August 29, 2013

Nintendo

For the longest time, Microsoft analysts had this unhealthy obsession with Apple. The logic went a bit like this: Apple is doing poorly because Microsoft won the PC war. If only Apple stopped making hardware and licensed their OS to other manufacturers, surely, it would do much better.

Of course, Mac users thought this notion quite odd, for good reasons. They liked Macs precisely because the same company made both hardware and software, which resulted in a product that worked much better than your average Windows PC.

Nowadays, Mac analysts have a similar obsession with Nintendo. The logic goes a bit like this: Nintendo is doing poorly because Apple and Samsung own the market for portable devices. If only Nintendo stopped making hardware and published their games for iOS instead, surely, it would do much better.1

Mac users should understand why this argument is flawed.2 Fantastic games3 like Super Mario 3DS Land can only exist because Nintendo makes both the hardware and the software. That game simply could not exist on an iPhone. Nintendo makes its own hardware because that allows it to make better, more interesting, unique games.4

But there's an additional problem with this argument: the premise is completely wrong. Nintendo is actually not doing poorly in the portable market. iPhones have not destroyed the market for portable gaming devices. The 3DS is, in fact, doing very well.

Let's look at the numbers. The 3DS's predecessor, the Nintendo DS, is currently the second-best selling console of all time, slightly behind Sony's PS2. It's possible that the DS will end up taking that crown from the PS2, and become the best-selling console of all time. How do the 3DS's sales compare to its predecessor's? This graph compares weekly sales during the first 130 weeks of the DS and 3DS (aligned to their launch dates).5

Graph of weekly sales numbers for Nintend DS and Nintendo 3DS showing the 3DS slightly lagging the DS's sales for the same period of their lives

Because the two launches didn't occur during the same time of the year, the holiday spikes don't align, but I think the picture is clear: sales of the 3DS are not that far behind the second-most popular videogames console of all time. After 130 weeks on the market, the DS sold 43 million units, while the 3DS sold 33 million units.6

The hypothesis that Nintendo needs to abandon the hardware market because the iPhone destroyed the market for portable gaming just isn't consistent with reality.

Console sales are typically dictated by the games that run on those consoles, not by their competition. Different devices can coexist peacefully, if each of them has unique games. The Wii, the Xbox 360, and the PS3 all sold quite well during the last generation, because all of them had good, exclusive games. Many people ended up buying more than one console, because they wanted to play exclusive games.7 In other words, if you want to play a Mario game, or the new Zelda, the fact that you own an iPhone won't prevent you from also buying a 3DS.

What's more, Nintendo doesn't need to sell many consoles to make a lot of money. The Gamecube, for example, clearly lost against its competitors. Yet even when its console did poorly, Nintendo's own games did very well. Super Mario Sunshine for the Gamecube sold over 6 million units, in a market where a million units sold is usually considered a success. The Gamecube "failed" against its competitors, selling only 21 million units over its whole lifespan, but Nintendo still came out ahead.

Nintendo had around 3000 employees in 2006, when the Wii was introduced. Today, after seven years of unprecedented8 success with the Wii, Nintendo has 5000 employees. That's a lot of growth in relative numbers, but in absolute numbers, Nintendo has remained a comparatively small company despite of the Wii's success. Nintendo's revenue per employee is off the charts. Nintendo does not need to continue selling consoles at the level of the Wii to sustain itself, especially when the 3DS is doing well.

I understand that Nintendo's games running on an iPhone is an attractive notion. I'd like to have some Nintendo games on my phone. But Nintendo would have to sell a lot of iOS games at iOS game prices9 to make up for the console games it sells a console game prices.10

Is everything rosy for Nintendo? No, of course not. The Wii U is doing very poorly. But this isn't because the Apple TV is preventing anyone else from entering the market for stuff that connects to TVs.

Further Reading

John Gruber's short comment on the 2DS prompted me to write this (though he's not the only Apple analyst who wrote something along those lines).

