A Rising Continent

Which is preferable for The Industry, rising profitability and growth or deepening losses and stagnation?

“What!” people may exclaim. “How can there be any question about it? Has anyone suggested, or is it possible to maintain, that deepening losses and stagnation is the basis of The Industry’s well-being?”

Yes, this has been suggested; yes, this has been maintained and is maintained every day, for one only has to venture through the musings of professionals that it is good for a console company to lose money and, in fact, it is “The Way” how things are done. It is the burden of the fast food analyst, who takes to heart a simple logical slogan; and, strange as it may seem, it is certain that it was repeated and performed until it became popularized and established as indisputable: “The console business is the razor and blades model. It is good to lose money on hardware and make it up on software.”

As I can read a history book, I do not see this through console history. Atari did not sell hardware at a loss as neither did Sega or Nintendo. Back then, what was considered ‘razor and blades’ was bundling software with the hardware as Sega executives thought they would lose all their money taking a loss on the Sonic software to sell the Genesis. (The true product, the ‘razor’ of consoles is the software, not the hardware.) Microsoft does not practice the ‘razor and blades’ model either as their model appears to resemble the “let us throw money at it” maneuver that world governments enjoy so much. And like world governments, Microsoft knows the key to making profit in consoles is to set aside a ridiculous amount of money, say a billion, delegate it towards a particular issue, such as hardware problems, only to later take those remains to funnel it back in as profit. Only Sony appears to follow this notion of taking huge losses on hardware and make profit back on software. Oddly, just because Sony does this, why did everyone assume it was standard practice for the industry?

Reader, does my history book differ from the analysts? Surely, they would have considered historical trends into their analysis. I mean, they would not just focus entirely on technological trends and ignore the full thirty year history of this industry!

”They do not appear to take a whiff of history. But look at their nice charts and technological price forecasts!”

Then we can confidently replace the analysts with basic Pentium computers.

”Analysis is like most jobs: the worker exists only to apply the formula.”

So it would seem. This ‘razor and blades’ assumption appears to be the false premise that all the insane analysis of Sony winning and Nintendo coming way behind are based. Nintendo just couldn’t compete, we heard over and over, yet Nintendo became unstoppable. How could such an analysis error been made? Investors deserve an answer.

”The Wii was such an aberration.”
”In time, the market will return to our original forecasts.”
”No one could predict this.”

There, you all are wrong! Everything has happened was predicted and hinted by Nintendo if anyone paid attention. Amazingly, all the quotes you will read below were completely ignored by the analysts and journalists. “It sounded like marketing then!” one might say. But none of this stopped the analysts and journalists from slobbering over the “HD Generation” or barking over the number of processors and the Cell chip.


Iwata Foresaw

On the Industry’s shores, a giant golden statue of Kutaragi stands. Proclaimed to be the savior of video games, the rescuer of third parties, and the one who made gaming “mainstream”, Kutaragi is the crown jewel of the industry. Investors and journalists hung on his every word.

Inside the gold studded Industry, everyone chattered excitedly about the wonders “Next-Generation” would bring. Their master, Experience, guided their capital and enthusiasm. It would be a two console war as Nintendo didn’t matter anymore. While Nintendo’s master was Foresight, observers dismissed it only as propaganda and marketing.

Now revisionists, in order to hide the reality that they are talent-less frauds, are saying, “No one could have predicted the Wii and DS success. Not even Nintendo!” But as you will read below, Nintendo did predict such success. Naturally, the new ventures could have become a failure as one must respect the law of probability.

As The Industry sat in their 15^th Century throne room, Iwata enters wearing the costume of Columbus saying riches and gold wait in a new continent. All that is left here of the Old World, of the old market, is to war over smaller and smaller profits. If we do not sail for this new world, Iwata told them, all we can do is wait for the old world to die.

The reader interrupted the article. “Good God, Malstrom. Don’t you think you are being carried away by the analogy? Have you become drunk with metaphors? Let us have more matter, less art.”

And you still think that I am the source for all the crazed metaphors bouncing around this sweet little text? Do, stay awhile; I will prove faithful, and you will find the source of these riddles. Let me now prove that the Wii and DS explosions were not accidental, lucky affairs but deliberate and calculating.

”I await another wordy text of yours.”

If I explained it, as I have tried to, no one would believe me and write me off as a mutated Nintendo fanboy. Yes, I could write a merry article on it, but the hot air of the Industry comes from every analyst trying to be a consumer and every consumer trying to be an analyst. Like a virus, the disease of analysis is spreading throughout the Internet and infecting journalists, consumers, and everyone else. Then war breaks out between all these “analysts”:

”It is your words that reveal you are the fanboy,” says one group.

”It is yours,” replies the other group.

No, gentlemen, your little words count for nothing in all this. Instead of analysis with the bells and whistles of charts and puffed words (so we can consider ourselves ‘intelligent’), let us just listen to what Yamauchi and Iwata have said over the years. Instead of talking, we need to listen more.
 

2001

A journalist asked, “The Dreamcast has died, and Sega has exited the console market forever. How goes the future of The Industry?”

"A number of companies will be eliminated," says Yamauchi. "But Nintendo will survive."

”And how do you ensure that it does?”

Yamauchi revealed he is orchestrating a new product blitz in hardware and mandating a back-to-basics strategy in its latest generation of games. Nintendo is moving away from the prevailing trend of increasingly complex games to what Yamauchi calls "simple and fun" entertainment--games that are both easy to play and cheaper for designers to write.

Iwata (one of the architects of the new strategy) added, "People are tired of games that are complicated and full of graphics but offer little else," says Iwata. (1)

”Hey Mal,” interrupted the reader.

What! You speak so soon!? The second half of my farcical play has barely begun!

”True, and I am very sorry for my outburst. But this antithesis shows only that Yamauchi and Iwata are idiots.”

Oh?

”The Gamecube was a stinking failure even to the Nintendo 64! Yet, you quote these gentlemen?”

The N64 and the 3d Revolution were the crisis. Consider that the focus for the Gamecube generation for Nintendo was purely survival. A major console company, Sega, just vanished from the market due to the bombing of the Saturn. Consider that companies cannot be changed as fast as a light switch. If the new strategy worked, then Iwata would get Yamauchi’s job which would set the stage, and time, for Iwata to fix the company and envision a more complete console.  It is said that the Wii is two Gamecubes duct-taped together, but, as you will see, the Gamecube was a castrated Wii.

A sniveling journalist approached Iwata and asked, “Stop making kiddie games! Why don’t you make more mature realistic games?”

Iwata replied: “If you create games that are based on real-life, cultural issues come into play. The more realistic the game is, the more difficult it is to release that game globally. That's where the challenge lies. A good example of this is American football. These games do well in North America, but there is very little interest in this type of game overseas. On the other hand, hardcore RPGs are more likely to do well in Japan than in the US.”

”Still, you should focus on more powerful and realistic games!” 

Iwata shook his head. “In some Western games, you get the feeling that people are making games only for themselves, not for the end user. It's like a watching a huge bodybuilder on a stage flexing his muscles, when really no one wants to look at him. You have to create a game with the end user in mind. A lot of people think that the Japanese market is tough. One reason for this may be that Japanese gamers look very closely at play control. If they're at all unhappy, they'll put the game down. Perhaps that's because Mr. Miyamoto has trained them to expect perfect play control.” (2)

”Aha! So this might explain why Western games have such problems breaking into Japanese market.”

And all this time, Western companies focus on trying to appeal to Japanese culture making only a mess. Perhaps if they tried a more universal route and focused on perfect play control, their games would be much more successful.

The reader was all excited. “Now comes the year 2002 when the changes began to occur!”

Right. Do you ever use binoculars?

”That is a silly question! Of course, I have.”

You do not use your father’s binoculars, do you? Or your grandfathers?

”Why would I? I use current binoculars that allows me to see further.”

And when you are, say, bird watching, you do not stare in the binoculars all the time?

”Preposterous! You must examine your local surroundings first and, upon spotting something with the naked eye, zoom in with your binoculars. If you only stare in your binoculars, you will have problems seeing the bird. Why do you bring this up?”

