Long read, but incredibly well-written and thought out. Its analysis of the industry is great, and despite being a fantastic analysis of a complex subject it's presented in a straightforward manner that's easy to understand.
My favorite parts are the section about how the hardcore can be profitable for some, but that exclusively catering to them will lead to death in the long term. I also enjoyed the explanation for why the money-grubbing Nintendo is constantly on the move, and why it opted to "disrupt" the industry (note: the article didn't spell out the latter, and the guy probably didn't know what it meant, but he did a good job of explaining why it was done...) I don't agree with everything he wrote, but even for the parts where we part ways I can definitely see his point.
As an added bonus, it's got an amazing amount of foresight, since it foretold much of what would happen with the Wii in 2005 (!!!). Enjoy!
http://lostgarden.com/2005/09/nintendos-genre-innovation-strategy.html
Nintendo's Genre Innovation Strategy: Thoughts on the Revolution's new controller
I’m still jet lagged from my recent trip overseas, but I managed to stay awake for the new Nintendo controller announcement. I must say that I’m feeling like an excited Japanese school boy waiting in line for the latest Dragon Quest.
I’m not going to tackle whether or not this innovative device will be a market success for Nintendo. There will be so much riding on the 1st party titles, the 3rd party support and the actual technical implementation of the controller that any comments at this point are at best opinions and at worst propaganda.
What we can however discuss in some detail are the two central philosophies behind the Revolution controller and their market implications.
- The increasingly hardcore nature of the game industry is causing a contraction of the industry.
- New intuitive controller options will result in innovative game play that will bring new gamers into the fold.
Is Iwata-san spouting nonsense or is Nintendo actually onto something?
Genre maturity leads to market consolidation
In past articles I’ve discussed two key concepts. The first is genre addiction and the second is the genre life cycle. These both have major market implications for both individual game developers, but also for the market as a whole.
To briefly recap, genre addiction is the process by which:
Genre life cycle is the concept that game genres go through distinct stages of market status as they mature:
What we see here is the consolidation of game designs over the life cycle of the genre. Early examples within a genre tend to have a wildly diverse spectrum of game mechanics that appeal to a broader spectrum of players. As the genre matures, the game mechanics become more standardized and the needs of the genre addicts more homogenized. As the market segment consolidates and standardizes, the majority of the players are well served. They get more polished games that have greater depth. Who could argue that a tightly polished game like Warcraft is a bad thing?
How maturity reduces the number of total game players
Goodbye people on the fringes: The people on the fringes, however, are left out. In the evolution of the RTS genre, there was an interesting offshoot in the form of the Ground Control games. These sported an interesting 3D perspective that was never truly adopted by the mainstream RTS producers. Most players within the identifiable RTS market segment did not enjoy these games and so it was not in the best interest of the game developers to include the innovative features in their designs.
However, some players enjoyed these titles quite a lot. As the mechanics for RTS games become highly standardized, these fringe players were alienated by games in the mature genre. A 2D Warcraft title just didn’t provide the same rewards that this fringe group was looking for.
Some of those gamers left gaming. It may take being alienated from several genres, but eventually a few decided that there were better activities to spend their time on. The market was simply not serving their needs. This shrinks the market.
Goodbye semi-hardcore: The mainstream group, however, fares only a little better. When you recycle the same standardized game mechanics, you put players at severe risk of burnout on a genre. There are only so many FPS many people can play before they don’t want to play them any more. This is less of a problem for the super hardcore players. However, it is a substantial problem for the less hardcore players.
As the less hardcore players burn out on the game mechanics of their favorite genres, they too are at risk of leaving the game market. The result is a steady erosion of the genre’s population.
What is left is a very peculiar group of highly purified hardcore players. They demand rigorous standardization of game mechanics and have highly refined criteria for judging the quality of their titles. With each generation of titles in the genre, they weed out a few more of the weaker players.
This is a completely self-supporting process with strong social forces at work. Players form communities around their hardcore nature. They happily eject those who do not fit the ideal player mold. They defend the validity of their lifestyle with a primitive tribal passion.
There is no internal force within a genre lifecycle that can break this cycle. Only external forces can do the trick. The question is, who would want to break this cycle and who wants to maintain it?
Who genre maturation is good for
Genre maturation is great for the very small minority of AAA developers that can serve the hardcore market. They release titles known as genre kings that are able to address the needs of a large percentage of an existing, well defined segment of genre addicts. Genre kings dominate a particular genre with impressive financial results. The amount of money genre kings such as Halo 2, Half Life, Warcraft, Grand Turismo and other rake in is an inspiration to both developers, gamers and publishers everywhere.
Hardcore genre addicts easily pay for themselves. On average they are willing to spend substantially more on games than the casual or the fringe gamer. When a genre becomes standardized, there is literally an explosion of revenue that comes from successfully tapping into a uniform set of needs. This scalability is a basic attribute of software and is a major mechanic behind hit making in the game industry.
As long as new genres are being created and money gained from better capturing homogenous segments genre addicts is high, the industry as a whole grows with a few fat king of the genre companies taking in the majority of the money.
Who consolidation is bad for
However, when the majority of money and effort is spent on capturing existing markets and not enough is spent on seeding new genres, the natural erosion of less hardcore players begins to decrease the overall market size.
It is easy to ignore this trend. Overall player numbers may decrease in certain genres, but remember that hardcore players spend more and flock to specific games in great numbers. So total revenues keep going up, and the revenues of hit titles keep going up. It seems silly to shout that the sky is falling when there are so many examples of over-the-top success. This is the current state of the American game market.
Only after the trend has been going on for some time does the erosion become too much to ignore. The substantial decreases in the overall revenue of the Japanese market place over the last five years provided a major warning signal. You could easily argue that similar erosion has occurred in the PC market.
