Andrew Haas Nintendo, Inc. 10/18/2010 Nintendo Strategic Analysis Intro

Andrew Haas

Nintendo, Inc.

10/18/2010

Nintendo’s Wii changed the video game industry forever. In 2006 Nintendo launched the Wii, an untraditional gaming system that used motion sensor technology to reach an untapped target market: families, younger children and the older generations. This unprecedented move was supported by a cheaper price than the hardcore gaming systems, Xbox 360 and PlayStation 3, and an interactive, simple, and fun playing concept. The Nintendo Wii was an instant success, and, in most cases, demand exceeded supply; however, since its launch in 2006, the Wii has sold over 74 million consoles (see exhibit). ¹

The 1972 video game Pong, developed by Atari, ignited a revolution and a multibillion dollar global industry. Nintendo introduced the NES in 1985 and was an instant hit leading the company to create classic games like Mario Bros. and Donkey Kong². New innovations came in the late 1980’s and early 1990’s with next generation systems from Nintendo and Sega. Sony and the first edition of the PlayStation franchise ultimately took over as market leader in 1994. In 2000, with an established market share, Sony once again took the lead with the PlayStation 2, a graphically and technologically superior console. Microsoft joined the competition in 2001 with the Xbox. The Xbox was a strong competitor because of the resources and marketing power at the disposal of Microsoft and grabbed 24% of the market share³.

In November 2005, Microsoft was the first to market the next generation of systems, the Xbox 360. The Xbox 360 was graphically superior as well as speedier than previous consoles. Furthermore, it was priced at an unprecedented $299 and $399. In the first year, almost six million Xbox 360’s were sold.⁴ In November 2006, Sony launched the PlayStation 3 (PS3). The PS3 was technologically superior to the competition with a Blu-ray DVD player, a Cell Chip processing system, and Wi-Fi wireless networking, but the product was late to market and priced extremely high at $599. The PS3’s expensive price severely hurt Sony’s market share, placing it at just 18.5% (see exhibit). The Wii, on the other hand, gained significant market share by targeting a new market and keeping the game simple and interactive. Ultimately for Microsoft and Sony, high prices and narrow target market scopes have severely hurt their sales and market share in comparison to Nintendo. In 2010, the market has changed slightly, but the Wii still maintains 36% market share (see exhibit).

New innovations are sprouting from Sony and Microsoft as they attempt to take market share from Nintendo. In this past year, the PS3 and Xbox 360 have introduced motion sensor systems similar to the Wii. Furthermore, each console plans to use 3D technology.

Products

The current flagship console for Nintendo is the Wii. The Wii is a small plastic device that can play games in either a horizontal or vertical position. The Wii’s biggest selling point is the unique motion controller. This controller allows consumers to play games wirelessly and through physical movements. This type of control was a revolution for the gaming industry and allowed the Wii to differentiate itself from its two biggest competitors, Sony’s Playstation 3 and Microsoft’s X-box 360.

Nintendo has released a series of accessories that have furthered the appeal of the Wii. Products like the Wii balance board and the Wii fit have allowed Nintendo to expand its reach to a growing number and type of consumer. The balance board allows players to control skating, surfing, and snowboarding games through a plastic board that players stand upon. Wii Fit is a workout program that has proved to be very popular with the elderly and female consumers⁵.

Nintendo’s other main product is the Nintendo DSi. The DSi is a handheld gaming device that consumers are able to take out of the house. The DSi introduced a revolutionary dual screen approach that pioneered a touch screen control system. Nintendo has also broadened the appeal of the DS through unique marketing approaches including offering the device in a myriad of colors and by creating games that appeal to an ever-increasing range of consumers. Nintendo is expected to launch the 3DS in early 2011. The 3DS will be their newest hand held device and will allow consumers to play games in 3D without the use of glasses⁶.

In the highly competitive world of video games, original and creative marketing has taken on an increasing level of importance. In 2006, with the launch of the Wii, Nintendo adopted a marketing strategy that differed drastically from its two main competitors, Sony and Microsoft. While Sony and Microsoft battled over the traditional “gamer” (18-29 year old males) Nintendo launched a different marketing approach labeled the “Keep Evolving⁷” strategy. Essentially Nintendo targeted non-traditional video game market segments. Nintendo believed that the core gaming market was saturated and that future growth in the industry would come from casual gamers. The company built their entire marketing strategy including hardware, advertising, and pricing around this idea.

The “keep evolving” strategy has propelled Nintendo into the forefront of the gaming industry. According to a December 2008 Pew report, the landscape of video game players had fundamentally shifted. The survey concluded that for individuals who play video games every day, the greatest percentage of participants were over the age of 65 (36%)⁸. The 57.4 million women who play video games account for slightly more than half of all video game players⁹. Nintendo has changed the outlook of the video game industry and expanded it from a fringe hobby to a mainstream recreational activity.

