Summary:

This case examines two of the leading video rental services in the United States, Blockbuster and Netflix, and how each adapted to changing technology and market forces. At the end of the case, Blockbuster has declared bankruptcy and Netflix has seen its first decline in subscribers since its founding in 1997. Netflix also faces a number of new threats, including illegal file sharing, rental kiosks and new low cost video-on-demand (VOD) services. Netflix responds to these threats by announcing that it will split the company in two. Netflix will focus exclusively on streaming content, while a new subsidiary called Qwikster will be restricted to providing DVDs by mail. Customers overwhelmingly react negatively to the announcement, and Netflix’s stock price plunges by more than 50 per cent.

The case can be used in courses on marketing strategy, generating profit from new technology, and crisis management. It can also be used to conduct a simple SWOT analysis and to examine the impact of disruptive technologies.

Netflix Inc.: Streaming Away from DVDs joins the best-selling case study The Wii: Nintendo’s Video Game Revolution, and other top selling cases in technology marketing, includingThe Launch of the Sony PlayStation 3 and Brand in the Hand: Mobile Marketing at Adidas.

To obtain copies of any of the aforementioned cases, please contact Ivey Publishing. Qualified academic instructors may obtain sample copies at no cost by registering with the publisher.

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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.

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.

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.

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.

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. 

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.

Researchers 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.

“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

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.

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.