What you will see is the binoculars the decision makers of this industry are as old as the 80s and 90s. Better technology, more improved expressions, is their vision. When Iwata appears, he replaces the old binoculars with a new one, an old vision for a new vision. Just as Sony is so intent on staring into their own old obsolete vision today, predicting eventual success but can’t see their own current market surroundings of market failures, Iwata will do the opposite. In life, you do not go very far if you are using someone else’s vision, your parent’s, your grandparent’s, or “society” for your career, finances, love, or anything else. If video game companies think and act like decades ago, they will be overrun by the companies that can upgrade their binoculars, their vision, to the present.

2002

A journalist approached Yamauchi and declared Nintendo to be doomed. “Microsoft will enter the console market. Microsoft is one of the wealthiest companies ever and has a history of trampling their competitors. Ask Netscape.”

Yamauchi laughed. "Within our industry there are those who believe that they will succeed simply because of their successes in other ventures or their wealth, but that doesn't guarantee success. Looking at their experiences since entering the gaming world, it's apparent that our competitors have yielded far more failures than successes. It's been said that Sony is the current winner in the gaming world. However, when considering their ‘victory,’ you should remember that their success is only a very recent development. Though Sony is widely held to be the strongest in the market, their fortunes may change. Tomorrow, they could lose that strength, as reversals of fortune are part of this business. Taking into account the things I've encountered in my experiences as Nintendo president, I have come to the conclusion that it requires a special talent to manage a company in this industry. I selected Iwata-san based on that criteria. Over the long-term I don't know whether Iwata-san will maintain Nintendo's position or lead the company to even greater heights of success. At the very least, I believe him to be the best person for the job."

“Do you have any words for Nintendo’s new management executives?”

"As I retire from management," said Yamauchi, "I have no words to share. Coincidental to my leaving the company, I would like to make one request: that Nintendo give birth to wholly new ideas and create hardware which reflects that ideal. And make software that adheres to that same standard. Furthermore, this software should attract consumers as new and interesting. Lastly, and of equal importance, is completing these products quickly and at a cost comparable to today's current market. I imagine most people question the feasibility of my request, but Nintendo has always pursued those objectives. I'd ask that the company continue to follow this goal as my final and only request to the new management staff. I can't say what these new types of software will be, but I'm sure they'll release it during my lifetime." (3)

A journalist approached Iwata. “According to Nintendo, 4.5 million Gamecube units have been shipped since the console’s launch. How many GameCubes will be sold?”

Iwata answered, “Our projections suggest 50 million GameCube units will have been sold by March 2005.”

”And all it will do is play games? No DVD movies? No other non-game features?” The journalist asked.

”Correct. Profits originate from the software so we must focus on making them more appealing.”

The reader burst out laughing. “What an idiot this Iwata is! 50 million GameCubes? Hah! They didn’t even get half of that by 2007!”

Be soft, reader, and know that this prediction was made in line with the Super Nintendo market performance. Listen to what Iwata says next.

“We can't be optimistic about the game market. No matter what great product you come up with, people get bored. I feel like a chef cooking for a king who's full. We're reaching the limits of how far we can appeal to consumers by boosting the machine's performance or providing more compelling graphics and sound. For the past few years we've been looking for new ways to surprise people, new ways for them to have fun.”

The journalist turned toward the Royal Court of the Industry.  ”Since Nintendo are reaffirming their commitment to the creation of innovative games, it seems that they will have to attempt to do so by unconventional means. Considering that the GameCube, on paper at least, seems to be the most limited, hardware wise, of the next generation consoles, it is interesting to see how Nintendo will go about making innovative games. “

”Stuffed with false facts!?” cried the reader. “How dare they say the GameCube was the weakest console of the sixth generation!”

As you can see, even when Nintendo delivers what the hardcore want in more power and graphics, the Industry will still refer to Nintendo’s system as the ‘weakest’.

Iwata spoke up over the voices. “We have a sense of crisis, that price cuts in software could destroy the game industry. The effort to produce machines with better technology has reached its limit. If things continue, they may lead to the decline of the entire game industry.” (4)

A journalist asked, “So all of GameCube games will be small?”

Iwata shook his head. “When it comes to game size and the size of different games on the GameCube, the games are not all going to be very small and very short in terms of playtime. As a matter of fact, Star Fox Adventures, which we're going to be releasing in the first half of this year, is actually going to be a very large-scale game, and I think people will look forward to that. And when it comes to numbers, really what we're talking about is looking at not releasing similar types of games that will be competing against one another, but having a number of different styles of games.”

This, I whispered, would be something for Microsoft to learn.

Iwata continued. “The other thing that's interesting about the consoles is that you see a lot of people who really try to compete based on the number of titles that they have for their consoles. And, to me, it's really not about, ‘How many titles do I have out there?’ The real question is, ‘How many titles do I have that people actually want to buy?’ Because, really, the unique thing about the hardware is that, unless there's something for that hardware that you want to buy, the hardware itself does nothing for you. So, even if you have 100 games out there, if nobody's interested in playing them, the hardware doesn't do you any good.” (5)

The curtains fell down over the farcical play.

”Why, that was short.”

As a 360’s lifespan.

”I take it you will use this occasion to deliver a sermon to the audience?”

I am only holding a mirror up to the Industry. Haters will see me only as hateful, viral marketers will see a viral marketer in the reflection, fanboys will see themselves staring back, all and all, what is this article but a collection of quotes strung together by my squeaks? There are many Iwata quotes, in fact, too many to include. But within 2004, a deluge will come so it is best to put the following into context.

”To put what into context?”

A collision of contexts began occurring. On one hand, the Industry, especially that of Western companies and analysts, said one thing over and over: ‘The Game Industry is growing like never before! Gaming is becoming more and more mainstream!’ Meanwhile, Iwata says something very different. He will keep saying, over and over: ‘The Game Industry is in crisis. Gaming must strive to become mainstream or it will die.’

”Those are diametrically opposed contexts.”

And those two contexts will shape the business plans of the seventh generation. Despite what anyone may say, both contexts cannot be correct. Either the Industry is right or Iwata is right.

”Interesting. Even when Wii became a success, the Industry still refuses to challenge that old context.”

And this is why they will lose in the Eighth Generation as well.


The Detroit Disease

Iwata, at GDC 2006, has compared Nintendo’s strategy in relation to competitors to be like Pepsi, and its cola competitors. There may be a better analogy: Detroit.

”The Car Industry?”

American business is infected by what is called the ‘Detroit Disease’. Hedge funds and investment banks, filled with the personal invulnerability associated with hot-headed teenagers, ignored the risks of what they were doing and eventually came to believe the risks weren’t even there. One of America’s largest toy-maker believed they could make big profits without spending much thought on quality by outsourcing all the production to China. Now that they discovered lead in the paint and other hazards, the recalls will cost millions and, what is more expensive, reputation.

”What matters, Malstrom, is the bottom line.”

Yes, the bottom line! Never mind paying ordinary people good salaries. Let’s just reward those on the top. And let us slash the pensions of those employees who dedicated their lives to the company. Forget about giving consumers quality. Just pile it higher and higher and sell it cheaper than the next guy. Keep your profits high by cutting everything else: staffing, quality, systems, and standards.

”Then how does Nintendo have such a high profit margin for its number of employees?”

This is a key question that those poisoned with the Detroit Disease, mostly Westerners, will not comprehend. Working for Nintendo is said to be very hard but the employees love what they do. Nintendo raised such a high profit margin by doing the opposite of the Detroit Disease:  by enforcing high quality, taking care of their employees, and keeping their standards high. Business journals stare at awe of the profit and employee ratio but, apparently, they aren’t seeing the company for what it is.

”Explain the Detroit Disease.”

Detroit Disease is the following:

-Belief that the market is immune to outsiders.

-Belief that GDP growth drives auto sales, that ‘growth’ means growth in market share, and that buyers are price-driven.

-Belief that price was something that was jacked up by leather models, white walls, and radios.

-Belief in the immortal words of Lee Iacocca who said, ‘the most important thing is the deal!’”

The Japanese had a completely different context than America did. The Japanese believed they were always in a global market, far bigger than the US, and that they (including Toyota) were small players on a global stage. For them, it was always about growth, not market share. They aimed the price low, but kept as much high quality as possible, in order to grow the market until they had earned the right to sell cars at higher price points. It was not about the ‘deal’ with customers, it was the ‘relationship’ with customers.

The reader was wide-eyed. “This fits Microsoft to a T. Have they become the General Motors to gaming?”

