I've been thinking about making a thread about Nintendo's positioning and strategy for Switch for a while now, but it took Time's recently posted interview with Shigeru Miyamoto to really make me do it. You can check out the full interview at the link, but for this thread's topic only the following excerpt is of relevance.
Mr. Yamauchi [Nintendo's longest serving president, from 1949 to 2002] once said that Nintendo shouldn't have a corporate philosophy to avoid creative staleness. Is that still true today?
Mr. Yamauchi had a kind of a personal philosophy, which was that he didn't hold a personal philosophy. What's really interesting is that, even though this was how he lived, he left several lasting nuggets of philosophy to the company. One of them was like, because we were profitable by providing fun experiences, that we should only use money to create fun. What this means is that what we as business owners look forward to is not increasing our company, but expanding our work.
So because Mr. Yamauchi had that philosophy and he said that consistently, it made work a lot easier for us. We didn't have to think about all the other things. All we had to think about was, really, providing fun. There's also the idea of having this original thought, a unique thought, which means not doing the same thing as other people. This is something obvious in the world: If you're trying to do the same thing as everyone else, you get further and further from the top.
If you want to be in second place or third place, you can do what other people are doing. I mean, you'll have to put a lot of effort and work into it. If you're doing something on your own, something unique, when the spotlight hits, you're already at the top before you know it. So that's why I feel like, in the world of fun, there's only number one. And that's why I think you've got to take risks to become number one. If you want to be number one by doing the same thing as other people, you've got to be kind of tough.
And because we're not tough, we can't fight with other people. [Miyamoto holds up his fists and laughs.] I think this really coincides and equates to what the entertainment industry is like, anything with the creative industry, and it links to terms like blue ocean or red ocean. This is something that Mr. Iwata did, to really link the philosophy of Nintendo to some of the business and corporate jargon, while also being able to convey that to all of the employees at Nintendo.
Here's my short take on what Miyamoto said, before I move on to the more complex subject.
The first thing of note is in the second paragraph of his answer where he states that it's obvious that doing the same as everyone else will get you further and further from the top; while he is absolutely correct here in the context of Nintendo's prospects, it's a facepalm-worthy moment because it didn't stop Nintendo from making the Wii U. The next thing of note is the quote that went into the thread title; talking about being number one is the right attitude to have for Nintendo, because they shouldn't be satisfied with anything less than that. The final thing of note is the admission that Nintendo isn't tough, which in this context means that in a war of attrition between console manufacturers, Nintendo is in the worst position because the other companies have more revenue streams and deeper pockets; this is how Sega got eliminated from the console market because they were in the worst financial position; the remedy to such a position is to do something different and this is where blue ocean vs. red ocean comes into play.
Blue ocean vs. red ocean will be the main body of this thread (yes, this is going to be a long thread). The author from Time was nice enough to add a hyperlink to the Wikipedia page that provides a summary of the concept, so I save some work here. The gist of it is that Blue Ocean Strategy is a highly respected theory in business, because it provides a lot of advice for how to reposition a business for significantly higher profit opportunities, and it is proven to work in praxis. The fundamental part of blue ocean strategy is to move away from a focus on competing to a focus on value innovation, attempting to create a unique value proposition to unlock new demand in the marketplace, or at times to address existing demand that is underserved.
Switch is a blue ocean product.
Not only does this give Nintendo breathing room in the dedicated video game market, it also unlocks the possibility for very high profits. Here are three key points how Switch creates unique value:
1. The conventional thinking is that home consoles and handhelds are entirely separate things. Nintendo is tearing down this wall completely. Portability creates value that is instantly understood by consumers.
2. Home consoles are dominated by AAA third party software, first and foremost developed from America and Europe. This is good if you like that; if you don't, you are a second-rate consumer at best. Switch losing out on AAA games is not a surprise to Nintendo, it's by design. While conventional thinking dictates that this is a glaring weakness, Nintendo won't let it be one. Switch's offerings have a good chance to resonate very well with the aforementioned second-rate consumer, because on Switch this consumer will be at the top of the food chain.
3. This point actually didn't take any special effort from Nintendo. With Sony's exit from the handheld market, Switch is going to be the only option left for dedicated gaming. No company is going to challenge Nintendo here. For one, Nintendo has utterly dominated the handheld market for over 25 years straight, an even longer period if you include Game & Watch devices. And two, if even PlayStation received such a severe beatdown, then there's really no hope for anyone else. Nintendo has a blue ocean (i.e. uncontested market space) by default.