People who are less likely to care:
People who are more likely to care
Nintendo needs new genres
That last point about the strategies of brand-based publishers is an important one. Nintendo needs new genres to make money.
Nintendo makes the majority of their money by leveraging their brand recognition during the early to mid-stages of a genre’s life cycle. The power of the Mario character can establish a Nintendo game as an early genre king and help tap into a new market segment for great profit. However, as they get later into the life cycle, the standardization of the genre mechanics and the intense demands of the hardcore population reduces the power of the brand.
A few major games will dominate the mature genre and it is unlikely that Nintendo’s will be one of them. Nintendo’s fixation on new genres and their unwillingness to pander completely and utterly to the existing hardcore audiences has made their name mud with many of the most vocal elite in the game industry.
Product innovation leads to increased profitability
C’est la vie. You can’t have it all. Focusing on product innovation at the expense of commodity markets is a classic business strategy that is used successfully in non-game companies around the world. Companies like 3M are required as part of their strategic plan to have 30% of their revenue come from new products. They are constantly exiting markets when strong competition emerges and constantly competing with themselves by offering new products that outdate their existing products. Nintendo releases new genres where other companies release new products, but the basics are the same.
The non-business person looks at this strategy with horror. Nintendo invented the 3D platformer, yet they have no major product in that niche at the moment. Surely this is the most obvious sort of stupidity. However, consider the following portfolio management issues:
What you find is that selling innovative products early on can be dramatically more profitable and less risky than selling commodity products. The early market might not be as large, but the money is much better. You see this over and over again. Nintendo sells less but makes more money. Sony and Microsoft sell more, but make less profit.
Consider this tidbit. The Xbox, which focuses on highly mature genres catering to hardcore gamers has production costs of $1.82 million a title. The Gamecube costs half as much at $822,000 a title. The real kicker is that the Nintendo DS only costs $338, 286 a title to develop for, even less than the Gameboy. Some of these costs have to do with the hardware and development kits, but for the most part they are derived from the scope of the projects. Being able to develop successful titles at 1/5th the cost of your competitors is a major boost to your bottom line.
Thus, Nintendo’s profitability and need to innovate go hand in hand. They need those new genres because the old ones quickly become too competitive and too expensive.
New controller features as a source of Innovation
The new controller is best seen in light of this larger corporate strategy.
One of the easiest ways of creating a new genre is to invent a new series of verbs (or risk mechanics as I called them in my Genre Life Cycle articles). One of the easiest ways of inventing new verbs is to create new input opportunities. Nintendo controls their hardware and they leverage this control to suit their particular business model.
And this is exactly what Nintendo has done historically. The original Dpad, the analog stick, the shoulder buttons, the C-stick, the DS touch pad, link capabilities, the tilt controller, the bongo drums…the list goes on and on.
Each time, they also bundle the controller innovation with a series of attempts at creating new dominant genres. Not all attempts are successful, but a few of them are highly successful. The 2D platformer, the 3D platformer, the Pokemon-style RPG, and the virtual pet game all come to mind as successes. By seeding a genre and by owning the key hardware platform that the new genre lives on, Nintendo achieves a position of financial stability and security that is unheard of in the game industry.
As a side note, folks who argue Nintendo should just make games for other platforms are completely missing the point. Nintendo needs to control their hardware platform in order to force innovation to occur in the control mechanisms. Other console manufacturers who rely on the hardcore audiences and standardized genres don’t see this need. They would happily standardize the console platform and make it into a commodity. Microsoft has historically made major comments about having one universal development platform.
The moment Nintendo loses control over their hardware, they lose a major competitive advantage in terms of creating new genres.
The new controller
The new controller is yet another logical step along a path that Nintendo has been pursuing for many years. We are likely to see some very obvious patterns repeated.
Some predictions about the games
There are also some obvious predictions that we can make about the game designs based off the standard genre lifecycles.
So when games come out slowly and only appear to be technology demos, I wouldn’t worry too much. A ‘gimmicky game’ is really just another name for a new core game mechanic that hasn’t been polished. Donkey Kong is considered shallow and gimmicky by children playing it for the first time in this modern age. Yet it sported the same core game mechanics that eventually blossomed into an entire genre of highly polished 2D platformers.
In the past, Nintendo built these new genre attempts internally. They got to own the IP and enjoyed the resulting success that comes from being one of the few to understand the benefits of innovation. The result has been a focus on a small number of 1st party development efforts and a trickle of titles. Unfortunately for them there are other innovative people in the world. New genre successes such as GTA on other consoles provided substantial and painful competition.
I see this changing somewhat with the DS. We are starting to get some wacky ideas from smaller companies and Nintendo seems to be a bit more welcoming of others. Nintendo needs to pursue this path further by allowing new companies to join the experimentation stage.
Conclusions
Nintendo’s strategy of pursuing innovation benefits the entire industry. It brings in new audiences and creates new genres that provide innovative and exciting experiences. The radical new controller is a great example of this strategy in action.
Surprisingly, this also benefits Microsoft and it benefits Sony. As the years pass, the hard core publishers that serve mature genres will adopt previously innovative genres and commoditize them. Their profits will be less, but they’ll keep a lot of genre addicts very happy. Everybody wins when a game company successfully innovates.
I see both of these strategies as a necessary and expected part of a vibrant and growing industry. Industries need balance and Nintendo is a major force of much needed innovation that prevents industry erosion and decline.
On a slightly less analytic note, I for one can’t wait to play the new games on the Nintendo Revolution. With all the new game ideas that will be demonstrated, it is certainly a great time to be a game designer. A couple years down the road, I suspect that this will also be a great time to be a gamer.
Take care
Danc.