Look at the contexts. In the last article of ‘A Fool’s Paradise’, you saw analyst after analyst, most of them western, inflicted with Detroit Disease. They were not concerned with true growth, only market share. Sony, interestingly, seems affected by this as well as they seem focused on winning the Western markets. The price was jacked up by movie playback and other frills. Every NPD, the analysts go into glee saying, ‘Look at the rising revenue! This means gaming is growing!’ This matches the Detroit way of thinking.

The reader added, “And they believe the ‘deal’ is more important than the ‘relationship’. Countless bundles and coupons they think will move those systems. They also do not think anything outside can threaten the game industry since they perceive game consoles as requiring billions of dollars of loss for the first couple of years!”

Quite true. It is well established today that Microsoft did their console business on the cheap. Even their customer service is outsourced to other countries! Microsoft reps defended this by saying that all American companies do it. Unfortunately for them, we are in a global market now. The loss of a billion dollars for 360 repairs could have been easily avoided had Microsoft been less cheap and used more quality control. When gamers send in their 360s to repair, they should remember the ‘Detroit Disease’.

The reader said, ”The belief of immunity from outsiders is interesting. Casual gaming was always around. Nintendo didn’t invent it. But someone else would eventually make a system such as the Wii and could have stolen traditional game market. A new interactive entertainment experience could easily disrupt the current way.”

(I nodded.) Disrupt or be disrupted. Nintendo got there first. When Detroit began failing to the Japanese, they came up with all sorts of excuses such as “deathtrap” used cars (whose only real threat was to prices of new cars), fashion quirks in California, excise taxes, Japanese conspiracy, and so on.”

”And this happened to the game industry!” the reader said. “They came up with all sorts of excuses. They blamed used games. They said Wii was a ‘fad’. They then said Wii had no real games, only casual non-games.”

The big problem of Detroit is their health care costs, negotiated at a time of no competition, and used in a short sighted manner back then to attract employees without foreseeing the eventual costs. Now Detroit, and many other American businesses, demand government universal health care merely to bail them out of their finances. No one held a gun to Detroit’s head when they made those health care pension plans.

”This mirrors the game industry as well! No one held a gun to the Industry’s head to throw as much technology as possible into the hardware, the equivalent of a console on steroids, and demanding every game have breathtaking HD visuals. They whine and moan about the costs but forget that they inflicted it on themselves.”

Right! Now, how can you tell whether an analyst or message board analyst has been infected by the Detroit disease?

”I don’t know. How?”

”They will:

-Believe sales are primarily price driven. (‘When PS3 and Xbox 360 have their price cuts, it is over for the Wii!’)
-Believe that the deal (‘Look at that bundle with coupons! What a great deal!’) is everything.
-Believe success is only measured in shininess and shoes, not the happiness or joy the products bring to this Earth. (‘Who cares if Wii Sports is something that families enjoy doing together!? I don’t want to hear about that!’)”

Even though the curtains were down, a big muscled man came screaming on stage barking out orders.

”Who is that?” the reader asked.

It is the macho manager. In America, Macho Management became the norm because organizations convinced themselves that it works to drive up profits better than the alternatives. They are convinced the downsides are minor compared to the benefits.

The Macho Manager approached the employees, gave an ‘inspirational’ speech, and then sat back to do nothing while everyone else worked.

Macho Managers become egotists. They have blinkered viewpoints where they are not patient enough for slow, incremental wins. No, they want massive, public success and will often take risks on a similar scale. All-or-nothing easily turns out to be the latter. They ride roughshod over others and have short fuses. Intimidation is their way. They love a good fight for they only shine during conflict. When there isn’t any, they generate some. They are in constant turf wars, not unlike bull seals competing for beach space and females.

Another Macho Manager appeared. One said to the other, “Dude! You’re going down! We will win this war!” “No! We will!”

See how they spend most of their time posturing, roaring, bickering, and trying to grab territory? How this helps their organization is beyond me.

The reader was genuinely curious. “Why do you bring up these macho managers?”

The Macho Managers began running around in circles screaming like monkeys.

If Detroit Disease pervades, the ‘macho’ culture often results. This is why you see heads of Microsoft and Sony publicly trash each other not unlike playground school kids. This macho culture has permeated even the web boards. Perhaps we are not suffering from fanboys but wannabe macho analysts. And for our current analysts, well, many of them also resort to the machoism.

”Did someone shoot you up with estrogen, Malstrom? How dare you criticize machoism!”

Machoism isn’t manliness. The fuel of machoism is fear. Take the contexts of ‘A Fool’s Paradise’. We now have a perversion with macho journalists, macho publishers, and macho analysts. I say away with them!

I jumped up on the stage, went to the back, and pulled a lever. A trapdoor opened beneath the two Macho Managers as they fell to the Pit of Fire. “Let us throw all of them in. Too much Detroit Disease for my sake.” All the analysts were thrown in to the pit. I pulled the lever and the trapdoor closed.

The reader looked expectantly at me. “Can we get on with the farcical play?”

Grabbing some popcorn, I jumped back to my seat as the lights appeared and the curtain rose.



2003

A journalist asked, “Strategy Analytics has said that the GameCube will be the last Nintendo console. What do you have to say about that?”

Iwata shook his head in disbelief. “When we withdraw from the home game console, that's when we withdraw from the video game business."

IGN asked, “What about the lacking GameCube sales?”

Iwata pointed to the video game market and said, "Consumers today apparently don't want to sit in front of the television to play games for hours and hours."

IGN turned toward the audience and said, “This comment leaves us completely baffled, as we're not entirely sure how the president of NCL hasn't noticed the millions of PS2 units shipped each month, in addition to the 1.5 million copies of Rockstar's Grand Theft Auto: Vice City that shipped from retailers during the month of December alone.” (6)

Another journalist asked, “How are Nintendo's hardware sales in fiscal 2002?”

The Industry stared at Iwata with a smirk on their faces. Iwata replied, “I am certain that global shipments of the Game Boy Advance portable game machine will reach the targeted 15 million units, thanks to the growing popularity of the Pocket Monster series of software. But sales of GameCube game machines fell below our expectations in Japan, and the market share of the machines has not dramatically grown in the U.S. and Europe. It will be difficult to achieve the initial target of 10 million units.”

”Do you think your products face tougher competition from rivals?”

”All companies are facing a slump in the video game business. We should assume that video games themselves are at a turning point.”

“Have you started preparations for developing next-generation game machines?”

”Of course we have. We are focusing on devising new ways to play games, rather than pursuing new functions.” (7)

Iwata then began talking about the history of gaming from Nintendo’s view and highlighted how much had changed from the early days. “Back during early development on the Famicon, teams were made up of only two or three people and that for games to sell 100,000 copies each was the norm. Million sellers weren’t unheard of however. But with the Super Famicom, development teams grew to fifty or more people. Production increased by a year or two. Sequels became more important, but not every follow-up guaranteed strong sales.”

Malstrom turned towards you and said, “Now listen to this!”

“The 3D boost, from 1994 onward, dazzled players with the newness of the third-dimension enough to make tried-and-true game ideas and concepts fresh again. The Sony Playstation 1, Sega Saturn, and Nintendo 64 came out and suddenly anything not in 3d was seen as antiquated. As a result, most games were in 3D and play controls evolved to work with these types of games, just as the imagery became more and more sophisticated to entice more players. Development time was once again increased and, oppositely, budget software was born.

”Although PS2 was a sales success because it had a DVD player function, it troubled me that we had moved to a hardware where the sole function wasn’t playing games. Despite general excitement, we should be cautious about convergence of entertainment functions. It doesn’t mean that all sorts of combinations will work. Cell phones may play games but they use up the battery power quickly having a direct impact on the cell phone’s core functionality.”

The Industry protested. “But convergence is the future! How dare you turn your back on it?”

"It is imperative that a game machine is easy to use for anyone. I don't agree that multi-function hardware is the only answer." Iwata went on drawing parallels between the current state of the gaming industry and the decline in popularity of the shooting and fighting game genres. He said that data shows that domestic software shipments are shrinking and while some people consider this to be a temporary phenomenon that will let up when new hardware releases, he is not one of them.

Iwata told them, ”The gaming industry used to be immune to recession and an overall negative business climate. Gamers are getting older and tastes are becoming more sophisticated -- and the industry is getting saturated; that gamers want more complicated titles with more replay value. This means they will be buying fewer games due to longer play value and a desire to play only software with very high production values.

