When the Xbox 360 came out, there was no question that it was in response to Sony's console offering. When the PS3 came out, Sony had the Xbox 360 in its sights. And the rules of engagement have revolved around functionality, features, graphics capabilities and enhanced storage, with the vision of the gaming console as a multi-functional media center residing in living rooms the world over.
This is one of the justifications given for the billions that these companies have sunk into these platforms, for which the payoff will come at some undetermined point in the future. The following statement exemplifies this thinking: "You just don't get it; it will take 5-10 years for these investments to bear fruit, and they will spend what it takes to execute this vision. This is not a short-term play."
But what happens when Nintendo (OTCPK:NTDOY) and Apple (NASDAQ:AAPL) take elements of your value proposition and go after them with laser focus? And do so in a way that makes money - and fast. And take mind-share - quickly.
What once looked like a bipolar competitive landscape has gotten a lot more complicated very, very rapidly. Wii, the introduction of AppleTV and the problems encountered by both Microsoft and Sony raises more than a few questions:
Does the grand "media center" vision really have legs? Are the high-priced Xbox 360 and PS3 consoles viewed as inaccessible by the casual gamer? Can you get to 100 million in console sales without the casual gamer? Does the casual gamer value the added features and functionality of the Microsoft and Sony consoles? Will the Nintendo beach head with both the DS and the Wii keep it ahead of the pack for the next few generations as it innovates over an increasingly large installed base?
Dean Takahashi and N'Gai Croal recently had an interesting little exchange that was carried in the San Jose Mercury News on April 10th, with N'Gai taking out his ugly stick and calling Microsoft to task for its flawed console strategy:
To: Dean Takahashi
Fr: N’Gai Croal
Date: April 5, 2007
Re: The Kings of Wishful Thinking
excerpt: After hemorrhaging billions of dollars during all but one
quarter of the Xbox unit’s existence, there is clear pressure on Robbie
Bach and Peter Moore to turn a profit this generation. Nowhere is this
more clear than the cost of the company’s Xbox 360 accessories: $100
for a Wi-Fi add-on. $100 for a 20 gigabyte hard drive. $50 for a 512
megabyte memory card (originally $40 for a measly 64 megabytes.) Add to
that now $179 for the 120 gigabyte hard drive, and it becomes clear
that Microsoft’s strategy can only be described by a single word:
This isn’t a strategy. This is wishful thinking–and a recipe for consumer confusion.
Just as anyone who buys an iPod is doing so primarily to listen to
digital music, anyone who buys a videogame console is doing so
primarily to play disc-based videogames. There is additional
functionality to both devices, like video and photos, but those are the
main reasons to purchase each one. (Besides, when it comes to the Xbox
360’s additional functionality, the appeal of video and photos is
nowhere near as proven as it is on the iPod. Especially given the
reasonable assumption that Xbox 360 early adopters are quite familiar
with file-sharing protocols like BitTorrent and LimeWire.) Increasing
the size of the hard drive on an iPod lets you store more music.
Increasing the size of the hard drive on an Xbox 360 doesn’t let you
play more disc-based videogames, and you don’t need 120 gigabytes worth
of storage for Xbox Live Arcade games. No, 120 gigabytes of storage is
all about one-upsmanship and digital video–which, as I’ve pointed out,
is still largely unproven market share driver for the console.
Dean's retort, which isn't as virulent as N'Gai's opening volley, includes a very telling admission that represents the core of my concern as it relates to Microsoft's and Sony's strategy and their competitive positioning versus Nintendo:
Again, you are right about the dangers of milking profits. Sony and
Microsoft are trying to charge what the market will bear. Nintendo is
moving in and seizing the opportunity to grab the consumers who want
reasonable and historical prices. If Nintendo gets too much momentum,
the tables will turn, Microsoft will squander its advantage, and Sony
won’t get liftoff.
The mass market is not price insensitive, friends. This is a fact. And the amount of money being invested by both Sony and Microsoft in their nextgen consoles does not indicate that they are pursuing a niche, hard-core gamer strategy. They are looking to shoot the moon, to sell tens of millions of consoles and to use the console as a lever to becoming the living room media center.
Does it seem to you that we've kind of seen this movie before? Feeling a sense of deja vu? It might be because someone once tried a similar strategy and failed miserably. The company: Sony. The product: The PSX.
From Sony's PSX press release 10/07/2003:
Tokyo, October 7, 2003 - Targeting the year-end shopping season in Japan, Sony Marketing (Japan) Inc. will launch two models of PSX, a new generation HDD+DVD recorder, created through the convergence of electronics and games technologies of the Sony Group.
Empowered by two key semiconductors ("EmotionEngine®" and "Graphics Synthesizer"), CPU and graphics rendering processor used for PlayStation 2, PSX has realized a high-speed high-definition GUI (Graphical User Interface), the likes of which have never been experienced before. This first-of-a-kind GUI enables speedy and easy access of various content to be enjoyed on PSX, with the same level easiness as switching TV channels with a remote control.
