Thursday, September 22, 2005

Nintendo Genre Innovation Strategy: Comments and Follow up

Well, that was an exciting moment in the history of this website. In the spirit of my old demo days, greetz go out to all the readers from Penny Arcade, Slashdot, Kotaku, 4ColorRebellion, Joystiq, GameGirlAdvance, Dvorak(?), and more. I apologize for any disruption of service for folks who were visiting the site. Everything should be back to normal, comments are back on, and I'm on a new server with 10x the bandwidth. Post away. :-)

I want to thank everyone for keeping their comments civil and insightful. It is a strange thing, but your intelligent commentary seems to spark more intelligent commentary. Shocking.

There are a couple questions about the previous article that I thought I'd take a brief amount of time to highlight here.

Source of "genre king" and "genre life cycle"
The terms "Genre king" and "genre life cycle" come about from several essays that I've written over the past couple of years. If you are interested in the theoretical background, I recommend you check them out.
  • Evolutionary Design: This was the source of many of the concepts behind my current definition of genre. Unfortunately the same title as a rather popular essay by Chris Crawford that I didn't know about until after this was published.

  • Genre Addiction: This is where 'king of the genre' was used that I subsequently shortened to 'genre king'. Some folks get turned off the use of the word 'addiction', but really I'm talking about basic market segment creation activities.
  • Genre Life Cycle: There are 4 short essays here where I explored the genre life cycle in more detail. Though honestly, I think the topic was so obscure and rambling that very few folks made it through all of them. :-) They also talk about genre death in more detail and clarify some of the wild-assed statements made in the genre addiction article.
Where are the numbers on title costs coming from?
I do need to report my sources a bit more clearly. That tidbit comes from the Japanese Computer Entertainment Suppliers Association. Here's a link to one report on it.

There have been reports that the study was flawed because it only relied on self reported information. However, the numbers are inline with my personal experiences talking to game companies on a daily basis, so I am inclined to believe them. Note of course, that these are averages. There will be Gamecube titles that cost more than certain Xbox titles. The basic concepts still stand.

Nintendo still makes hardcore games
You'll notice Nintendo walking a line in their PR where they say 'games for everyone.' The fact of the matter is that genre king titles remain very profitable for them if a company can get a lock on the genre. And for several genres, Nintendo has that lock.
  • Action RPG: Zelda
  • Multiplayer Casual Racing: Mario Kart
  • Creature trading RPG: Pokemon
  • Party games: Mario Party
The games in these categories are nearly synonymous with the genre and it is unlikely that Nintendo will simply stop making them. So what you'll find is that Nintendo will likely continue to promote hardcore gaming within the genres that they dominate. This is still in keeping with an innovation strategy.

There is also a strong platform component to the console industry that I didn't explore fully in the essay due to already packed space constraints. Each console is what is known as a 'walled garden'. Consumers experience the delightful content rich experience that is available on that console, but unless they make expensive additional investments (like buying a new console) they are locked out from using other company's content. Each console creates micro market segments. For example, Metroid Prime 2 sold less than Halo 2. However, it still managed to be the market leader within the FPS Gamecube market segment.

So you'll also find Nintendo creating genre kings within the protected marketplace created by their ownership of a walled off hardware platform. Again, competition is lower and profits are higher. Typically they'll leverage an existing brand to give their offering even more competitive punch.

What is the rational behind Nintendo leaving some customers behind?
If you like genres where Nintendo does not dominate, then you'll likely have to go to another platform. It is difficult, perhaps impossible, to profitably be all things to all people in the business world. Every company makes a strategic choice on what customers they want to serve. Often that means 'firing' fringe customers that do not fit what is best for the company. Banks do it. Stores do it. Enterprise organizations do it. The benefit is employee focus, increased profits, and superior ability to provide value to your target market. It also takes a lot of balls to give up a paying customers.

Typically firing a customer takes a very simple form "Hey, we appreciate you wanting to work with us, but we think it is in your best interest to go to our competitor X." So the worst customer happily trots along to competitor X and starts demanding bigger production values, additional sequels, etc. The competitor sells more, but they lose money doing it. Who is the winner here?

1st party vs 3rd party
This topic is an entire essay on its own. Historically, Nintendo has reaped the vast majority of its profits from first title releases. They make a small amount from each game sold on their platform, but by being a publisher they a much higher percentage of the revenue on a title.

In this viewpoint, it makes sense to promote a large 1st and 2nd party developer network that are published through Nintendo and focus on innovative titles and genre kings in low competition areas. The result is a smaller number of highly profitable titles.

However, this profitable and logical strategy alienates the 3rd party developers. They naturally take their innovations to other publishers. In the worst case scenario, other platforms become the home of new highly profitable genres that lure potential Nintendo customers over to the competing platforms.

There are lots of ways for Nintendo to get out of this situation. They've tried using character licensing, but they risk tiring out their brand. I'd like to see them start up a new Nintendo second party network that supports smaller companies. They would reap the following benefits:
  • A bigger chunk of the revenue by being the publisher instead of merely being the platform owner.
  • A steady stream of new titles that help guarantee leadership in attaching new genres to their platform.
  • A stage gate style development pipeline where they can then convert into successful second party titles into larger scale 1st party genre kings.
Enough rambling. I'll be back to my regularly scheduled essays soon. :-)

take care