An investor asked, “You keep talking about some so-called ‘game crisis’. But about America where sales seem healthy?”

Iwata nodded. “The North America market has offered more sustained sales than the Japanese one, where sales of games trail off after two weeks. Though, that it in America it is difficult to broaden and expand the market and that it's virtually impossible to create software that appeals to both Japanese and American gamers alike. Pokemon, a franchise that has sold more than 10 million GBA games worldwide, is one exception to the rule and indicates that the industry needs more titles like that. Despite the fact that the GBA titles weren't 3D games or realistic they still sold well.” (8)



2004

A journalist asked, “Who came up with the concept of the DS?” Indeed, The Industry asked, “Why does it have two screens?”

Yamauchi said, “I first proposed the concept of games employing a dual-screen device in 2002.”

Iwata added, “Yamauchi discerned a trend among game consumers that the DS could take advantage of, and handed off the idea to us to implement in more detail.”

”The game business has matured in ways I hadn’t expected,” Yamauchi revealed, “and it has reached a critical point. Users aren’t interested in heavy, thick, long, big games, burdened with flashy graphics, heavily-orchestrated sound, and complex stories. Hardware manufacturers building the latest chip technology to power those kinds of titles don’t understand games and neither do their developers, even if they do have the money to keep producing them. Simply creating more advanced technology and adding more features to hardware doesn’t translate to fun games. Nintendo’s next console, which we aim to debut at E3 in 2005, is focused on new kinds of gameplay which the DS will prefigure.”

The journalist gave a wry expression. “This sounds much emphasis is being placed on this… this… DS?”

Yamauchi answered, “The DS represents a critical moment for Nintendo's success over the next two years, if it succeeds, we rise to the heavens, if it fails, we sink into hell. My hope, and Nintendo's mission, is to spread new gameplay through this device and re-energize the games market in both Japan and the rest of the world.”

And with that, Yamauchi’s chair levitated, and he flew out of the Industry’s Court.

The journalists turned toward Iwata. “So what is with the GameCube being a dead system?”

”Look at the spike of the system’s sales after last year’s price drop as proof that observers proclaiming the death of the platform were wrong. But Yamauchi is right about the advance of technology. Hardware that is simply more technically powerful is not the answer. Nintendo doesn't make hardware that doesn't have a clear and well-defined purpose, and so its hardware design teams are seeking to infuse their next product with that kind of purpose.” (9)

”How do you see the current state of the game industry and its future?”

”I think the number of game players will decrease if the game industry continues to pursue its current strategy of making software more complicated and luxurious, which in turn requires customers to consume enormous time and energy. Customers now find themselves hard-pressed to keep up with the game developers' approach. If we put the brakes on such a trend, we would be able to put the industry back on a growth path. Nintendo was aware of this early on. We would like to market such software and expand the sales of game machines.”

“You said that you would like to release new software which would bring customers back to the fold. What customers do you specifically have in mind?”

“We are facing a critical situation, in which the number of game players will decrease unless we change tack. We will release software targeted at customers in different age groups. Donkey Konga, software for the GameCube jointly developed with Namco Ltd. and released last December, has sold well. Its content was well received. I think the charm of Donkey Konga partly lies in the fact that even a three-year-old child can play it.”

“Nintendo repackaged 10 classic titles of its original home console system, such as Donkey Kong, Super Mario Bros. and Pac-Man, for GameBoy Advance, releasing them in Japan in February under the title Famicom Mini. As a follow-up, 10 other popular titles, such as Mario Bros. and Twin Bee, were released for the hand-held game machine on May 21. Do you intend to continue the revival of old software?”

“It is a matter of course that we should consider the utilization of our software assets. There are many things we can do. Adults can hardly get involved in games unless we offer them simplicity. Adults who do not usually play games should be able to understand them in 10 seconds. We would like to revive older software which would prompt such adults to feel like playing them.”

The journalist asked, “So game software should be specifically targeted?”

Iwata shook his head. “Game software should neither be exclusively targeted at children nor adults. Instead, we will develop software which anyone can instantly understand. At the same time, production of software readily acceptable to adults is worth studying. In March last year, we released Made in Wario, a collection of mini-games, which was favorably received by both adults and children. Made in Wario contained features of the so-called Family Computer launched in Japan in 1983, and so evoked a sense of nostalgia in many adults. Children, for their part, must have enjoyed it without understanding these connotations. I think we should continue to adopt a similar approach. When we market new software for adults, we should publicize it as software that everyone can enjoy. It will be nice if adults who have kept away from playing games will be motivated to take them up again. That will be more effective than undertaking a promotion specifically aimed at adults.”

“Nintendo has not entered the online game business, while other game companies are focusing on them, as is shown by SCEI's PlayStation2. Is Nintendo not thinking of heading in that direction?”

“Not at the moment. SCEI's online golf game didn't sell well, while its off-line golf game sold one million copies. This was also proof that customers do not want online games. Online technology has its own interesting features, so I don't rule out the possibility of making use of it for games. But, at the moment, most customers do not wish to pay the extra money for connection to the Internet, and for some customers, connection procedures to the Internet are still not easy. Some time ago, game companies as well as the media were predicting that online games would take off in the future. But game companies now find it difficult to make online game businesses successful, and their enthusiasm for them is cooling. During the year-end shopping season last year, none of the online games succeeded. The failure of SCEI's golf game was a good example. All the games that sold well were off-line games.”

”Will the PSP compete with the Nintendo DS?”

The Industry leaned forward, salivating over the answer.

Iwata answered: “Entertainment goods are not necessarily superior just because they are equipped with state-of-the-art technology. Game developers have made games too complicated for ordinary people to play, because they thought advanced technology by itself is great. I think customers will not regard the Nintendo DS as having the same purpose as the PSP. Just as the GameCube does not compete with the PSX, the Nintendo DS will not compete head-to-head with the PSP.”

A reader whispered, “Let me get this straight. The start of the mini-games and casual, the start of the non-competition was the GameCube!?”

According to Iwata, apparently that is correct.

Journalist said, “GameCube is dead, Mr. Iwata.”

Iwata responded, “Since we price cut the system to $99.99, it overtook Sony in sales at one point. The overall sales of the GameCube in North America and Europe have been going as intended, but Nintendo is having a hard time reading the Japanese market. The strong sales last year proves that GameCube is far from a dead platform.”

”So what is Nintendo’s long term goal now?”

”We must increase the customer base. The development of the Nintendo DS, which features a unique videogame experience, is one of our attempts at it.”

Iwata revealed Nintendo has begun to study customer responses on the Internet. "My predecessor was a genius at sensing what people want, but I want to take a more scientific approach to read customer needs."

“And what about the GameCube’s successor?”

"I do not believe releasing a higher performance machine is the solution. Our hardware development team is thinking about the next move, but I cannot tell you about it."

“What about online gaming?”

Iwata laughed. "Many people believe that online games are the next big thing. But I wonder how much revenues Microsoft and Sony have made from online games. I don't think the current online games have adopted the right business model, and people will not pay money for them. But we will explore networked videogames. For example, we may think about using wireless communications to enhance the enjoyment of a videogame." (11)

A swarm of game developers gathered around Iwata. They chanted that Nintendo needs to listen to their demands on making the successor to the GameCube.

Iwata looked down on them and said, “If we continue down the same path as we have in the past, people may become tired of gaming. We have learned that people get tired of any entertainment form. In Japan, the gaming market is shrinking. There is still room to expand in the U.S. and Europe. But we should not become complacent with that growth."

What? “No! No!” cry the developers. “Do it our way! Stay the course!”

Iwata pressed a button. “Innovate or die!” (12) Swarms of chomp chomps rushed of the trapdoors to devour the game designers.

At E3 2004, like a crazed pageantry for the royalty of the Industry, Iwata came up and said:

”Nintendo was proud of when we introduced the D-pad with the NES instead of arcade joysticks. Proud of two-player gaming on the NES and four-player gaming on Nintendo 64. Proud of the analog sticks, and rumble pak, and true 3D. We are proud we established portable gaming with Game Boy. All these advances are now industry standards. All make us proud. But I think we are most proud of this.”

(I jab the reader in the elbows.) Nintendo is basically saying it is providing a new industry standard. The Industry, meanwhile, was busy calling the DS the Virtual Boy.

