Posted by: seanmalstrom | July 21, 2009

Why No Discussion About Overshooting?

In early 2007, gamers were annoyed that third party companies only saw the Wii as a ‘casual games machine’. This was when the ‘casual games’ meme was beginning to take hold. Being the resourceful guy that I am, at this time I wrote the article called “Birdman and the Casual Fallacy”. If people want to act like morons and invent stupid labels like ‘casual gaming’, then I think we can invent stupid labels for them like ‘birdmen’. So deep was the disgust of how publishers were approaching the Wii from gamers that the ‘Birdman’ article spread extremely rapidly.

While the Birdman article wouldn’t go into disruption (as that was what ‘Disruptive Storm’ was for), it was more aimed at attacking the idiocy of the “lol, casual gaming!” song and dance.

One of the key elements of that article was that while Wii Sports and Wii Play were simple games, yes, Nintendo would not stay with these simple games. They would move upstream and the motion control games would become more fleshed out. This has generally become true with the big issue of Motion Plus delaying all Nintendo games until they get retooled. We’ll return to this subject in a minute.

A bedrock principle of disruption is that products improve faster than the customers can absorb the benefits. This leads to ‘overshooting’. It is putting out a product with features and bells and whistles that the customer cannot utilize. For example, the new versions of Microsoft Word are overshooting the market. People want a decent text editor for school work and all, and they do not need the bloated features that Word offers. People stop buying the latest version of Word because their older version of Word is ‘good enough’.

Nintendo thought the move to HD gaming was overshooting the market. HD visuals would dramatically increase the cost of the game console. The HD TV install base in 2006 was not very large. And most people cannot tell the difference between HD visuals and non-HD visuals. Or, rather, the PS2 Era visuals were ‘good enough’. This is why the PS2 still sells at around the same rate as the PS3 today which is something Sony and analysts would consider unbelievable three years ago.

The above chart should illustrate the issue of overshooting very well. The most important part of that chart, and the most important part of disruption, is that red dotted line that says what customers can absorb. Anything above that line and you are ‘overshooting’ and wasting money.

Disruption is very much a customer centric model. It is not product centric. Talking about disruption without talking about customers is wasting your time. One of the most common misapplications of disruption is to suggest that disruptive technology is ‘magic technology’. For example, the Wii’s success is described to its motion technology. So if someone comes out with ‘better’ motion controls, Wii is in trouble! In reality, the success of the Wii success has more to do with bridging gaps between overshot customers and non-customers.

The reason why Wii succeeded was not just because of ‘motion controls’ and being ‘disruptive’. Xbox 360 and PS3 were overshooting the market. $400-$600 in price points (which ARE caused by the HD visuals). The HD graphics, especially since they required a different type of TV, were not impressing the majority of the market. This overshooting allowed a disruptor to enter the scene.

In other words, if the Wii came out in place of the Gamecube, it likely would not have been successful because customers could still absorb the graphical changes from the PS1/N64 Era.

Here is where the upstreaming and all comes in. A famous Christensen example is the steel industry where the mini-mills entered at the bottom of the market (re-bar) and made steel for the least demanding customers. The integrated mills (the incumbents) didn’t like these less profitable customers and were happy to abandon them. The mini-mill companies followed upmarket to the next tier. And the incumbents were happy to retreat further to more profitable tiers. Eventually, the incumbents ran out of tiers and were completely disrupted by the mini-mills.

As soon as the incumbents abandoned a tier, that tier became a commodity. Prices plunged since it was just mini-mill versus mini-mill. It is this desire for additional profitability that caused the mini-mills to move upmarket.

This chart illustrates the moving upmarket. A disruptor has several strategies to choose from. A disruptor can just remain at that low tier. A disruptor can push upmarket. Or the disruptor can change the basis of how the market is defined.

So what is Nintendo doing?

It appears Nintendo is performing the third strategy, of changing the basis of how the market is defined. Is Nintendo moving upmarket? Yes, as we will soon see.