PSX is also equipped with various features as a digital media player, providing storage and playback of a variety of entertainment content such as high-resolution, mega-pixel images from digital still cameras and music from various package media.
Since PSX is designed to run various features by firmware via a powerful hardware engine, users can upgrade or add new features later by accessing the network.*
The two PSX models of DESR-5000 and DESR-7000 are equipped with maximum capacity HDD respectively to accommodate various features in serving as a digital home electronics product as well as a game device for enjoying PlayStation and PlayStation 2 games.
Sony Marketing (Japan) aims to accelerate the expansion of the DVD recorder market by positioning PSX as the key to home entertainment and the core for digital electronics products throughout the living room.
You get it. Totally whiz-bang. Totally cool. Features galore. And a total financial flop. The console was priced high, was loaded with features consumers didn't value and, therefore, was the victim of brutal (and necessary) price cutting and production pauses a scant six months after launch.
From The Register 04/15/2004:
Sony has suspended production of its PSX games console-cum-personal video recorder in a bid to flush the channel of unsold stock.
According to Sony officials cited by Japanese magazine Shuukan Gendai, the move is a temporary one, but they could not say when production of the machine would begin again.
Whenever manufacture resumes, the delay doesn't say much for the demand the public has for the machine. Either Japanese consumers are not buying the machine, or Sony wildly overestimated the numbers that would do so. The bottom line is that there are too many PSXs sitting on dealers' shelves.
Sony PlayStation chief Ken Kutaragi claimed that some 100,000 units were sold during the PSX's first week of release, last December, but clearly sales have fallen off over recent months.
From The Register 09/07/2004:
Japanese retailers have slashed the price of Sony's PVR-cum-games-console, the PSX, by almost 50 per cent in a bid to drum up consumer interest, according to Internet reports.Sony offers two PSX models in Japan, the only territory in which the machine is currently sold. One sports a 250GB hard drive, the other a 160GB unit. To date, the two have retailed for ¥95,000 (£484/$863) and ¥74,000 (£377/$672), respectively.
But according to GamesIndustry.biz, citing unconfirmed third-party reports, a variety of Japanese retail outlets have cut those prices to ¥52,900 (£270/$480) and ¥39,800 (£203/$361).
If the cuts have not been sanctioned by Sony - their size suggests these are not manufacturer-led reductions - it will surely come as something of a disappointment for the consumer electronics giant.
Launched last year just before Christmas, sales were so far below Sony's forecasts that it was forced to suspend production during the Spring in an attempt to clear out channel inventories.
This didn't happen that long ago. Did Sony completely lose its institutional memory? Even worse, as the PSX was doing its big swan dive, Sony was still planning to up the ante on features, functionality - and price - with its nextgen console, the PS3.
From Gamesindustry.biz 06/24/2004:
An annual report into the games industry published by Wedbush Morgan Securities has suggested that added media functions in PlayStation 3 could push its launch price up to $500, alienating many consumers in the process.
The 144-page report, titled The Definition of Insanity: Why The Next Console Cycle Will Start Off With A Whimper, was authored by industry analysts Michael Pachter and Edward Woo, and is a largely positive look at the future of the games industry which projects strong growth over the coming years in most sectors.
However, as the title suggests, it also sounds a number of warning notes regarding the coming hardware transition - perhaps the most surprising of which is the suggestion that Sony's PS3 could debut at such a high price point.
Pachter and Woo claim in the report that Sony will try to introduce the PS3 with significantly more functionality than current consoles, building on the model of the PSX device - which includes a digital video recorder (NYSE:DVR), DVD burner and a number of other home media centre style functions.
The report suggests that by late 2006 - generally considered to be the earliest possible launch window for the PS3 - these features will cost roughly $250 to include in a system, leading to a $500 price tag for the next generation console.
"At this level, we believe that many consumers will be alienated," the report warns; and indeed, such a high price tag would definitely place Sony in a difficult position, especially as not all consumers will want the extra PSX-style functions.
Fast forward to today. Both Microsoft and Sony are offering super-premium versions of their products, more firmly cementing their bets in the multimedia space. Hard-core gamers seem willing to pay for the high-end graphics and extra functionality, but what about the casual gamer? They seem to be much more in tune with the features, functionality, usability - and price - of the Wii.
Nintendo has clearly struck a chord with the everyman, someone who just wants to step to the plate, bowl a game, smash that serve or share with their friends. Nintendo is about accessibility, ease of use, value and fun. Theirs is not a holy war against a competitor, but a quest for understanding and acceptance from their market. THE market. The market where you can sell 100 million consoles. The market that provides you with the foundation to layer on additional features as technology costs continue to drop and even more games are developed for the platform. Microsoft and Sony are battling it out in the trenches. Nintendo isn't playing their game. Interestingly enough, they are clearly winning. Just look at the stock price.
Related today: Nintendo's FY Profit Jumps 77%, Boosts Dividend