Nintendo 2013 is Sega 1997

Nintendo kicked off the new generation of console hardware last fall with the introduction of the Wii U but will it be able to survive the rise of new consoles by Sony and Microsoft and how will it evolve?

The death of the console

Innovation in controllers has been a mainstay of recent Nintendo offerings. It was the first company to provide a motion-activated approach to gaming with the introduction of the Wii and, with the Wii U, is the first company to include a second screen experience directly into their controllers.

However, what was once innovative is now looking like a standard component. Both Sony and Microsoft included their own take on motion sensors (with Microsoft doing completely away with the controller when it introduced the Kinect) and now Sony and Microsoft are likely to introduce their own take on second screen experience with the new consoles they will unveil this year. Xbox, with Smartglass, showed that it can manage games that run on Xbox and mobile phones. And Sony, at the PS4 unveiling, talked about how it sees the mobile experience as an integral component of what the PS4 will be about.

All this, however, belies a larger underlying problem for console makers: Buried in a recent report on the state of the gaming industry was the news that only 6.4% of developers intended to develop titles for the Wii U, a substantial problem for Nintendo if it intends to remain competitive in the console business. And with more developers seeing the Wii U as underpowered, the news is not good for Nintendo.

On the other end of the spectrum, however, is the rise of mobile as a new platform, further undermining console businesses. While Nintendo, Microsoft and Sony battle for a share of the console world, game developers have started looking at iOS and Android as viable platforms for game development. And with the cost of development for those platform being substantially lower than for proprietary consoles, the challenge will continue to rise. With mobile gaming continuing to engage players at a deeper level than consoles, what could it mean for the next generation of TV-connected consoles?

Nintendo: The new Sega?

One does not need to be a substantial tea-leaves reader to see that this is not going to end up well for the incumbent but Nintendo’s weakness in the console business may be its salvation in the long run.

An interesting artifact in Nintendo’s history is that it is a very large game publisher. In fact, it is one of the largest game publishers in the world, larger than EA, Blizzard Activision, Ubisoft, or Take-Two. And as such, it has a rich library of titles that it could port to another platform if it wanted to.

One may think that abandoning the console business would be suicide for a company like Nintendo but there is some historical precedent for it. Atari, which dominated the console business in the early 1980s, morphed into a game business and grew without the console for several generations. And Sega, which was bested by Nintendo, transformed itself into a software company that now produces titles for Microsoft and Sony’s console as well as for iOS and Android.

The history of Sega could provide a useful, if painful, model on how to deal with such a transition. Throughout the 1990s, the company was the leader in the console business but its last console failed to gain traction, leaving the company with heavy losses and an unclear path. As it announced it would move out of the console business and transition to becoming a full time game publisher, Sega had to do some substantial restructuring. While it has had ups and downs, the company’s net income has increased to levels higher than those it saw as a console maker and its margins are substantially higher.

If Nintendo were to take that approach, it could see itself becoming a dominant force cross a number of platform while solving some weaknesses it has had. For example, the Nintendo DS is being heavily undermined by Apple’s iPod touch with kids (the main public for such devices) preferring the touch display of Apple’s devices to the joystick approach of the DS. By shifting to producing titles for iOS, the company would be able to appeal to the same audience and extend its power in the field, instead of potentially losing relevance among a critical public.

At the same time, the company would increase its margins and become more nimble and adaptable to changing market trends. Interestingly enough, Nintendo is the rare kind of company that could effect this type of change. Its introduction of the Wii, at a time when many of the nay-sayers had left it for dead, was a genius move as it allowed the company to position itself away from the core gamer world occupied by Sony and Microsoft while expanding into the unaddressed market of more casual and social gamers. This position, however, is what now sits at the core of its difficulties, as the very players the company has been targeting are now more comfortable playing their mobile phones or tablets and do not see the need for dedicated hardware to handle home playing.

Will Nintendo make the move? That remains unclear but rumors are that it is an option that is being investigated. Whether that option becomes a reality is something that Nintendo will have to more seriously consider later this year as Microsoft and Sony enter the battlefield.

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