By changing the basis of how the market is defined, Nintendo is closing the Next Generation box Microsoft and Sony have walked into. In order for them to get out, they have to begin acting like the Wii. Microsoft gets it. Sony doesn’t as they are still locked in a technology context. It was much easier for Microsoft to throw billions of dollars at ‘Next Generation’ then it will be to make new interfaces.

The reason why a disruption starts ‘below’ the current market trajectory is that the new market has customers that demand less than the current market.

As you can see in the chart above, the customer requirements for the markets are at different levels.

Now, I think there are two main gaming disruptions going on. For game consoles, it is the Wii obviously. For PC Gaming, it is the ‘free’ games on the Internet such as flash games. Those flash games have *really* improved lately.

Did you notice Cliff Blezinski of Epic Games say that the future of FPS games is the RPG? The FPS becoming an RPG, becoming more complicated, is akin to Epic moving upmarket, to making games for higher demanding customers. Eventually, they will begin to overshoot the audience which will give an opportunity for a disruptor to enter the scene.

The point is that all the Next Generation games tend to lean toward bigger and better, toward the upmarket. They are not trying to make their games simpler or more accessible, that is for sure.

There was someone, responding to my painting a picture of inevitable Core Market melt-down, who said that I had to do this in order to ‘defend’ Nintendo’s strategy. Actually, Core Melt-down is an essential part of disruption. The melt-down is in the overshooting.

Take Sony for example. They believed game consoles should be like the razor and blades model. They would put out their console at a loss and with the growing market and cheapening computer components, they could keep dropping the price in an aggressive manner and, in the end, make a tidy profit. This worked for the PS1. It worked for the PS2. But it is not working for the PS3. Even at its current price levels of $400, the PS3 is still losing money. Sony doesn’t want to drop the price further. But they used to drop prices aggressively, so what is going on? While Stringer is maintaining a tighter hand on the leash, the real reason is that the growth is no longer there. Tretton recently said it was like being tied to a boat’s mast in the middle of the storm and lamented that it couldn’t get any worse.

In a way, Sony reminds me of those who flipped houses in America. Since there was a belief that real estate would go up forever, people would buy houses, not live in them, and sell them later at a higher price. Unfortunately, real estate prices do not go up forever. Many people got caught on the wrong side of the flip.

I know some real estate investors. They succeed, even in a down real estate market, because they invest for cashflow, not capitalization. They make money when they buy the house, not when they sell it.

Sony’s business strategy depended entirely on consistent growth in the video-game market. The way how it was going about its consoles was ‘flipping’ them to a degree. With the PS3, Sony is stuck on the wrong side of the flip. Nintendo, however, does not have that problem because Nintendo approaches consoles from a cashflow standpoint instead of a capitalization method. And, of course, Microsoft just blows up billions of dollars.

Once you cross the dotted line of the first graph displayed, growth is going to be stagnant or there is going to be decline. The Xbox 360 and PlayStation 3 has more stuff in them than customers can absorb. It is overshooting the audience. On a game level, the games are overshooting the audience.

In order for Wii to move upmarket, the HD Twins are going to have to retreat. While they are doing this, Nintendo is busy transforming the market to look at different standards. Going upmarket is not a process that will complete itself this console cycle. It could take a decade.

People are citing Madworld or Conduit as examples of Wii moving ‘upmarket’. Motion controls in games with core values are not what upmarket is about. In both Madworld and Conduit, the Wii-mote provided a more sustaining innovation to these games, not a disruptive one. Conduit’s controls were better than dual analog. But the game did not share any of the expanded market values. Remember, when the mini-mills went upmarket, they did so based on their values. Not on the integrated mills’ values. The mini-mills were not trying to do what integrated mills when they moved to more demanding customers.

The Wii has already taken over one genre of gaming and no one has noticed it: Sports. People talk about Nintendo not being hardcore enough and all, but that is all BS. What hurt Nintendo during the 16-bit generation was not that the Genesis and their ‘hardcore’ advertising or the Genesis games. What hurt Nintendo was that the sports players left the Nintendo platform and Nintendo could never get them back.

