After reading analysis again and again my eyes saw something interesting: I’m talking about the 2 generations rule. And I don’t talk about "You can’t be market leader for more than 2 generations". Something different. Let’s look at history:

Nintendo: When Big N launched the NES they focused on games for the younger crowd – and were successful with their strategy. We all know the NES sold more than 60 million units all around the world and became the most successful console of the 2D era.

The SNES continued to dominate, again with the same strategy. Nintendo focused on kids friendly games and the SNES sold 49 million units worldwide.

With the N64 Nintendo had to change it’s strategy – 3D games were new and looked impressive. But besides the new look Nintendos games were still all the same. As we know the N64 was fairly successful but couldn’t match the high sales of the PSX.

But still Nintendo didn’t want to change: The Cube tried to be an "N64 in better" but sold even worse and Nintendo seemed to get in some real trouble.

So they had to change their strategy and launched the Wii: The Wii focuses on funny games for all ages and Nintendo seems to be right with it’s new path at this point in time – the Wii sells like crazy and is a giant success.

But don’t forget Nintendos handheld market: The Gameboy reached high sales thanks to Nintendos good games and became a huge success.

The GBA continued this trend and sold well, too. Again Nintendo focused on the same games as they did with the original Gameboy.

Nintendo was in a strong position when Sony announced the PSP but they didn’t want to stand still and decided to change their handheld strategy: With the DS Nintendo brought the most successful handheld ever to the market and it’s sales continue to be outstanding.

Sony: When Sony entered the console market they tried to focus on a different audience: With the PSX Style began to be important for gaming consoles. With it’s CD player inside the PSX sold more than 100 million units worldwide.

The PS2 sold even better because Sony continued to walk down the same path they had entered with the PSX. As we know today the PS2 still sells great after the PS3 already launched.

The PS3 though sells fairly bad. What happened? Sony still followed the same philosophy with it’s 3^rd home console so they should be more successful with the PS3, shouldn’t they?

Of course Sony was also into the handheld market: The PSP sells good but not nearly as fantastic as the DS does. Again it follows the same philosophy than the PSX and PS2.

Sega tried to focus on a more mature market when they launched master system but Nintendo was so mighty at that time they could never reach the NES sales.

The Megadrive / Genesis though was very successful. Again Sega used the same strategy but they had learned from their earlier mistakes. The Genesis fast became the second system close to the SNES.

Of course Sega wanted to continue this high sales and launched the Saturn – again following the same philosophy. And they failed with it because of the mighty PSX and the fair selling N64.

With the Dreamcast Sega gave it one last try. The forth time they focused on the bit older audience than Nintendo. The DC sold fair (but not that good) but because of Segas financial situation production had to be stopped.

At the same time Microsoft tried to enter the market. Xbox featured lots of games for the hardcore crowd but forgot about casual gamers and didn’t sell that well.

With Xbox 360 Microsoft focuses on the same market again but this time they didn’t have the big competition in this segment they had the last time. The 360 continues to sell fair and could reach the 30 million mark in it’s lifetime.

Conclusion: If you read carefully you probably noticed one thing: every time a console manufacturer kept it’s strategy for more than 2 generations it’s console became more or less a failure (N64, Saturn, PS3, Atari). How big this failure is depends on:

• your financial situation. Do you have bags of money left (N64, GC) or is there nothing left? (Dreamcast)
• How big your audience can be in the best scenario. Could it be big (Nintendo) or is it more or less small? (Sega, Atari in the past)

Sticking on the same philosophy the forth time is often even worse! Examples are Gamecube, Dreamcast, and again Atari. (WHY in the end this consoles were even less successful doesn´t matter. If it is the money or the games – in the end it is the same.)

Second: There are two kinds of changes. have-to-changes and want-to-changes. have-to-changes can be successful (Wii) but they don’t have to be, especially if you just change the look of your games but stick to your philosophy (N64, DC both featured 3D graphics but still the same games).

Want-to-changes are often successful if you

• expand your existing audience ( = focus on a market that is bigger than your previous ones) (examples: Wii (it’s both have to and want to), DS)
• don’t forget about your core gamers (again Wii and DS are good examples) 
•  don’t have a big competition on the market you want to enter (Dreamcast focused on adult games but the PS2 was better in it)

Third: Keeping the same philosophy for a second generation often brings you even more success (the second generation is nearly almost the most successful one) examples: Sony PS2, Microsoft Xbox 360, Sega Genesis / Megadrive, Atari.

Looking into the future: If we keep this thoughts in mind, what can we say for the next gen?

• Sony would have to change
• Microsoft would have to change
• Nintendo should keep the Wii strategy
• Nintendo should keep the DS strategy

And as we see those things will probably happen.