“Better technology is good, but technology's not enough. Today's consoles already offer fairly photorealistic expressions. Simply beefing up those graphics will not let most of us see a difference. Nintendo is working on our next system, and that system will create a gaming revolution. Internal game development is underway. When the impact of the new home machine comes, our revolution will be there.”

Journalists flew up to Iwata asking, “Give us the hardware details! How many processors!? What is its GPU? Oh, do tell, tell!”

“I suppose I could give you a list of the technical specs. I believe you would like that, but I won't for a simple reason; they really don't matter. The time when horsepower alone made an important difference is over.” (13)

As Iwata held up the DS, the ground shook.

”What is that?” asked a reader. “Another one of your article’s special effects? Did you schedule this into the play?”

(I shook my head.) I am not capable of affecting The Industry.

The ground vibrated again.

”It is an earthquake!” someone in the back cried out. Everyone dashed from their seats to the large pane windows in the front of the theater. Thunder rattled from the sky.

I held out my hands. “People, people, return to your seats.”

One protested. “But these earthquakes and thunder are but wondrous and strange!”

”And therefore, as a stranger, welcome the earthquakes to The Industry. Gentlemen, to your seats! We learn the patterns and geology of the market only the morning after the earthquake. To your seats, go!”

The crowd mumbled and went back to their seats. I signaled the actors to continue.

A journalist asked, “Now that you have revealed the DS, tell us more about your ‘revolution’. Why is it revolutionary?”

Iwata smiled. “The ‘Revolution’ is of a different nature that does not follow the conventional path of new game systems that increase speed and visual quality for making elaborate games. The rule of satisfying customers by increasing specifications worked once, but no longer applies now."

“Then what does count?”

”Gameplay,” Iwata answered, “is what counts- not improvements in graphics and sound.

”So will it be like the DS and have TWO screens?”

The Industry was still confused. “Why does it have two screens?” they kept asking.

Iwata said no. “We have no intention of making a two screen console akin to the DS. Revolution is of a different nature that does not follow the conventional path of new game systems that increase speed and visual quality for making elaborate games. What we are looking for is not next-generation technology, but next-generation game play." (14)

Another journalist entered and asked, “How do you differ from your competitors?”

Iwata answered the difference is clearest between the DS and PSP. “The PSP is essentially a portable PlayStation 2 console, with highly sophisticated graphics, and the DS is Nintendo's attempt to create something entirely unique. The philosophy behind DS itself is simple; games have become increasingly complex since the early days of the industry and now, Nintendo wishes to bring gamers back to the start line of 20 years ago.”

The Industry was confused. “But why?” they asked.

"Games are stuck now," Iwata replied. “The solution is not to continue making more complex and visually impressive games. Instead, I want to take a different path: We want to create a product and an experience that hasn't been experienced before.”

The Industry was baffled. “He must be very confident in its potential!”

Iwata told them, “This is the year when we'll join the fight in earnest with this new product. Game development is deadlocked today. Games have grown in pursuit of more beautiful graphics and more complex systems for 20 years, but that growth is no longer translating into success, and games have stopped selling. The situation won't change if we keep expanding in a conventional way. Instead, we want to offer a gameplay experience which players haven't encountered until now." (16)

Another earthquake shook. A reader asked, “Where is it coming from, Malstrom?”

We will find out soon enough. Continue.

A journalist asked Iwata about the upcoming Xbox 360.

Iwata answered: "When it comes to the philosophy of making hardware, our philosophy is completely different than the direction Microsoft is taking. I think they are simply looking toward beefed up technology for the next-generation console. And from the developers' and programmers' point of view, that kind of machine will be very difficult to work with. In the end, there will not be a sufficient reward in exchange for the hardships they will need to endure.

"That should create an opportunity for Nintendo because we are trying to make unique hardware -- not just a beefed-up version of GameCube, but something that will be easy to program. In the long run, that will make game development on our new system more profitable."

“But,” the journalist asked, “what about Nintendo’s inability to reach the mature gamers?”

And Iwata said, “To answer your question, in the short term, there is some impact; but in the long term, I think it is most important for Nintendo to reach the widest variety of customers. That is our main emphasis right now, and it will be in the future as well."

The journalist asked, “But what adding in the hardware features that the Xbox 360 and PS3 are promising to have?”

"In the world of gaming, if you are going to only purchase hardware, you will not enjoy yourself at all. It is our assumption that it is the software that provides the sensational experiences, and that [the games] are the only reason to buy the hardware. So, from the viewpoint of the software creators, their favorite new hardware will be the console that will enable them to make their dreams come true. That is true for the customers as well. Once we can identify these unique points [features], we can begin thinking about which partners we should take for their technology and know-how. Past generations [of consoles] have been measured by functionality such as computer graphics technology, processing speed, and power. It was as simple as that.

"To put it another way, before the launch of PlayStation 2 and GameCube, game creators mostly cared about working on the most powerful machines so that they could make games more attractive. But, if you ask me, if the situation will stay the same in the next generation, [both] Mr. Miyamoto [Shigeru Miyamoto, creator of the Mario and Zelda games] and I really doubt it.

"With the next generation of consoles, if the only thing they have is ten times the functionality [meaning processing power and improved graphics], I don't think people will be able to tell them apart from this existing generation. In the end, if the next generation of consoles only represents beefed-up technology, there will not be much of a future.

"Nintendo is working on its next-generation system. Allow me to call it GCNext or GCN. The abilities of GCNext will be different from what you have seen from consoles in the past. What Nintendo is currently discussing is not about state-of-the-art technology for enhancing processing power. But what I, Miyamoto, and Mr. Takeda [engineering leader Genyo Takeda] are discussing is what should be done to entertain people in a new way; and in order to achieve this, what functionality must be added to our current technology.

"Please understand, I am not saying that technology is unimportant. I understand that technology is important. But if we are just focusing on technology and investing in an IT manufacturing plant to come up with higher performance processing [chips], we will not succeed."

The journalist asked, “So does Nintendo consider putting out new unique hardware more important than the software?”

"When Mr. Takeda was working on the GameCube, he stated that they [his team] were making the hardware strictly to support the software. In other words, Mr. Miyamoto's group and the people who create the software are more important. I think this is a unique feature of Nintendo's structure."

The journalist asked, ”And you are not concerned about the competition?”

"We are going in a different direction than Sony. We believe that other companies are already investing in state-of-the-art semiconductor development. Nintendo is not actually trying to create a state-of-the-art technology that is not known to the world. We are reviewing technologies that are in the early stages of development [by other companies]. Nintendo should be able to find the optimal solution to make the best possible hardware by cooperating with several partners.” (17)

As you can see, Iwata was very confident of what would happen. Back in 2004 he was publicly saying Microsoft and Sony were going the wrong way. Of course, everyone accused Iwata of marketing and baseless PR. After all, The Industry was growing by leaps and bounds, right?

”Iwata sure does sound confident.”

Indeed. Considering the failure of the GameCube and the slow start to outright mockery of the DS, you expect he would be more cautious. Despite that, he declares the next system to be the ‘Revolution’ that will alter the face of gaming as we know. Further, he keeps saying that the market is in crisis.

”The Industry believed the opposite.”

”And this is why everyone thought Iwata mad. There is a truism that good business leaders appear a little insane to everyone else. Mostly, this is because they see something that the rest of us do not see.”


2005

A reader was bored. “Tell me Malstrom, why go on and on about the business? I care only for the art of video games!”

I snapped my fingers, and the Iwata on stage said,

”Even artists must know the business side of game development. After all, if a game never comes to market, there is very little chance of it making any money.“

”Money! Is that all you are about?” said the angry reader. “This is how Nintendo measures success: through money!”

I snapped my fingers again, and Iwata spoke.

“One thing that has not changed--and will not change--is our nature as a form of entertainment. Like any other entertainment medium, we must create an emotional response in order to succeed. Laughter, fear, joy, anger, affection, surprise, and, most of all, pride of accomplishment. In the end, triggering these feelings from our players is the true judgment of our work. This is the bottom line measurement of success.”

”But what about the awesome hardware features that the Xbox 360 and PS3 have? It is hardware capabilities that sell systems!”

“Software sells hardware. People buy game systems to play the games they love.”

”Hmph! You dangle Iwata up there as an Oracle in a cheap way answer my questions. You act like Iwata has all the answers.”

