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Today the Wall Street Journal reported that Nintendo’s fiscal year loss for 2011 was three times greater than the company projected, coming in at $836 million.  For those who have been following this blog, Nintendo’s rapid fall from grace should come as no surprise. Back in 2009, at a time when Nintendo could do no wrong, we praised the company for its innovation and ability to broaden the appeal of video games, but we also warned that new products like Kinect (then known as Project Natal) would likely pose a threat (see “Disrupting the Disruptor” – Jan. 2010).

To counter this threat, we recommended that Nintendo launch an HD version of the Wii and drop its existing console price to below $100 to appeal to late adopters. Although Nintendo is finally undertaking such changes, it is far too little and far too late. Then Nintendo made matters worse by launching its 3DS at $100 higher than previous handheld launches, all but killing the goodwill it gained from extensive and favorable press coverage.

Finally, consumers are currently reluctant to purchase new Wii consoles in anticipation of the Wii U, set for launch later this year. Although the Wii U may provide Nintendo with a short rebound, I cannot see how it will be able to reverse the company’s overall decline.

In 2009, we predicted that cloud gaming would eventually reshape the gaming landscape. At the time, an early Beta version of the OnLive gaming service had just been announced. OnLive uses cloud computing to allow people to play system-intensive games on Internet terminals, older PCs, and even some smartphones.

We wrote:

Even if OnLive doesn’t work, similar services will eventually negate the need for anything more powerful than a standard Internet terminal. In time, it might become possible to play games like Crysis directly on Internet-equipped television sets, such as Sony’s Bravia line of HDTVs. Once that happens, gamers won’t even need a console to play advanced games. (See Innovation and Marketing in the Video Game Industry p. 77)

In a recent edition of Maximum PC, reviews editor Michael Brown described one of the first TVs to incorporate cloud gaming. Calling it a “Must see TV”, he writes,

Vizio demonstrated new entries in its VIA Plus series of LCD HDTVs at CES that integrate the cloud-based OnLive Gaming System—no console required. The company is also bucking the active-shutter-glasses trend with a line of LED-backlit LCD TVs that utilize circularly polarized filters on the display along with passive 3D glasses. (see Maximum PC March 2011 p. 10)

It could be some time before cloud gaming becomes ubiquitous, but the popularity of tablet PCs and Internet enabled TVs will surely facilitate the adoption of cloud gaming services.

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.

As Nintendo continues to lose market share to Microsoft and Sony, we highlight some of the predictable causes of the company’s latest decline. When I was writing the manuscript for Innovation and Marketing in the Video Game Industry in early 2009, I observed that “Nintendo could quickly lose its standing as an innovator” if it did not renew its value proposition (p.224). However, I never imagined that Nintendo would abandon some of the very key success factors that we praised in the book.

In the mid-1990s, Nintendo refused to adapt to a rapidly changing market for video games. In Innovation and Marketing in the Video Game Industry, we highlighted a number of factors that led to Nintendo’s decline, such as its refusal to move from cartridges to CDs, its lack of support for third party developers, and its lack of understanding of US consumers (see Chapter 2: Nintendo’s Dark Age). When the company launched its DS and Wii consoles, it approached the market in an entirely new way, focusing more on consumer needs than on product features and performance. However, I also cautioned that Nintendo would need to adapt to a rapidly changing market that included new competitors like Kinect (then known as Project Natal). If not, Nintendo could find itself in the same position as it was in in the mid-1990s, with rapidly eroding market share.

We offered several ideas that would allow Nintendo to continue leading the market, such as dynamic pricing, platform renewal, and the continued use of societal marketing. Instead, Nintendo abandoned some of the key success factors that we praised in the book when it began offering its Wii and DS consoles in a bewildering array of configurations and refused to adapt its offering to appeal to late adopters.

Therefore, it comes as no surprise that Wii sales have fallen behind competitors in all its major markets and will likely continue to decline. In response, Nintendo has hinted that it might drop the price of the Wii, but we have previously argued that Nintendo reacted too slowly to reach late adopters.