Craig Grannell's take on the situation:

I might think the 2DS is ugly and might not be that nice to hold, but that doesn’t make it a dumb idea. It’s cheap and very obviously positioned for holiday sales. It’s $100 cheaper than the cheapest iPod touch (i.e. about half the price), which immediately places it in a totally different market.

More data on Nintendo from Federico Viticci over at macstories.net, including this important point:

The idea that Nintendo should make games for iOS is fascinating, easy to grasp and follow, but flawed. Nintendo doesn’t work like Apple. And, more importantly, Nintendo can’t — and doesn’t want to — be Apple. Nintendo is a mix of a toy company and a game company: consoles exist to support Nintendo’s crown jewels — the games and first-party franchises.

(...)

Here’s just one data point: Animal Crossing sold 1.54 million copies in the last quarter (a month ago, it was up to 4.5 million copies sold since its original release). Assuming that Nintendo makes around $30 in average revenue on first-party games, that would make for $46 million in revenue, in a single quarter, on a single game.

John Siracusa talks about the 2DS and Nintendo's future on the Accidental Tech Podcast:

I love [Nintendo's] games, and I would not want to play their games on a touchscreen, or with any of these little controller things that Apple now supports. It's not the same thing. (...) I don't think it would make anyone happy. It would turn them into Sega. (...) I want Nintendo to keep being Nintendo.

John Siracusa, again:

Now consider the Nintendo 64, the company’s first 3D console. The Saturn and the PlayStation beat it to market by years, and both had the good sense to use optical disks instead of cartridges. Though the PlayStation came to dominate that generation, it was the Nintendo that transformed 3D gaming forever with the potent combination of Super Mario 64 and the Nintendo 64 controller—hardware and software products that were designed together, and it showed.

(...)

But if the time of the game console is not yet at an end (handheld or otherwise), then Nintendo has a lot of work to do. It needs to get better at all of the game-related things that iOS is good at. It needs to produce software that clearly demonstrates the value of its hardware—or, if that’s not possible, then it needs to make new hardware.

Any advice that leads in a different direction is a distraction. There’s no point in any plan to “save” Nintendo that fails to preserve what’s best about the company. Nintendo needs to do what Nintendo does best: create amazing combinations of hardware and software. That’s what has saved the company in the past, and it’s the only thing that will ensure its future.

Garrett Murray writes:

So let me get this straight: Your company is circling the drain, your latest console was a flop, your first-party software comes out way too infrequently and even when it does it’s not nearly as good as it used to be, and all you’ve really got going for you is an awkward, no-one-ever-mentions-wanting-one hand-held gaming device that does 3D at the expense of having graphics one could even possibly call modern in 2013, and so you decide to spend your time building a new version of said hand-held system which does not do that unique 3D feature and instead is big, ugly, clunky and only $40 USD cheaper than the 3D version which is ugly too but less so?

I want to make three points about this.

First, Nintendo isn't circling the drain. Nintendo has billions of cash reserves, and zero debt. Feel free to peruse their balance sheet. Nintendo actually increased its cash reserves in 2013. Nintendo does have pretty big issues, but it's nowhere near the drain.

Second, a lot of feedback I've received mentions personal experience, as in "my niece doesn't want a 3DS", or "I don't see any 3DS on the subway", or "no one ever mentions wanting one". These are all interesting anecdotes, and they probably do tell us something about Nintendo's mindshare, but the fact remains: the 3DS is selling very well. We have this data. We know it sells well. Perhaps just not to the people you personally know.11

Third, many of the complaints about the 2DS feel a bit as if somebody picked up a box of Lego Ninjago and declared it a failure because "there are not enough regular Lego blocks in this box!" Well, yes. You're right, there are probably almost no regular Lego blocks in a box of Ninjago. And if you want regular Lego blocks, then Lego Ninjago is not for you. But that doesn't mean it's a bad product. It just means you're not in the target audience.

The kinds of people who write design blogs and Apple blogs on the Internet are, like me, used to being the target audience of most tech products. The iPhone is made by people like me, for people like me. The HTC One is made by people like me, for people like me. The MacBook Pro is made by people like me, for people like me. The Nexus 7 is made by people like me, for people like me. The Pebble is made by people like me, for people like me. And because we're the target audience, our own opinions are usually relatively good indicators for how well a product is going to do.

