Avoiding the Performance Trap

Yesterday, Nintendo posted disappointing earnings that sent the Nikkei into a tailspin, despite an announcement that it would reveal a new HD home gaming console at the upcoming E3 conference in Los Angeles. According to the New York Times

Video game industry analysts said they don’t expect Microsoft and Sony, makers of the Xbox 360 and PlayStation 3, respectively, to upgrade their own consoles until 2014, potentially giving Nintendo a chance to dig into their market of harder-core gamers.

However, it is unlikely that the new Wii will appeal to the “market of harder-core gamers,” given Nintendo’s strategy of focusing on family and casual entertainment and the traditional lead that Sony and Microsoft have enjoyed in this market for more than a decade. Moreover, as developers continue to tap into the potential of the PlayStation 3′s multicore Cell processor, it would be a mistake for Sony to launch a new console so soon. In addition, Microsoft’s Kinect is viewed by many as a platform renewal in and of itself, allowing Microsoft to both extend the life of the Xbox 360 and tap into the casual and late adopter markets.

A scenario not likely to be repeated

Nintendo CEO Satoru Iwata claims that the Wii’s woes can be traced to a failure to establish marketing alliances.

I now regret that we didn’t tie up with someone outside the company to market the Wii. If we had done that, the fate of the Wii might have been different. Now I am aware that we should not rely too much on ourselves. You will see what I mean by this when we market the 3DS and the Wii in the future.

However, it is unlikely that marketing alliances alone could have forestalled the Wii’s fate. In fact, for some time we have predicted that Nintendo would lose its first place standing in home console sales unless it dropped the price of the Wii considerably to appeal to late adopters or launched an HD version of the Wii. Now it appears that Nintendo is poised to do both, although it may be too late as Microsoft solidifies its lead both in the core gaming and casual markets. Meanwhile, Sony continues to make gains in its multimedia entertainment strategy, having established media partnerships with Hulu, Disney and others.

Nintendo’s announcement could accelerate the Wii’s decline now that the Wii HD has been announced, as early adopters will likely refrain from purchasing any Nintendo home consoles until late 2012 when the new console finally hits store shelves. To stem the decline of its home console, Nintendo needs to act fast and aggressively, lowering the price to under $100, which would break a key psychological barrier for many late adopter consumers, who make up a considerable percentage of the total market for video game hardware.

Instead, Nintendo will likely drop the price of the Wii to $150 next month. That may give Nintendo a temporary boost before the Wii continues its downward slide. Unfortunately, Nintendo’s timid approach to competitive market pressures suggests that the company may not drop the price of the Wii below $100 until next year (if ever), thereby allowing Microsoft to continue to build a substantial lead in the late adopter and casual gaming segments.

Meanwhile, Iwata also revealed that the 3DS failed to meet the company’s sales projections. Last year we praised the innovative design of the 3DS, but cautioned that pricing needed to remain near Nintendo’s historical average for new handheld devices — around $150. As such, Nintendo may have hurt sales by pricing the console at $250, even though it only costs $15 more to make than previous generation consoles that were priced at $130.