Organization

Nintendo Company, Ltd., is publicly traded; its largest shareholders are The Capital Group Companies (9.26%), General American Investors Company (3.00%), Franklin Resources (2.09%), FMR LLC (1.19%), and Janus Capital Group (1.12%).¹⁰ The lack of majority shareholders has earned Nintendo a grade of A+ on Bureau van Dijk’s shareholder independence scale.¹¹

Nintendo Co., Ltd. is based in Kyoto, Japan, and coordinates the design, production, and in some regions, sales of gaming products. The company categorizes its business interests in two groups: leisure equipment and other products.¹² Leisure equipment is composed of gaming systems (Wii, DS, etc.) and the software runs on these platforms. Nintendo’s other products category includes the production of playing cards and the management of Nintendo’s intellectual property (for instance, licensing the use of Pokemon or Mario Brothers characters).¹³

Nintendo Co., Ltd. outsources the manufacture of many of its products, including the Wii, and the development of certain software franchises.¹⁴ However, much is done in-house, such as research and development for consoles and software.¹⁵ Nintendo Co., Ltd., also manages its own distribution in most Asian countries.¹⁶

Nintendo Co., Ltd. is a parent company to many wholly-owned national or regional branches, which include Nintendo of Australia, Benelux, Canada, España, Europe, France, Korea, Netherlands, and UK.¹⁷ These subsidiaries handle the marketing and distribution of Nintendo products in their respective regions. In countries not served by a Nintendo-owned subsidiary, independent distributors are used. Notable independent distributors include Latamel (Latin America), Stadlbauer Marketing (Eastern Europe), and Active Boeki (parts of Africa and Asia).¹⁸ Management

At the corporate level, Nintendo’s management is exclusively Japanese and almost exclusively male.¹⁹ The company is led by Satoru Iwata (President), who has a history working for Nintendo in a business planning capacity.²⁰ Iwata is famous for his strategic decision to avoid the ‘console war’ fought between Sony and Microsoft, instead choosing to focus on a system (Wii) that was less performance-oriented, lower-priced, and geared toward a wider market.²¹Nintendo Co., Ltd.’s board of directors is made up of twelve directors (five senior managing directors, two managing directors, and five directors); only the senior managing directors and President Iwata technically represent shareholders.²²The composition of management within the subsidiaries is not widely published. It appears that most subsidiaries’ management teams include Japanese executives and local personnel; in many subsidiaries, a Japanese executive is the top manager.²³

Earnings per share (US$17.31 in Q1 2010) show a drop over recent years, but are still nearly three times as much as in Q1 2006.²⁴ Today’s stock price of ¥20,820²⁵ is a fraction of the stock’s historical maximum price, achieved on 11/1/2007 (¥73,200).²⁶ The drop in share price reflects several events. Pessimistic analyst ratings, profit projection downgrades, and fears that the saturation of the gaming systems market have contributed to the drop of the stock price.²⁷ Most recently, a 10% drop in the stock price resulted from news that Nintendo’s upcoming 3DS handheld system won’t arrive to market until after the Christmas season.²⁸

In order for the Wii to continue to be a market leader Nintendo needs to continue to develop and encourage third party development of enticing games. Nintendo has an excellent line of video game characters because of the Mario Bros. franchise. The company needs to continue to cash in on this line of games and expand unique offerings that take advantage of the Wii’s motion detection capabilities.

The Wii’s two biggest weaknesses are the lack of HD graphics, and comparatively sparse online gaming features. Sony and Microsoft have launched a redesign of their respective flagship consoles, and Nintendo should follow suit. The ability to play DVD’s, store online content, and produce HD graphics will give current and prospective customers the desire to purchase a revamped console. Online gaming and social networking is another area where Nintendo can capitalize on their market share. The positioning of the Wii as a casual gaming console presents the perfect opportunity to include online social networking sites like Facebook and Twitter into the Wii experience. This will allow the Wii to appeal to an even broader range of customers and further secure its leading market position.

Nintendo is also the leading company in the portable gaming world. They need to continue to offer a wide range of games that appeal to their diversified customer base. The Nintendo 3DS is an exciting product, but unfortunately Nintendo will miss out on a major opportunity by not releasing the device in time for the 2010 holiday season. Despite this strategic mistake, Nintendo currently enjoys a competitive advantage in the portable gaming sector and needs to pursue a focus on development and marketing of this industry sector.

Featuring two screens, including a touch screen, a microphone, built-in Wi-Fi capability, and backward compatibility, the DS is an incredibly successful portable gaming device beating its rivals in the marketplace by a wide margin.

Nintendo relationship tree

Source: MintGlobal report on Nintendo Co., Ltd., page 8

Source: MintGlobal report on Nintendo Co., Ltd., page 13