No, (I replied). But he does have the foresight.

”Why don’t you have him ask a question for a change!”

(I thought about it, snapped my fingers, and made it so.)

”As we spend more time and money chasing exactly the same players, who are we leaving behind? Are we creating games just for each other? Do you have friends and family members who do not play video games? Well, why don't they?” (18)

Iwata then approached The Industry. While everyone was excited over the Sony announcements (“Did you see that Killzone 2 E3 trailer? OMG!”) and the upcoming Xbox 360, not many paid attention to Nintendo.

“We gave you DS, a new Game Boy, and new games to play on them, and now you say ‘we want a revolution’. Well, we've got one.”

Iwata pulled the little console out of his jacket.

(Earthquakes rumbled. I motioned for the worried actors to continue.)

“The key here is not what you are playing, but how you'll be playing. This is the console where the big ideas can prevail over big budgets.”

The Industry shrugged. “So why is it ‘revolutionary’?”

Iwata answered, "Different also defines our approach to our next home system. It won't simply be new or include new technologies. Better technology is good, but not enough. Today's consoles already offer fairly realistic expressions so simply beefing up the graphics will not let most of us see a difference. So what should a new machine do? Much more. An unprecedented gameplay experience. Something no other machine has delivered before. The definition for a new machine must be different. I want you to know that Nintendo is working on our next system and that system will create a gaming revolution. Internal development is underway.” (19)

A journalist asked, ”What were your impressions of the console announcements by Sony and Microsoft?”

“The direction that we are heading is completely different from the direction the others are going. They are spending enormous energies on specifications so they can claim an edge in computer graphics. But the result so far is the media and game fans are still not quite satisfied with the resulting graphics. I believe we need to refrain from announcing anything specific about performance right now. The graphics they can generate now are not to be trusted as the real thing. Once they can generate samples of actual machines and we can touch a real controller, that’s when we may be able to give an assessment. (20)

”You know, Mr. Iwata, we haven’t seen anything about that controller,” asked one reporter.

"For the next-generation console, we plan to introduce a friendly user interface so that, for example, a mother who's watching her child playing a game might say, 'Oh, I'd like to try that too. However, user interfaces are devices that can easily be imitated by other companies, so I can't reveal any details right now." (21)

“Is there anything you can tell us?”

Iwata smiled and said, “We're not about selling new kinds of TVs or taking control of the living room...” (22)

Another journalist appeared and said, “Bill Gates say that Nintendo has nothing but a niche market. What do you say to that?”

”Talking about the definition of the niche, or niche market, I really have the completely opposite opinion. The people the other companies are targeting are very limited to those who are high-tech oriented, and core game players. They cannot expand beyond that population. We are trying to capture the widest possible audience all around the world. In other words, we are trying to capture the people who are even beyond the gaming population. So for that kind of company, we don't think the term 'niche' is appropriate.”

(I burst out laughing.)

”Shh!” cries the audience.

”I am sorry,” I professed. “Bill Gates saying Nintendo aims at a niche, and Iwata turning it around and saying that GATES is aiming at a niche and doesn’t realize it, is quite funny.”

(The audience shook their head and muttered something underneath their collected breaths.)

“Mr. Iwata, are you not embarrassed by the audience of the GameCube? They are mostly children.”

”I've never once been embarrassed that children have supported Nintendo. I'm proud of it. That's because children judge products based on instinct. Everyone wants to appeal to people's instincts, but it's not easy. That doesn't mean we're making products just for children. We believe that there's interactive entertainment that people in their 60s, 70s and 80s can enjoy, so we're doing various things.” (23)

”Mr. Iwata, you keep saying that you must expand the gaming population. But how does one do that?”

Iwata answered, “To expand the gaming population there are 3 main challenges:

“1.    First, we had to reengage the people who had stopped playing.

”2.    We had to attract new gamers.

”3.    Finally, and most important we had to introduce new products that appeal to veterans and new gamers alike.”

The journalist asked, “So far, the DS sales yield has remained at a further pace than PSP except in America now where that gap is closing. What do you have to say about the DS?”

Iwata explained the DS. “Before we began with DS, I had a growing sense of crisis. Since the days of famicom, the control mechanism has become more and more sophisticated. Perhaps those who have never played have looked at the controller and thought, too difficult. In order to expand the gaming population it is taken for granted that we need to satisfy veteran gamers. But at the same time we need a new proposal to get new players in, to have them say I can do it! I can touch it! So what’s most important is the controller interface. Those who are not playing today, those who are not sure if they have nimble enough fingers… and at the same time offering new sensations to vet gamers? How? We can encourage people to play games with fresh excitement from the same starting line. This was the same approach as taken from DS. But we can’t split the TV into two nor can we make it touch screen. So we disregarded convention wisdom that the controller must be held by two hands.”

Iwata held up the motion controller and The Industry went into a state of shock.

A jolt threw the audience over their seats as if the tectonic plates had begun to buckle. “Is the world falling apart?” one asked. “That was the strongest earthquake yet!” Before, the earthquakes had come and gone but now, it was a steady shaking. A sense of unease went about in The Industry.

Iwata said, “We are not only going to offer small and simple games, but we are also going to establish a new standard for game control. We need to get novice and veteran players. We can’t expand without both, and because of this we need to propose a wide variety of software, encompassing many different sizes and types of games, Since the launch of famicom 20 years ago, the game industry has evolved significantly. Even now there are many people who believe in the idea that as long as we continue with just making games more gorgeous we will continue to expand. But the final judgment will be made by games players around the world. When games can no longer surprise, people will grow tired of gaming." (24)

The Industry asked, “Won’t that… thing… alienate third party developers?”

"Well, of course, the idea is that the Revolution will sell and sell and sell so it becomes the standard in the industry," Iwata mused. "However, at least for the launch period, we designed the controller so it can play any of the different conventional styles. After all, we are talking about it playing games from our past machines (i.e. the virtual console). So don't worry." (25)

“A lot has been said about Microsoft's new Xbox console coming out later this year. If that's the case, it may have a year's lead on you, and many are predicting Nintendo will be the big loser, not Sony. What are your thoughts here?”

”Whether Nintendo is a winner or loser on Revolution totally depends on how our customers react to it, and since they do not know much about it, I can't respond. A year or two from now, it will be interesting to know who ultimately made the right choices. I'm confident we have made the right decisions.” (26)

The earthquakes began to intensify.

”Look!” I said. “The DS has popped in Japan! All DS systems have been sold out! Japan is now DS Land.”

"If we cannot expand the market, all we can do is wait for the industry to slowly die."

”And look, reader, how these markets are but forests of feathers and, where they swing, is the profiting wind.”

"It is our responsibility to make games for all skill levels...including people who are not playing games now."

”Yes, yes, games for all! All for games! So runs the market away, for some must watch while others must sleep. Those awake in The Industry profit while those sleeping dream their lucid technology dreams.”

One reader turned to another. “Is he making sense to you?”

”No.”

"Technology alone can't advance videogames...which is why we plan to take Revolution in a dramatic new direction. Revolution...does not follow the conventional path of new game systems." (27)

”High definition roses on Iwata’s razed shoes, let us gather a fellowship for the crying players.”

”I do think he’s lost it,” a reader admitted.

”Quiet readers! Let Iwata explain the Revolution’s codenames.”

“The CPU is called Broadway because Broadway is the capital of live entertainment. The GPU's name stems from the fact that Hollywood is the capital of movie entertainment. With Revolution, we are determined to create the new capital of interactive entertainment. This is Nintendo's plan: make our existing game world better.  For us, this is a passion. This is a mission of adventure.” (28)

”So confident was Iwata that the codename for the Revolution’s chips reflected his belief that the Revolution would be the center and capital of all future video games.”

A reader mused, “It is like he thought the Wii would become the cornerstone of the next generation.”

”Yes! Exactly!”

”That is arrogant,” another reader thought.

”No,” I said. “The Blue Ocean Strategy is all about seeing ‘the big picture’. And the ‘big picture’ is the Wii becoming the capital for video games.”


2006

Iwata stood up before The Industry and said,

”Once upon a time, way back in the 1980s, a company became number one because its products meant fun to young people. Then, in the 1990s, a bigger company with a bigger brand name and bigger budgets took away the number one spot.