Gloria Barczak, co-author of Innovation and Marketing in the Video Game Industry: Avoiding the Performance Trap, will head Northeastern University’s Institute for Global Innovation Management (IGIM). Current IGIM director, Prof. Henry W. Lane decided to step down after being appointed Acting Dean of the College of Business Administration last month.

Founded in 2003 by Northeastern University’s College of Business Administration, School of Law and Center for Labor Market Studies, the Institute is an internationally recognized research center for developing effective approaches and solutions to global innovation management and for the development and dissemination of teaching materials concerning the global challenges facing technology intensive companies.

In addition to being a founding member of IGIM, Gloria Barczak serves as Group Coordinator for the Marketing Department. Prof. Barczak has an international reputation for her work in new product development, including the open innovation model, the role of customers as co-creators in the innovation process, and the role of virtual teams in collaborative global product development.  She is the author of more than 25 refereed papers and her work has been cited more than 600 times.  Professor Barczak was recently ranked as one of the “Top 25 Innovation Management Scholars in the world” by the Journal of Product Innovation Management

Since its publication, Innovation and Marketing in the Video Game Industry has been available in a number of different electronic formats, including PDF and Google Books. Readers can now purchase the Kindle Edition directly from their PC or Kindle and have it delivered wirelessly across multiple devices via Amazon Whispernet.

When Dance Central debuts tomorrow, it could provide the type of innovation the music sub-genre has been seeking since the release of Rock Band. Dancing games were first popularized by Dance Dance Revolution in the late 1990s. However, the limitations of the dance mat prevented earlier dance games from attracting a wider audience of non-gamers.

With Kinect, Dance Central breaks free from the dance pad, giving players a wider and more natural stage. This should help attract new gamers who typically find video games contrived and unapproachable.

Another reason that Dance Central will likely be successful is its use of the types of psychological cues that have made music games like Guitar Hero and Rock Band so successful.

Readers who have followed my previous posts know that I have been critical of the way game publishers have mismanaged the music simulation sub-genre. In 2009, music games suffered from market saturation and declining marginal utility. The industry is now trying to reinvigorate the market by making instruments more realistic, but risks alienating casual gamers who may feel intimidated by higher levels of complexity.

The solution we outlined in our book was simple. It included limiting the number of launch titles, increasing the time between launches, and developing sufficiently compelling new content to keep gamers interested. However, companies like Activision and Viacom had invested significant sums of money in the Guitar Hero and Rock Band franchises and they were under pressure to provide a quick return on investment. Unlike recent Rock Band and Guitar Hero iterations, Dance Central provides the type of fresh and intuitive content that can reinvigorate the genre.

slotmachineResearchers at the Canadian Centre of Arts and Technology at the University of Waterloo turned to slot machines to help them identify what makes casual games compelling (Harrigan et al. 2010). “They require little or no training or previous experience; require little time commitment although players can continue to play for hours; are quick and easy to play [and] offer instant rewards for play in terms of feedback (whether financial, through points, or audio and video rewards).”

They also found that music and other auditory stimuli were underused in casual video games. “We feel that sound in casual games is particularly overlooked, and could be one significant yet simple avenue for making games more attractive.”

One reason that music games have been successful is that they excel in these areas. For example, when players hit the correct notes they are rewarded with visual and auditory cues. Therefore, even if the player fails to complete the level, enough positive feedback is given to keep the player from giving up. Slot machine manufacturers use these “reinforcement cues” to disguise losses as wins.

“The research is clear that players physiologically experience [losses disguised as wins] and regular wins identically. Thus, even while taking money from the gambler, the slot machine game designers have figured out how to reward the player.”

Dance Central employs similar visual cues through rings (Spotlight) around the player’s on-screen avatar.

Dance Central Visual Cues

“The better your performance,” explains Harmonix, “the faster the Spotlight grows and fills with color. The Spotlight colors change from red, to yellow, to green, to blue when you perform moves accurately. Perform perfectly for a ‘Flawless’ result to earn bonus points.”

Negative cues are also important, notes Harrigan, because they “provide enough of a frustrative value to make the game interesting for longer periods of time” but are not so frequent as to negatively impact the player’s self-esteem.

