‘technology’ itself as it was about getting jobs done. Western Union believed they were in the telegram business. They weren’t. They were actually in the communication business. When Alexander Bell tried to sell them the telephone, they called it a ‘toy’. So Bell makes his own company, and they begin selling phones mostly to very wealthy people. The phone, at the time, was a crappy product that communicated over short distances. But for wealthy people, this did not matter. The first buyers of the telephone used it to communicate with their servants. Over time, and with working with the customers, the product improved. The telephone began to grow and grow until eventually Western Union was completely disrupted.

Disruption would have come sooner or later. Bell did not intend to disrupt Western Union. However, when overshooting occurs, disruption is inevitable. Someone is going to be the disruptor so it might as well be you. If Nintendo didn’t disrupt console gaming, someone else would have (and Nintendo would have been the disrupted). It is inevitable because markets cannot survive when companies focus on improving what the market considers ‘good enough’. Another company, perhaps an entrepreneur, will see these constrained customers and will create a product that does the job that they need to do. At this point comes The Dilemma.

In disruptive terms, ‘Core’ means the main pillar of customers your company depends on. For Western Union, the ‘Core’ was railroads and financial institutions. ‘Expanded Market’ means new markets the company is creating. For Bell, the ‘expanded market’ (which is all he had, since he used a start-up) were wealthy people communicating to their servants. This ‘expanded market’ is not enough of course. It had to expand considerably more before it began eating up the old ‘Core’ of Western Union.

The Dilemma is best illustrated with newspapers. Knight-Ridder knew that the Internet was the future. So they invested quite heavily in transferring their newspapers to the Internet and getting a foundation built. However, they kept making newspapers as usual. Who buys normal newspapers? Older people, considerably. These old people are Knight-Ridder’s “core” market. Who reads newspapers online? Younger people. These younger people would be Knight-Ridder’s “expanded audience”.

Disruptive products are always crappy products for non-consumers (which is what the first online newspapers were). Almost always, these crappy products are declared to be ‘casual products’ and this declaration comes from the Core Market. Old people would lament these online newspapers in how they were only for ‘casual readers’. The same ‘casual complaint’ is being made about Google’s word processing and it is made by people who use Microsoft Word. These thoughts of the product being ‘casual’ is very useful to the disruptor as they can build up their new market where competitors see only ‘crappy products’ and are not inclined to enter such a market.

But back to Knight-Ridder. Even though the company invested in its ‘expanded audience’ of the Internet, it did not move fast enough. The Dilemma hit. Everyone began fleeing the old value and newspapers began to enter freefall. The profitable growth of the expanded market could not offset the collapsing losses of the imploding Core market. In the tech industry, when someone refers to being hit by ‘The Dilemma’, this is what they are referring to. It is like some monster that, periodically, wakens and comes out to shake up an industry. CEOs and Presidents fear it probably more than anything.

The first signs of the approaching Dilemma come from stalled growth in the Core Market. Further signs will, obviously, mean a decreasing Core Market. The Core Market is ‘sick’ because the products have overshot the consumers, and, more importantly, consumers are finding other products to get their job done. The task for the company is to keep the Core healthy as long as possible, to stave off The Dilemma as long as it can, while rapidly building expanded markets. Eventually, The Dilemma will have its way, and the Core Market will implode into either a niche or self-destruct entirely. When The Dilemma comes, the company is safe as it is now flying on its expanded market. Its expanded market becomes its new Core.

How does this translate to the video game industry? Nintendo, alone, detected that the Core was sick. Growth was stagnant in America despite analysts’ silly shouts of ‘more revenue than ever!’ Costs kept going up, and the growth was not matching those costs. Before, the console companies could compete to a higher and higher upmarket because the pipeline of new users, young males, kept feeding into the Core. That pipeline is no longer working as it once did. In Japan, the Core was extremely sick. There was significant decline in the Japanese market. Since Japan’s trends tend to be a forerunner of other market trends in the globe, there was reason enough to realize that other markets would be suffering what Japan was.

Time was now ticking. However, it would be too stupid to jump into the expanded market too soon. A company must ‘fumble forward’ and slowly adapt itself to the new ways. The DS was made as a ‘third pillar’. And it was ugly. The initial software was pretty bad even from Nintendo itself. But as Nintendo ‘fumbled forward’, it got better. ‘Brain Age’, ‘Nintendogs’, the DS Lite, among other things really showed how Nintendo learned as the company transformed itself and its culture into a disruptor. The Wii was able to be made because of Nintendo’s experiences with the DS.

Nintendo is furiously carving out new markets and attempting to keep the Core Market healthy as long as possible. A very smart idea were the ‘bridge’ games to save Core franchises by integrating them with expanded market values. Soon, The Dilemma will hit, and as the Core collapses (or is absorbed into the New Market), companies, both console and third party, who are dependent more on core than expanded market will suddenly find themselves with more losses than profits.

If the Core was the Titanic, when overshooting began was when it hit the iceberg. The old architects of the boat, Nintendo, quickly realizes that it is inevitable: the ship will eventually sink. The others laugh at this notion. It was just ‘Nintendo propaganda’. People like me who think it is fun to study the blueprints suddenly see the upcoming structural collapse (my Blue Ocean articles, that came out in Fall 2007, revolved around the Old Continent sinking while everyone rushed to the New World). The ‘hardcore’ partied on the decks. As the lower decks fill with water, there was no notable change in the boat. However, many are beginning to notice something is amiss. The boat is no longer smoothly going as it should. GTA IV and, likely, MGS IV are not moving HD systems as they should. The old rules, that had worked for twenty years, are no longer working.

While it remains to be seen how Sony and Microsoft deal with their new controllers and what approach their software will have, it is still unknown whether Sony and Microsoft see it as a way to attack Nintendo to seize additional market share OR that they see The Dilemma. If they do see The Dilemma, the ‘fight’ is not about taking marketshare or duking it out for winner of the generation. The ‘fight’ would be the intense and desperate battle to seize as many lifeboats as possible as the Core Market slowly sinks. Such a ‘fight’ would be over survival.

When GTA IV failed to move systems, the Microsoft guys were very rattled. Was it because what they thought was the ‘winning ticket’ to generation win no longer the case? Was it because of the seemingly invincible Wii? Or was it something even more frightening- the recognition that The Dilemma had arrived?

Dramatic? Sensational? That is what the newspapers said. However, this is a more conservative view compared to the idea some are saying that this is the last generation of consoles (Wii excluded of course).