Now it’s your turn. What are your thoughts? (Note: this is not a "pro Nintendo thread"! Nintendo is just successful at this moment but if they keep their DS/Wii strategies for more than 2 times they could fail too.)

it just seems to be an ongoing trend in gaming that every company fucks up their third system:

Nintendo, N64: screwed over third party developers and stuck to cartriges
Sega: Saturn included a whole bunch of add-ons which alienated the fan base
Atari: 7800 failed dismally against NES (but the 5200 wasn't too crash hot)
Sony: PS3 too expensive, not going well so far
MS: well they haven't maid it yet, but due to a terrible outing by Xbox and so far 360 aint looking too crash hot, if they even make a third gen it won't look too bad compared to the previous two

Nintendo seems to have bucked this trend with their handhelds, however. 

Exactly. And that´s what it tried to figure out with this Thread: You CAN be successful with your 3rd console but you have to change your philosophy for it. And after two generations of big successes the most companies are not willing to do this. Which is a big mistake.

BTW: Nice avatar

We really only have Nintendo and Sony to base that assumption off of, and no more/less.

 Sega didn't do good with the SMS, did great with Genesis, then did very bad with Saturn and DC. Nintendo did great with NES, SNES and somewhat good with N64. We still have yet to see how badly PS3 sales will drop off compared to PS2, ect.

However, I would agree that it seems the virus of failure is that these companies try to cater to one gaming theory (not actually market), and stick with it. I guess the reason is that they have found succuess with one method, and feel that the one method will work, when gaming trends change. In the NES days, games were a kiddie machine. Earlier still, they were a teenager machine. Now they are an everyone machine, and only the PS1/2 really was able to capture all audiences.

 Atari failed at the 5200 and Jaguar. Nintendo failed at Virtual Boy. Sega failed at Saturn. Microsoft has yet to fail. Sony has yet to fail, but seems very likely this generation.

Well we´ve got Sega, too. With 1st generation worse than the seond one and gen 3 and 4 failing they exatcly match to this theory. And Atari was the same: 1st gen good, 2nd gen better 3rd gen bad. So we get to 6 proven examples for it.

 Of course it is just a theory, but Microsoft follows the same way (at least for the first 2 gens) with Xbox and 360.

 And important is how big your market can be in the best possible scenario (I pointend it out befor though): Sega did good with Genesis because they knew their mistakes from their first console. Sega fits even better in this rule than Nintendo because SNES sold worse than NES.

 But again: It is just a theory.

Are you saying that losing $4 Billion to barely pull in a distant 2nd place wasn't a failure? 

Well I was maybe wrong with Atari (I wasn´t into the market at that time)

Two things: The gaming business as we know it today started with Nintendo Entertainment System. In that case you´re wright I shouldn´t include Atari in this Thread. But Nintendo was the first company to really open the market to a broad audience. And the Master system was Segas first system in the new era and (let´s speak it out) at least it followed a strategy

@Rolstoppable: Good point. It´s true everytime a company focused on growth (but didn´t forget the core audience) it won the generation. I mentioned it in my post, though.

I didn´t say "there is a two generation rule" - I just said "in the past, everytime a company followed the same path for more than 2 generations the 3rd console more or less failed." And the market you want to sell your console to decides your business strategy. It IS your business strategy - so all in all we said more or less the same

Again for everyone: I never said "you can´t be the maket leader for more than 2 gens". I just said you "have to" change your strategy. That´s what happened to Nintendo, Sega, it is happening (or likely happening) to Sony now and Microsofts first two consoles are continueing this trend to a certain degree.

Edit: Segas Master system was introduced in 1885 (in Japan) - two years after the Mark I had launched. So I wouldn´t call it a "generation console". This is not even half a generation...

Its certainly an interesting theory, it does fit in with my own. As an investor in Nintendo my thought is to bail out before the next round really hits. The original name ofr the Wii, Revolution, was imo a batter name than Wii. When it aims at revoluationary advance, Nintendo does well; when it tries to simply evolve nintendo has generally been stagnant.

I think that the moral of the story is that the market is receptive to and thrives on innovation. What we've seen from each established vendor is that they will innovate until they achieve dominance. After they achieve dominance, they try to consolidate the market by deliver more of the same (literally more, as in a bigger version of the previous gen). This leaves an opening for a competitor to come in with a new strategy. Atari created the home console industry, dominant by default NES revived the VG industry, SNES was more of the same, N64 again Sony took the opening and succeeded with PSX, whose disc drive drove down the media cost and really opened the market to 3rd parties. They followed with PS2 and PS3. Tho PS2 owed a large part of its success to the innovation of backward compatibility, which was unheard of in that generation of consoles. Nintendo wrestles back the market with a new innovation in the Wii. Nintendo's Sega innovated every gen because they never achieved dominance (eventually, they gave up). MS has a solid niche, but has yet to achieve dominance. Their biggest weakness is that they don't have compelling innovation. Their biggest success is in the on-line integration, which is an adaptation of a PC formula as opposed to innovation. MS is growing their niche, but has not really innovated in this generation I think that the real moral of this story is that a winning formula in the VG industry is only good for, at most, two generations of dominance. Each generation starts afresh and is an open to a new dominant player. The current dominant player stays dominant by default. But if a compelling innovation is offered, the market will reward it with dominance.