Lastly, slot machine research has also demonstrated that social feedback is a significant motivator. Although slot machine play is inherently individualistic, designers have learned how to broadcast successful outcomes to others on the casino floor. This provides positive feedback to the winner and reinforcement cues to other players who are less lucky. Casinos also display pictures of winners with large checks and leader boards for high scorers.

Similarly, Dance Central features a battle mode that gives players important “peer praise through competition or sharing.” In hip-hop music, rap and dance battles have long been an important source of encouragement for young singers and dancers and have increased hip-hop’s international popularity, particularly in places like Korea, where the government hosts an annual break-dancing competition.

Taken together, Dance Central offers most of the features that make music games compelling. Hopefully, Viacom will manage its new franchise better than Rock Band by not compromising its long term viability in a race for short-term gains.

References:

Harrigan, KA, et al. “Addictive Gameplay: What Casual Game Designers Can Learn from Slot Machine Research.” (2010).

 

A version of the above post originally appeared on Gamasutra on October 24, 2010

Last week, I participated in a panel discussion on the role of social networking in the promotion of new video games. Early in the session, the moderator posed the following question: Can online social networking be used exclusively to promote video games by small independent developers? The consensus was “no”, social media alone is not enough.

Below are some of the reasons why relying too much on social networking is usually a mistake.

1. Low signal to noise ratio.

Earlier this year, I wrote an article titled, “The Economics of Developing Apps for the iPad and iPhone,” in which I discussed the challenges for developers of apps for the iPhone and iPad.

With 140,000 apps to compete with, even the most creative programs will have a hard time attracting the notice of potential customers…Whenever an application is approved for the App Store, it diminishes the value of all the existing apps by reducing their individual utility. In a sense, it is the inverse of the network effects that accrue to a social networking site as more people become members.

The same logic holds true for popular social networking sites like Facebook and MySpace. The most successful users of social networking tools are established businesses that already have a following. However, even large companies are finding it harder to get noticed, especially those arriving late to the social networking game. Nevertheless, the rush to establish an online presence is also creating new opportunities for small development studios (see below).

2. It takes money to make money.

The days of promoting a product cheaply through online social networks are over. Although there are cases of products going viral despite a shoestring budget, they were always the exception. For every “Blair Witch Project” there were hundreds of independent films that failed to even reach the big screen, let alone provide a return on investment (see  YvesCreations LLC: Alex Goes to Hollywood)

Anita Elberse of HBS recently conducted a study of 33 movies and video games that were promoted through social media. She found a strong positive correlation between advertising spending and the success of a social media campaign.

3. Traditional media is far from dead.

Consistent with the findings of Elberse and her colleagues, our research has shown that successful social media campaigns involve a combination of new media and traditional media. Even when the primary promotional vehicle is online social networking, the most effective campaigns are the ones that integrate their online message with television and print advertising.

4. You need a story.

This was a consistent message from panelists. I mentioned how large companies hire celebrities to promote their products through social media. Celebrities with a strong online presence are able to direct fans to quality advertising content (paid media) and create buzz (earned media). Other panelists mentioned the value of winning notable competitions or partnering with a well known studio.

Opportunties

The above options are neither inexpensive nor easy. In today’s environment, it is becoming almost impossible for the small independent studio to get consumers to notice a new product, such as a video game or independent film. However, as I mentioned earlier, companies of all stripes are eager to jump on the social networking bandwagon.

The problem is that most traditional companies don’t have content to attract customers to their Facebook page or iPhone app, and most do not have the expertise to create new content. That has created a window of opportunity for small developers to partner with companies to promote products.

An example that I mentioned during the panel discussion was Starbucks, which created a memory matching game to attract users to its Facebook site. Anyone who played the game won a free sample of Starbucks coffee. Players were encouraged to return to the site for the chance to beat high scores and win prizes.

Companies like Starbucks have little or no expertise in developing video games. Instead, they outsource projects to third parties. Because large game studios are busy creating their own games, traditional companies outsource content creation to advertising agencies with in-house development staff  or to independent developers who are willing to create content for third parties.