Now you might have some questions, so I'll go over a few that I expect to be common.
Q: The Wii U had the Gamepad and was different. Does this not mean that it was a blue ocean product?
A: Wii U was a red ocean product. Mere feature differentation does not make products blue ocean, because feature differentiation is common practice in red oceans. Play the same games as PS and Xbox, but with maps and inventories on a second screen isn't any different than "Better with Kinect" on Xbox. Similarly, the Share button and touchpad on the DualShock 4 do not turn the PS4 into a blue ocean product. All of these things are feature differentations to get an advantage over the competition that is otherwise very, very similar.
Q: Is there such a thing as a purple ocean?
A: No. Only people who have no grasp of the concept of blue ocean vs. red ocean will use the term purple ocean. The people who conceived Blue Ocean Strategy never use the color purple or any other kind of inbetween thing. There is only blue and red. People who throw around the word purple mistake mere feature differentiation (explained in previous Q&A) as a blue ocean trait.
Q: The Wikipedia page states that value innovation is the simultaneous pursuit of being different and a low cost. Switch isn't cheap!
A: Switch launches at $299. PS4 launched at $399. Xbox One was $499. Therefore Switch still fits the mold, especially because Sony has already moved on to PS4 Pro and Microsoft is ready to launch Scorpio this year, both consoles being more expensive than Switch.
Q: Is Blue Ocean Strategy about targeting casual gamers and non-gamers?
A: Partly correct at best. While it certainly works to attract these groups, the unique value proposition tends to attract gamers who clearly do not belong to either group. Are you a lifelong gamer who appreciates variety in gaming devices as well as games? Then a blue ocean product will almost certainly capture your attention. That is, if there are good games. Redundant to say in this case, because Switch is a Nintendo system, so there's a built-in guarantee that good games will be there.
With that out of the way, let's take another look at which blue oceans Nintendo is set up to capture over the course of Switch's lifetime:
1. Handheld gamers. While Switch's launch price is high in a handheld-only context, the hardware price can be safely assumed to come down eventually. I've already established that Nintendo is the only remaining option for dedicated handheld gaming (does anyone doubt that?), so that provides Nintendo with a big pool of consumers. While some may be quick to argue that the handheld market is dying, handhelds still have sold over 80m units this generation and ~7m this past year. That doesn't look like much at first glance, but if all of that is going to be Nintendo's, then that's already a quite solid amount of sales.
2. Gamers who love gaming. While PS and Xbox are red ocean territory and substitute each other in both capabilities and games library, meaning that Xbox sales go down if PS sales go up and vice versa, Switch isn't going to be stuck in the same box. Adding a Switch to go along with one's PC, PS or Xbox seems like a no-brainer. Switch's unique value proposition makes it irrelevant whether or not someone already owns a PS or Xbox.
3. Retro gamers. Anyone who has kept an eye on the used games market for classic video game systems knows that there is demand and a lot of spending power. The biggest problem for this category of gamers is a lack of supply. I don't only mean for classic systems and games, but for new ones as well. These people are heavily active in the retro scene because new consoles don't cater to them. Switch is not yet another system filled with AAA software, so that instantly makes Switch interesting. A game like Bomberman returning to retail sends a strong message too.
4. ???. Since Switch has a unique value proposition, it's virtually impossible to predict who else might buy into it. But the door is wide open for that, because Switch's design, branding and marketing is coherent.
When you start to add these numbers up, even if you use modest estimates, Switch is going to be at least moderately successful and very profitable for Nintendo. Blue ocean strategy is about unlocking and addressing demand with high payoff possibilities. The best part about this? Due to the unique circumstances of the video game market, Nintendo will most likely not get challenged by anyone. Nobody dares to make a handheld. Both Sony and Microsoft are reliant on AAA third party games to sell their hardware, but it's physically impossible to put the necessary processing power in a portable case. This ultimately means that Nintendo is well-positioned for the future and that Nintendo's biggest threat is Nintendo and their creative drive that could self-destruct them.
It's this positioning and strategy that makes Kimishima's target of selling as many Switches as they sold Wiis reasonable. If the expectations are already on that level, then it's only appropriate to ask if Nintendo intends to sell more units of Switch than Sony did with the PS4. The answer is yes, because in the world of fun, there's only number one.