Microsoft versus Nintendo: A Marketing Battle

For some time now I've been surprised at the number of people in retail who talk about how Microsoft did much better than Nintendo in the recent console war. This has always somewhat amused me, as when they started saying this the two consoles were on largely similar unit sales. It's a great example of just how good Microsoft's Marketing department is when they're on form.

Nintendo made a profit with the GameCube (I think). Microsoft made a $4,000 million loss. (Why not $4 billion? The UK and US 'billion' are different numbers! Figure from Forbes, but thanks to Video Game Media Watch).

There's no doubt Nintendo would have liked to do better, and there's no doubt that Microsoft was ready to haemorrhage cash to gain market share - which they have achieved, on both accounts. But I suspect Microsoft's war chest for this endeavour wasn't planned to be quite that large.

Comments

[Josh]

Nintendo did make a profit. Microsoft swam in red. It's why I've always been amazed at how amazed people are with Microsoft's "success".

Yeah, MS did some things right with the XBox - but had it not been for their ability to waste billions and billions of dollars, this would still be a two horse race today. Tech savvy for the console was nothing compared to a pure burn strategy.

The reason why gamers should take note of this is that it won't last. MS does intend to make a profit eventually, and it will do the same thing it did with it's other costly project - like Internet Explorer. It will get a power curve of innovation with a quick drop slope. The console will be more expensive with each iteration, less subsidized and probably less powerful (relatively). MS's real hope is to gain enough market clout that by the time the XBox 3 comes out (supposedly their plan is post profit on the third gen), nobody will be in a position to care anymore.

[James O]

It just makes me wonder if the stockholders will ever take MS to task. Surely MS can placate them for a while doe to the real costs of starting up a new venture in a very closed market, but how long can they (and Sony) afford to bleed cash before someone holds them accountable?

Nintendo's financial acumen always impresses me. While many online mock the GBA Micro as an uninnovative retread (which it is), few seem to see what a smart business move it is (new product geared to a slightly different audience using tech thats several years old and no enw R&D money.) The business sense behind Revolution is quite smart too - they cannot financially compete with the Jerry Bruckheimer consoles from Sony and MS and hope to prevail, so they sell an indy/art-house style console (that exists almost as a seperate market) for less cost (for consumer and producer) and almost certainly higher margins. Nintendo's innovations are not just for furthering the market, it's simple good business sense.

Fancy that, innovation as a sound business plan? It certainly goes against the grain, but it's quite easy to see that Nintendo has business savvy behind its cuddly mascot lineup.

[Chris]

Of course, the other side of the coin here is that Nintendo made a lot of enemies when they had their effective monopoly. That was arguably the fatal mistake they made which (ultimately) allowed Sony to steal market share by offering an 'open market'. Although I have great respect for Nintendo, if they had not abused their control of the market they would be in a very different situation now. To be honest, I don't think a different company in the same situation would have behaved any differently, though. We've all seen how Microsoft behaves when they acquire an effective monopoly.

[Dan Boutros]

I remember reading that this generation was the first time (in years?) Nintendo posted a loss (mainly led by Gamecube). They were the only company MAKING money on the hardware for a long while however, and if I remember correctly, Microsoft's long term strategy is a ten year plan, which they said would have a three year intended loss in order to gain market share. I think Sony posted a similar plan in the development of the Cell chip and its intentions to recoup that investment post 3 year development.

I seem to recall the loss figure (M$) being obscene. Like 3 billion?!?! Maybe it's not as ridiculous as that, but have a look around. I recall that within the last year, they also posted that their losses were greater than they expected, but they did gain the market share they were after. There may be a press release in the Games Press archives somewhere.

Isn't it funny that through all of Microsoft's percieved evil in the IT world, they are seen by many (well, many that I know anyway) as the saviors of what would otherwise be an industry run by the arrogant Sony and the overly expensive to work with Nintendo.

[Chris]

When it comes down to it, one large multinational corporation is much like another. Any one of the three companies would and will abuse their position if and when they have a monopoly. In the case of Microsoft, it's probably a case of 'the enemy of my enemy...' for those companies who view them positively.

[psu]

Microsoft may have lost a lot of cash, but what that cash bought was shelf space in your local Gamestop (or whatever).

That shelf that used to have all the Nintendo and PC games is now all Xbox.

The problem with Nintendo is not financial, it's that in the long term no one cares about what they do. In the next five years or so, the only games worth playing on a Nintendo box will be made by Nintendo. So from the standpoint of the larger market, they have "lost" this time around because they have become irrelevant.

Also, the $4B that Microsoft spent to do this is probably something like a month or two of revenues of their Office division, so who cares?