Such partnerships do two things; they provide much needed development funds and they align your game with a well known company or brand. Later, these partnerships can be leveraged when you are creating your own independent games.

Until recently, Amazon UK was the only site that allowed readers to search the full text of “Innovation and Marketing in the Video Game Industry: Avoiding the Performance Trap.” We are pleased to inform readers that the title is now available for preview on Google Books.

Google Books offers several advantages over Amazon’s “Look Inside” feature. Research tools such as a citation exporter and text search help you find the information you want quickly and incorporate it into your paper. Google Books also helps you locate titles in a nearby library or order from an online retailer.

Below is an example search for “R&D” which displays the pages where the term “R&D” appears in the book. By highlighting search words, readers can focus on the context of the relevant term to find the best match.

 

Example of full text search in Google Books

 

 

Using the citation export function requires some additional steps. For those who unfamiliar with this feature, visit the book’s Google Scholar page. Then in the upper right hand corner click “Scholar Preferences”. This will bring up a page that will allow you to set your preferred citation manager. After you save your preferences, Google will automatically display the option to export citation under the book or article in “Google Scholar” searches.

To learn more about how to make full use of Google Books, see Google’s online guide.

Long before Guitar Hero, Harmonix founder and lead developer Alex Rigopulos had a vision — to bring the joy of music making to the masses. In the late 1990s, he and co-founder Eran Egozy were studying music education at the MIT Media Lab, when they discovered something that would eventually lead to one of the most successful video game franchises in history – that creating music was a fundamental human experience, but few people had the time or patience to master an instrument. In a 2004 interview, Rigopulos said,

Playing music is, I think, one of the most fundamentally joyful experiences that life has to offer. Just about everyone tries at some point in their life to learn to play music: piano lessons as a kid, guitar lessons as a teenager, or whatever. The overwhelming majority of people give it up after six months or a year in frustration, just because it’s too difficult to learn to play music the old-fashioned way.

When Rigopulos and Egozy founded Harmonix, they made several games that garnered wide industry praise, such as Frequency and Amplitude. However, none of these early games was as successful as they had hoped.  Then along came toy importer Red Octane. They wanted to bring a widely successful Japanese rhythm game called Guitar Freaks to the US so that they could import and sell the plastic guitar controllers.

Guitar Freaks Controller with 3 buttons

Three button Guitar Freaks controller

The problem was that Guitar Freaks was too Japanese. Founders Kai Huang and Charles Huang turned to Harmonix to develop Guitar Hero as a way to promote the sale of the controllers. Neither Harmonix nor Red Octane envisioned how successful Guitar Hero would become. Several years later, when Huang reflected on the key to the game’s success, he said,

When you look at how easy it is for rock fans or consumers to get into the Guitar Hero game, almost anybody can, whether you’re five years old or 65 years old. Everybody can pick up the guitar, everybody knows what it is, and they can have a great time playing the game almost immediately.

Since then, the marketplace has been inundated with new rhythm games. Last year, I wrote an article titled Too Much of a Good Thing: Explaining the decline of Guitar Hero and Rock Band explaining why the release rate of new music games was unsustainable. My advice at the time was to reduce the number of titles and to increase the time between releases. That advice went unheeded and, as a result, the genre has continued to decline.

More recently, we have seen companies trying to rekindle interest in the genre by introducing new levels of complexity.  Rock Band 3 is one such game. It introduces a new keyboard controller, not unlike Nintendo’s defunct “Miracle Piano” (See below) and a new “pro level” guitar controller. In his review of Rock Band 3, CNet’s Dan Ackerman writes,

This version has six fixed string-like sensors in place of the traditional strum bar, and replaces the five colored fret buttons with separate tiny buttons for each string at every fret on the guitar neck. That’s 17 frets across six strings, more than 100 independent buttons.