But the 2DS just isn't made for people like us. That doesn't mean it's going to fail. That doesn't mean it's a bad product. It just means it's not for us.12

And this, finally, brings all of this back to the topic of design. If you want to design a successful product, don't design a product that's only good for people like you, because most people aren't like you.13

Update

Follow-up to this essay.

  1. A future where you can run Zelda on an iPhone might seem quite inviting, until you consider the trajectory of the quality of Sega's games, post their own exit of the hardware market. ↩︎

  2. "All you need to do in order to be successful is to stop doing what made you unique and successful in the first place." ↩︎

  3. People sometimes complain that Nintendo's games aren't as good as they used to be. For some of its franchises, this is probably true. Newer Zelda games never seem to be as good as their 8- and 16-Bit siblings. But for other franchises, it's pure nostalgia. In my opinion, some of the best Mario platformers were released during the last few years. ↩︎

  4. Compare this to Apple. Apple makes hardware, and sells that at a profit. Apple makes its own software to help sell its hardware. The opposite is true with Nintendo. Unlike Apple, Nintendo's money comes from selling software. Nintendo makes its own hardware to help improve, differentiate, and sell its software. When Nintendo can make a profit on hardware, it does, but hardware is sometimes even sold at a slight loss. Both companies have something in common: they use one to support the other. Apple's hardware would be less valuable without its software, and Nintendo's games would be less interesting and unique without their hardware.
    An important effect of this is that hardware sales are less important to Nintendo than to Apple. Nintendo needs to sell software. The more hardware it sells, the more software it can sell, but since Nintendo's games have such a huge attach rate, it can do quite well even when its hardware is only a mediocre seller. ↩︎

  5. The sales numbers are from VGChartz.com. ↩︎

  6. This already ranks the 3DS as number 12 on the list of all-time best selling consoles. By the way, the PS Vita has sold less than 6 million units so far. Why not ask Sony to exit the console business? ↩︎

  7. One of the reasons why this is the case is because the upfront investment of buying a console is not that big, compared to the cost of the games people are going to buy for it. Attach rates of consoles are typically around six games per console. Gamers easily spend 300 bucks for games alone, usually much more than they've spent for the console; so the cost of the console is not that significant, compared to the total cost of ownership. The same is not true for the typical iOS gamer, where games are much cheaper than the hardware they run on. ↩︎

  8. Unprecedented for Nintendo, that is. No other Nintendo TV console sold as well as the Wii. The Wii sold 100 million units. The NES sold 62 million units, and the SNES only sold 49 million units. The N64 clocked in at 33 million units, and the Gamecube at a bit over 21 million units. ↩︎

  9. Most of Nintendo's franchises would work poorly with a touchscreen. Maybe they could release playable, full-scale versions of Mario or Zelda games if they targeted Apple's controller API, but then they'd limit their audience to the few people who actually buy controllers for their iOS devices, and they would still have to charge iOS App Store prices. Just look how well Square Enix's premium-priced games sell on iOS. It just doesn't add up. ↩︎

  10. It's easy to misunderstand Apple if you assume that they work like Microsoft or Lenovo, but the same is true for Nintendo if you assume that they work like Apple. Check out Nintendo's current assets and debt. ↩︎

  11. If I extrapolated from my own personal experience, I'd come to the conclusion that Apple owned 90% of the desktop PC market, that Windows Phone was a serious contender in the mobile phone market, and that at least half of the world's population only ate vegan food. ↩︎

  12. Personally, I think the 2DS serves two purposes: first, it's a device for parents who worry that a 3D screen will harm their kids' eyes. Second, it's there to get people into the store with the promise of a cheaper 3DS, and then upsell them to a "real" 3DS. Wired has more on the 2DS's function as a cheap entry into the 3DS ecosystem. ↩︎

  13. Related: John Siracusa's explanation of how regular people use iOS devices. ↩︎

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