Sports are a major ‘genre’, bigger and more reliable than RPGs and FPS. Sports games were huge in the Atari Era. I remember the hit game of Michael Jordan vs. Larry Bird for Atari. During the NES Era, sports games were a major force on the system. The reason why NES came with two controllers was so people could play sports games together. Sure enough, in the NES Era Nintendo came out with many various sports games. NES Tennis, NES Golf, NES Baseball, and on and on.

During the 16-bit generation, with EA deciding to support Genesis (and backwards engineering the system!), all the great sports games came out on Genesis. During the 32/64-bit Era, all the great sports games came out on PS1 and not N64. With the Gamecube, again, PS2 and the Xbox were where the sports players were at.

A main objective of the Wii was to recapture the sports players. Reader, I am sure you are already shaking your head. “Malstrom likes to make things up, LOL.” But consider that with motion controls, Nintendo could peel away sports players from the HD Twins. If you look at the latest NPD numbers, you will find that the sports games on Wii are outselling the sports games on the HD Twins (OK, maybe not Madden).

The flagship game for the Wii was Wii Sports. In Wii Sports, it is no accident that the golf stages were patterned exactly from NES Golf. While everyone thinks that Nintendo letting EA’s golf, tennis, and Sega’s Virtua Tennis get released first and with motion plus with Tiger Woods Golf, that Nintendo was ‘trying to give third parties a chance’. I interpret it differently. Nintendo is at the tipping point of siezing sports gamers onto their system. Note that Wii Sports Resort’s advertising is going to be lasered in on sports enthusiasts. Expect many Motion Plus commercials during sports games.

Sports is an example where Nintendo moved upmarket to get those core gamers onto their system. The gaming press has not noticed this because they don’t even consider sports games to be ‘hardcore’ but ‘casual’. But, no, sports games have been Core Games for quite a while. Playing golf with Motion Plus motion controls is far more appealing to the mass market than playing golf in high definition. While Wii Sports was the ‘low tier’ of that, Motion Plus is a definite move upmarket to those more demanding golf consumers.

This all was possible because HD is overshooting what the consumers can absorb. So in order to talk about moving upmarket (which is NOT moving core gamer as many people incorrectly think), we return to overshooting that made disruption all possible.

Overshooting occurs all the time in gaming, but we don’t really realize it. Sound capabilities kept improving. They were really sounding good at the SNES. But with CD playback, they became perfect. Since then, they have begun overshooting customer needs. Most people don’t have a surround sound set up so they cannot listen to surround sound. Moving the speaker set up to seven speakers, instead of six or five, is just continuing the overshooting. Most customers won’t notice the additional feature. But this is an example of how consoles once marketed themselves as ‘better sound!’ and now no longer do. There is no point to do so anymore.

The big question about motion controls is not whether or not there will be better motion controls. There will. The big question about motion controls is when will they begin overshooting the customers. Remember, the bedrock principle of disruption is that products improve faster than customers can absorb. Motion Plus might already be beginning to overshoot the customer needs. If this is true, Sony and Microsoft are in big trouble.

Now, you might say, “Malstrom, come on! I like hearing you talk about Blue Ocean Strategy or disruption but why do you have to be all dramatic and talk about the Core Market melting down?”

Folks, why do you think Nintendo made the Wii in the first place? You think Iwata said, “Oh boy, guys. Let us go get those casual gamers!” Miyamoto: “Yeah!” That is not why the Wii was made.

Why is Nintendo so hung up on expanding the market even to the point of pissing off their fans? It is because the market is shrinking. Numerous quotes, from Iwata, to Reggie, to even Yamauchi, all say that if Nintendo does not go this route, all they can do is just sit here and watch gaming slowly die.

In the below video, where Reggie talks about Nintendo’s strategy, you will find that most of the video is not about Blue Ocean Strategy or disruption. Instead, most of the video is about the collapsing Core Market. If you are a game journalist, I know this is the first time you have seen this video, but you should watch it. It is very revealing of Nintendo’s direction.



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