Rock Band 3 Controller

100 Button Rock Band 3 Controller

In all the cases we have looked at, adding complexity reduces consumer interest and  interferes with the gaming experience. One example is the Atari Jaguar home console, introduced in 1993 with a 15 button controller that represented the epitome of needless complexity, clumsy ergonomics, and deficient usability. Although technically, Jaguar was one of the most advanced consoles of its time, it became one of the worst selling consoles in history. Rock Band 3 should fare better than Atari’s doomed console. However, even if the new controller initially enjoys a following among early adopters and enthusiasts, in the long run the move to 100 buttons is just as ill-advised.

At the same time, newcomer Seven45 Studios is introducing Power Gig: Rise of the SixString. Power Gig uses real guitars made by First Act, a Boston-based company that primarily produces beginner instruments sold through large retailers like Wal-Mart and Toys R Us. (Side note: First Act also produces handcrafted professional guitars sold exclusively through their First Act Studio Store in Boston)

Power Gig also addresses the criticisms of musicians who deride rhythm games as dumbing down of music. For example, Led Zeppelin guitarist Jimmy Page and Jack White of The White Stripes have both come out publicly against Guitar Hero. As a result, some musicians have resisted partnering with these companies to produce in-game versions of popular music tracks. Power Gig seeks to address such criticisms and has enlisted the support of rock legends like Eric Clapton and Dave Matthews. Kid Rock, who also endorses the game, said in a recent press release,

I was never interested in pressing buttons on a guitar to entertain myself or anyone else. The reason I signed up with Power Gig is because this game is a way to not only have fun, but also to play real notes on an actual guitar! Anyone can now rock out—even if they have never shredded before in their life.

Earlier this year, LA Times reporter Randy Lewis wrote,

Ask any musician what’s wrong with video games like Guitar Hero and Rock Band and you’ll get some variation of this response: If gamers spent half as much time with a real instrument as they did pushing plastic buttons on a toy version, they could become musicians instead of just mimicking them.

However logical such arguments may sound, they ignore the fundamental principles that made Guitar Hero a success, principles that Rigopulos and Egozy discovered through years of diligent research on the psychology of music, namely that most people do not want to tackle the complexity necessary to become real musicians. What endeared gamers to the original Guitar Freaks is all but lost in the latest iterations of guitar-based rhythm games.

As we have already pointed out in the book and in several articles, developers of such products are falling into the classic performance trap. Back in January, I posted a short article titled, Needless Complexity: The Classic Performance Trap, in which I discussed the uphill challenge faced by a startup that wanted to incorporate real guitars into music games. At the time, I wrote,

Some product developers seem to have forgotten the purpose of games when they create needlessly complex peripherals that attempt to provide more detailed and realistic experiences. These products are not only barriers to new players who feel intimidated by the control scheme, but also to skilled players who want to escape and have fun. We provide several examples in our forthcoming book, such as the NES “game” Miracle Piano Teaching System by Software Toolworks, a piano simulator aimed at helping “players” learn to play a real piano.

The problem is that when the controllers become overly complex, they become obstacles, not only to new players, but also to experienced players who play for “fun” rather than “realism.” Meanwhile, those who are motivated to learn to play a real guitar will likely do so the traditional way. Miracle Piano was never successful because it required the same learning curve as a traditional piano, but at the same time, it lacked the feel and sound of a real piano or even a quality digital keyboard. Kids who hated piano lessons hated Miracle Piano, and were dismayed by their parents’ efforts to turn their beloved game console into an educational tool. In fact, games like Miracle Piano helped kill Nintendo’s once unassailable monopoly.“We got stuck with the reputation that we were the brand parents wanted their kids to have, which is the kiss of death,” said Nintendo’s George Harrison in 1994.

There will always be gamers who will welcome these changes, and for them, Rock Band 3 and Power Gig will be a godsend, allowing them to take their favorite games to new levels. But like true musicians, they are “really a tiny minority.”

The one consolation is that these games will continue to offer easy modes that allow gamers to use existing controllers in ways that are not unlike previous iterations of Guitar Hero and Rock Band. The question then becomes one of “Can the market sustain another round of rhythm games?”

Originally posted on Gamasutra on 08/21/10. See original post for comments and discussion.

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