”Fortunately, that first company also had another line of products that let it remain popular and profitable. This company used that threat to reconsider its strategy, and think how it could regain overall leadership. And this is what it decided. It would redefine its own business, and expand its market beyond current core users. Could this strategy work?

“Well, we already know the answer. The answer is yes.

"Because that first company, Pepsi, has returned to number one in its industry, displacing Coke. Pepsi stopped asking, how can we sell more cola? Instead, it started asking, what else do people want to drink?

“Today, Pepsi is number one in bottled water. It is number one in sports drinks. It is number one in health drinks. And, of course, it remains number one in the snacks business that it used to maintain profitability while they executed their disruptive strategy.

”I am here today to share some stories about Nintendo. But, I begin with a story about Pepsi because it demonstrates how thinking differently, and holding strongly to your strategy, can disrupt an entire industry and in a good way.”

I shook my head. “This was how Iwata opened his GDC 2006 speech called ‘Disrupting Development’. The title of his speech alone should have sent his competitors scared.”

A dumb viewer said, “I do not understand the bold.”

”Don’t you see? Before the Wii had launched, before the DS exploded in America and Europe, Iwata was declaring Nintendo was going to be number one. Far from hyperbole, he said that Nintendo was Pepsi and, like Pepsi, Nintendo would use disruption to change the Industry to their favor.”

”You put words in Iwata’s mouth. This is what this dumb play is all about. You make Iwata say something and then you say what you wish he did.”

”I am content to let the Iwata speak for himself. Listen to his next words carefully.”

“For some time, we have believed the game industry is ready for disruption. Not just from Nintendo, but from all game developers. It is what we all need to expand our audience. It is that we all need to expand our imaginations.

“Several years ago, when I began talking about reaching out to casual gamers and non-gamers, few people listened. Today, Nintendo DS is succeeding in disrupting the handheld market. In fact, you could attribute most industry growth last year to just this one product line. Now, people are listening more closely.

“I know many of you smiled when we demonstrated Nintendogs at the GDC last year, but I'm sure not many of you believed it could sell 6 million copies around the world in less than a year.

“But the success of DS is not based on just one game; it is the story of several new kinds of software creating brand new players.”

”How anyone can say the Nintendo got ‘lucky’ with the DS and Wii show that they are not paying attention! This was a calculated business plan. Look at the journalists at this speech slobbering over the scent of a supposed ‘megaton’ to come out! And look at others who the business plan is invisible to them but can see only the hardware They say, ‘How can the mediocre hardware of the Wii outsell the superior hardware of the PS3?’ For the same reason chili-dogs outsell caviar.”

”It is amazing how Iwata mentions disruption so openly,” one reader wondered.

”Nintendo hid their business strategy by putting it in plain sight. Ahh, disruption. The most radical re-definition in business of the 90s, and it is still misunderstood. Part of the reasons for this is because everyone began chanting ‘disruption’ for every new product without fully understanding it. Bill Gates complained that every new product idea kept saying how it was ‘disruptive’. But do you know the craziest thing,, reader?”

”No. What?”

”Iwata not just declared Nintendo would become number one again. He then said that the PS2 will have its record broken. Listen.”

”Let me explain how disruption is working for us. Most of you are very familiar with the American market, so let me share some information about Japan.

”When it launched in 2001, PlayStation 2 sold 6 million units in its first 21 months. Soon after, our Game Boy Advance did even better, reaching 6 million in 20 months. But Nintendo DS is selling at a much faster pace than any game system in Japanese history. We have reached sales of 6 million systems in just 14 months. And, this number would be far higher if production could keep up with demand.

”In part, the DS success is due to how we redefine better technology with unique hardware features. But more importantly, the disruption of Nintendo DS comes from how software takes advantage of the hardware.”

”This is Nintendo’s ace card. Microsoft and Sony have their hands filled with money, manufacturing plants, and other industries. What did Nintendo have? ‘No chance’, the analysts said. But Nintendo had one strength, and one only, and that was the integration of hardware and software. Nintendo is not a software company. It is both.”

”So if Sony and Microsoft are just cramming bigger chips out there, this allowed Nintendo to use that integration to make a unique product.”

”Correct. Sony and Microsoft could not have come up with the DS or the Wii. Look how both were so mocked by even regular gamers. This integration of hardware and software is also Apple’s ace card as well.”

”And it is this that allows Nintendo to become the sole disruptor of The Industry.”

”Nintendo said they were not competing yet Iwata is running around declaring how Nintendo will return to number one, how the Wii-mote will become standard because it will sell, sell, and sell, and that Microsoft and Sony are going down a wrong path which will become evident in 2006 and 2007.”

”Iwata tricked The Industry.”

”No. The Industry tricked itself. Now, I want you to listen to the following bullishness in Iwata concerning how he had the foresight to push Brain Trainer.”

“My bigger concern was how the market would react beginning with retailers. Few people inside Nintendo believed they would place very big orders the game was just too different from what they knew. Maybe it wasn't even a game at all. So at this point, one member of the sales team suggested a new rule. When our salesmen showed the software to retailers, even before business was discussed, the first 15 minutes of every meeting must be spent with the buyers trying the brain exercises themselves.

”Oh, when they heard this, the retailers hated the idea! They were disgusted, but they had no choice. So they started playing, and we could only wait to see how they would react.

”And how did they respond?

”Those first retailers, after playing the first game, agreed to buy a total of 70,000 units, which was still more than our domestic sales team expected, but I was not satisfied with that number. But between the launch of the first game and the second, you could see a disruption of the market occurring across Japan. Something had changed. New people were playing.”

”It surpassed the domestic sales team’s expectations yet Iwata still wasn’t satisfied! People think Nintendo dumped their products out there and the disruption took place all on its own. No. The key is Iwata. He was the one who pushed it.”

“Some people put their money on the screen, but we decided to spend ours on the game experience. It is an investment in actual market disruption. Not simply to improve the market but disrupt it. We believe a truly new kind of game entertainment will not be realized unless there is a new way to connect a player to his game.”

”Welcome to the Generation of Disruption. Sony and Microsoft thought they would be disrupting how television and movies were done in the living room. I know this because the definition to disruption, when looked up, was always given the example of the upcoming Sony and Microsoft game consoles. This is why Wall Street was excited about the upcoming next generation. So many industries, movies, music, the digital top box, would be decided by the upcoming console war!”

”But no one gave any thought that Nintendo could disrupt gaming and end the top box war before it begun.”

”Precisely! Now, there can be no top box war because the definition of gaming has changed. But there are more disruptions Iwata mentions. The iPod was a disruptive product, and Iwata lists the Virtual Console as one of Nintendo’s disruptions.”

“I consider our virtual console concept the video game version of Apple s iTunes music store. Since I first announced the virtual console concept last year at E3, other people have become very interested in digital downloads. Others will offer such a service, but it will not be the same. Because for us, this is not just a new business opportunity, for us, this is true innovation true disruption. It is part of our DNA. The digital download process will bring new games to the widest possible audience of new players. Young people, older people, even those who never played video games before.”

”Fitting that Nintendo should model itself after the Ipod since Apple’s disruption was very successful against Sony’s ‘Walkman’ who pundits said its brand would deliver it majority market share.”

”When I think of what faces all of us right now, I imagine what it must have been like for the explorers who first set foot on a new continent. For them, it was impossible to imagine all the adventure that lay ahead.”

The earthquakes intensified and the theater erupted in chaos. The crowd ran to the windows up front where a black greenish sky awaited them. The windows shattered and thunder cracked from the clouds.

The crowd rushed outside and, like everyone else on the Industry’s shores, looked to the horizon. The water began to be sucked into the ocean as the shore grew and grew.

”Yes, we have already disrupted handheld and it worked. Yes, we have already disrupted Wi-Fi and it worked. We disrupted the very definition of a game and that is working, too. In a few weeks, you will better understand how to disrupt console gaming. You will play, and you will see. (29)

The actors stood outside, staring at the hellish sky, dumbfounded. “What! I am not paying you to stand around in my article! Go! Perform the stage outside if you have to.”

The actors turned to one another, shrugged, and acted till doomsday.

”Cease your distractions, reader. Here, Iwata declares Wii Sports to be this generation as Super Mario Brothers was to yours.”