[Chris]

You're right that Microsoft's cash bought them shelf space in specialist retailers (and market share in general terms), but Microsoft's total turnover is only about $40 billion (the Office division is 25% of this) - so $4 billion is about half of the annual turnover of the Office division. That's a lot of cash to burn (even for Microsoft) to get an approximately 12% market share. It might have been cheaper for them to buy Sega and have inherited their old market share. :)

I'm suprised to hear you suggest that "no one cares" what Nintendo do, and that you think they have become "irrelevant". EA, Activision, THQ, Ubisoft and others have all made press releases announcing their intent to support the Revolution, and there is definite industry-wide interest in Nintendo's potential to recapture the wider market that the games industry has lost in its increasing competition for the Hardcore market. It looks to me that Nintendo are actually more relevant to the games market as a whole right now than when the GameCube launched. :)

[Dan Boutros]

Big fat agreement from me.

After attending X05 this week, I'm even ever more on the front that Nintendo will be more relevant than ever when Revolution releases.

Of all the companies, they are easily the most practical and thankfully the most 'truly' forward thinking in a holistic way. Though I expect Sony will evolve their Eyetoy in a similar way. Team Eyetoy was struggling with their depth of field code last I spoke to them.

[peterb]

"EA, Activision, THQ, Ubisoft and others have all made press releases announcing their intent to support the Revolution."

Talk, as they say, is cheap.

The focus on profit and loss in the game market is a canard. The only thing that matters from a business perspective is: did a company meet (or exceeed) their plan? Or did they fail to do so? (If a plan is so brain-dead that it's not worth investing money on, Wall Street may punish the company when it announces it. You'll note that didn't happen in the case of MS and the Xbox)

When Microsoft announced they were entering the console market, the _universal_ attitude among the gamerati was that it would be a big fat flop: no one would buy it, it would be crushed by the PS2 and the Gamecube, and MS would run away with its tail between its legs.

Now, it's several years later, and we can see several things:
- Microsoft has met and exceeded their _revenue_ goals for the Xbox. They were clear from the start that their only goal for the Xbox was establishing market share and positioning themselves for the the next wave. In _none_ of their statements has MS ever indicated that profit for the Xbox was a goal for this generation.
- Nintendo has _failed_ to meet their revenue goals for the Gamecube. The fact that they've had to cut back production on the units to reduce inventory levels (at a time when the PS2 and Xbox were _selling out on store shelves_) is clear evidence of this.

From both of these factors, I'd say it's clear that Microsoft's game division is _on plan_, and Nintendo's division (the Gamecube division, obviously -- Gameboy sales are obviously super) has _missed its plan_. That's how one evaluates business success or failure in the short term. Success or failure in the LONG term ("Was Microsoft's purchase of market share worth it?") we will only be able to judge several years from now. But turning "Microsoft has done exactly what they said they would do!" into "Microsoft has done exactly what they said they would do, and, uh, somehow that means, that, uh, things are really grim for them!" is just fooling yourself.

In many ways, what Microsoft has bought is not 12% market share, but 50% marketing share. Of course there are fewer Xboxen than PS2s; the console launched a year later and started from zero name recognition. The key point, however, is that if you walk into your local EB (at least in the US), you will see about the same amount of _shelf space_ devoted to Sony and Microsoft products. That legitimacy and marketing power, more than the 12% market share, is what they bought. In 2 years or so we should know whether or not that was a worthwhile purchase.

[Chris]

The question from my original post (which none of us can answer) is whether Microsoft significantly exceeded their war chest for this operation. I still suspect they did.

The key point I was making was how Microsoft won the marketing battle by getting retailers to *believe* Nintendo had "lost" at a point (years ago now) when the two format's had sold about the same number of units. And even before the Xbox launched, Microsoft PR successfully convinced many retailers that the Xbox and GameCube were 'targeting different markets' (lie!). Truly, Microsoft's PR ran rings around Nintendo!

On the subject of shelf space, in the UK it varies, but the Xbox gets about a quarter of the shelf space of the PS2, more or less. You can also buy PS2 software in practically every supermarket. Looks like Microsoft may have done better in the US in this regard.

I agree with you that in a few years we'll get to see whether it was worthwhile. :) The Xbox had it's overengineered power as a selling point. This time, all Microsoft has is a head start, and presumably some loyalists. It's going to be interesting. The head start certainly didn't help Sega. :)

The real battle Microsoft want to win - for control of a network ready multi-media device with a hard-drive in "every home" - hasn't even begun yet! That probably starts with the PlayStation 4 and the Xbox... er... 720? :)

[James O]

peterb, I think you may be shaping your opinions of relative success per console too much on the US market. While certainly the XBox has enjoyed better sales here (being a local console and having Halo et al), the Cube is much better off in Japan.

Additionally, even if Nintendo is shrinking financially, as long as they are still profiting they are a sustainable company. After all, Apple Computers has a very small amount of shelf space in computer stores, but their desktop systems still sell well enough for them to be profitable (though, of course, the iPod is their main revenue stream now.) Success is not entirely contingent on having large market share, especially if you have low unit costs and a rabidly loyal fanbase.