Was Nintendo right to opt out of the graphics arms race?

[Louie]

TomaTito said:

Louie said:

What the Switch 2 is doing now is exactly what the theory of disruptive innovation states: With the Switch and now the Switch 2 Nintendo moved upmarket compared to the days of the Wii: The Switch was acceptable to many people in terms of "old market values" (graphics, power) and the Switch 2 is good enough in terms of power for most gamers out there. Thus, more people buy it, more "traditional" hardcore games are released on the system. Because the disruptive technology inside the system (in this case mobile chipsets) has gotten so good that it is good enough for most of the market.

I also saw this during the launch period, the Nintendo price hikes seem like a deliberate red ocean strategy. They are effectively squeezing out the competition's next-gen consoles by pushing them into a premium corner burdened by high AAA development costs and a potentially smaller audience. This strategic move leaves their rivals with limited choices: either increase their own prices or attempt a market disruption with a cheaper alternative, a base already secured by the Switch Lite. [source]

Great quote! I would add the disclaimer that Blue Ocean Strategy and disruptive innovation are not the same thing. Unfortunately, these strategies often get mixed up by gaming journalists because Nintendo had a blue ocean product (DS) and a disruptive product (Wii) in one generation. A blue ocean product looks to broaden the market without getting into direct competition with established competitors.

A disruptive product, well... disrupts the established market. That's exactly what's being described in the above quote: "pushing them into a premium corner with a potentially smaller audience" --> moving upmarket. 

This is exactly what the theory predicts. The theory also predicts that established companies (Sony in this case) will make a lot of money up until the point at which they are being disrupted. Upmarket competitors like the fact that they can focus on their most lucrative costumers (in Sony's case: hardcore gamers who will pay a lot of money for PS+ subscriptions, buy a lot of games, etc.) because it means they won't have to cater to the downmarket. 

This strategy works well up until a certain point, where suddenly the disruptive product is "good enough" for most existing customers in terms of old market values (in this case: Most hardcore games being released on a Nintendo platform in a good-enough technical state). At that point the rug is suddenly being pulled away from under the established company's feet.

If we look at the console market, we can see that Sony and Microsoft have sold their consoles on the premise of better technology for decades. But now we are at the point of diminishing returns: Price hikes for GPU and RAM, ever-harder-to-see graphical improvements in games, etc. It will be really difficult to make a PS6 enticing, if the price of the console skyrockets while the graphical improvements are minor and most people can't see the difference compared to a potential Switch 3 console.