“About 20 years ago when Super Mario Bros. hit the market, it was just the time when people were getting very interested in video games. And when one player is playing with a Super Mario Brother... and as soon as the player makes [a mistake and loses his turn] others say, "Ok, let me try. I really want to do that." But now when some players are playing with a video game, and there are some people surrounding them, even though the player himself or herself might say, "Why don't you do that?" The surrounding people say, "No I cannot do that; that's not for me." But with games like Tennis I think that we can change that situation. When people see somebody playing with Tennis, I believe other people immediately can understand what the player is supposed to do and say, "Let me try it." So I think that kind of situation is really encouraging in order to expand the gaming population.”

A journalist asked, “Speaking of Sony, I wanted to know what your reaction was to their [E3 2006] media briefing, especially their expensive price and the fact that they now announced motion sensing for the PS3 controller.“

“As for the latter part of the question, actually we were anticipating that Sony would make that kind of announcement, so I had to make a kind of wry smile at the time. Having said that, however, putting the motion sensing technology into the classic [PS3] controller, which is going to be held with two hands, is pretty much different from the motion sensor being incorporated into the Wii remote or the combination of the Wii remote and the nunchuk controller... There's a huge gap between the two, I can tell you, with that whole experience, so I really don't think that the inclusion of motion sensing into Sony's classic type of controller can affect in one way or the other the advantage that we have with the Wii controller.

”As for the comment on the price point that Sony announced, the only thing that I may be able to tell is that probably there's a huge gap between how the platform supplier wants to price it and how the customers want the supplier to price it. And other than that it's very hard for me to comment on that as the corporate president running a rival corporation. I think the ultimate decision has to be made by the actual customer and as one of the potential customers of PS3, of course I think it's going to be kind of a [tough] price point for anybody to purchase; that sentiment has been shared by a number of people working in this industry that I've been able to talk to so far.” (30)

”This is Iwata’s diplomatic way of saying to Sony, ‘You’re idiots!’”

``We want to appeal to mothers who don't want consoles in their living rooms, and to the elderly and to young women. It's a challenge, like trying to sell cosmetics to men. If we can do this, the Wii could break all the boundaries in terms of user rates for game consoles. We are not battling Sony or Microsoft. Our enemy is consumer indifference to games.'' (31)

“And look! Iwata foretells that Wii could break all boundaries of game consoles.”

The audience was no longer looking at the actors but at the eerie sky and silent waters whose motions has stopped.

An investor asked, “How many Wii hardware do you plan to sell in three years from the launch?”

”I do not intend to declare how many Wii we will be selling today, but Wii will be a failure if it cannot sell far more than GameCube did. In fact, we shouldn't continue this business if our only target is to outsell GameCube.

”Our business is very special in various ways because our customers can never tell what we should make. In the majority of the other businesses, you are told, "You should ask the customers because they know the truth." So, you will thoroughly ask your customers what are the issues they feel about your products and try to make a hit product by solving the identified problems. In case of video games our job, in a sense, is to surprise the customers. Asking our customers, "what will surprise you," is the silliest question. Our customers will be surprised and happy when we can provide them with something they have never expected. For us developers, there is no way to expect what will sell and what won't. Having foresight, or the ability to forecast what works out well and what won't is a very important talent for the software planners in the entertainment business. Fortunately, Nintendo has been recognizing the importance of foresight for many years to run the company. This hasn't changed even after I succeeded Mr. Yamauchi's position, and Nintendo has been able to succeed in introducing a variety of unprecedented products.”

”Nintendo’s master is not Experience but Foresight.”

“I don't know if this is a good example, but when we announced Nintendo DS, the unanimous reaction were, "What are we supposed to do with two screens?" and "I don't think the touch-panel can change the way how we play games nor create new entertainment because that technology has been available in the world for many years." Nintendo alone was thinking differently and betting that our unprecedented approach would succeed and be the right one. The handwriting recognition application for DS had been developed at Nintendo even before we started discussing the possibility of making Brain Age software at all simply because we thought that such an application could surely be useful someday in the future.

”When I am surfing on the net, I often see such terms as "Web2.0" lately and feel that the world of the internet has entered into a new phase since last year. Looking at how video game companies are using Internet technologies, we have been wondering if it is the right approach to consistently use them just to compete against each gamer for 5 or 10 years. This is how we came to propose WiiConnect24, which will use the Internet for people to enjoy sharing information. I am yet to know what kind of revolutionary entertainment can be created with WiiConnect24, but we will not stop challenging these unprecedented things. You may feel that Nintendo has been doing things that it did not used to. You will be feeling the same way in the future as well. Whenever we sense that users' new needs must be there or there's got to be unique opportunity for us to surprise customers, we would always like to be an aggressive challenger.” (32)

The earthquakes suddenly stopped and a distant roar could be heard. The golden statue of Kutaragi stood alone against a coming sense of gloom.

"Our focus has been on how we could make those who had not been interested in TV games so far become interested ... So we are not really thinking about competing with PlayStation 3. Although we are not really thinking about winning against Sony, we do hope to make efforts so that in the end, the number of units sold by Nintendo surpasses that of Sony." (33)

The first tidal wave, massive in scope, slammed into the Industry and snapped the Kutaragi statue in two. Screams filled the air as most of the ‘Royal Court’ got swept out to sea. Kutaragi, himself, got washed away from his throne.

Another tidal wave hit. More screams.

”That cursed Blue Ocean will destroy us all!” one said.

”Don’t worry,” said another. “The waves will stop. How deep can that Blue Ocean go?”

”Fools!” I told them as another wave washed over us. “The question is not how deep the Blue Ocean is, but what is coming out of it.”

”What do you mean?”

I handed them a telescope. “Look yonder and you will see a shape appearing from the abyss. It is a new land arising from the watery depths. As it surfaces, it is the reason for the tidal waves slamming into the Industry.”

The person squinted in the telescope. “Good God. This is Iwata’s new market? How big will it be? An island? A chain of islands?”

”It is a continent, sir. In the business world, CEOs pretend to be captains sailing their companies which the ideal being that one becomes a Columbus, that one discovers a whole new continent to explore and exploit.”

”What is this continent?”

”No one knows. Not even Iwata. That is what will make this generation so exciting. The Brain games and dog games you think define the ‘new market’ are nothing but its outer islands and shores. We have still not yet pierced its mainland.”

A frightened gamer asked, “Is that new continent bigger than our world?”

”Oh yes. That we can be fairly certain of. This world,” I motioned to my surroundings, the Fool’s Paradise, “will sink. Some of it will survive by going over to the New World. But just as Atari’s ashes built this world, so too will it occur again. This is the beginning of the end to the Classical Gaming World.”

Addendum: Why Sega Fears Nintendo More than Microsoft and Sony

"I don't care how many polygons X-Box can put out. It's all about who can deliver the next great gameplay experience. I'm not nervous about X-Box or PlayStation2 because we think we can make better games. No one will have head-to-head Internet play but us. What does worry me is Dolphin's sensory controllers [rumors about a new Nintendo controller for Gamecube were rampant- Malstrom] because there's an example of someone thinking about something different."

-Greg Thomas, Sega of America’s VP of Development (quote from MCV magazine in 2000)

References

1) Yamauchi and Iwata reveal a new antithesis for gaming with Gamecube/GBA launch. http://www.businessweek.com/magazine/content/01_13/b3725166.htm

2) Iwata explains why Nintendo does not make ‘mature’ or ‘realistic’ games. http://www.gamecubicle.com/news-nintendo_gamecube_miyamoto_iwata_interview.htm

3) Yamauchi names Iwata as President, says Sony’s fortunes will change, and makes one last request for Nintendo. http://cube.ign.com/articles/530/530986p2.html

4) Iwata predicts 50 million GameCube units sold and then says he should not be optimistic for the game industry is in crisis. http://www.megagames.com/news/html/console/nintendocommitedtogames.shtml

5) Iwata outlines that software sells the hardware, not the other way around. http://www.gamespot.com/gamecube/action/supermariosunshine/news.html?sid=2852135&page=2

6) IGN is stunned in 2003 that Iwata says the game market does not want big complex games. http://cube.ign.com/articles/383/383515p1.html

7) Iwata, in 2003, says the new Nintendo system will focus on new ways to play instead of new functions. http://www.gamecubicle.com/news-nintendo_gamecube_iwata_interview_nihon.htm

8) TGS 2003: Iwata warns The Industry about convergence and games need to be more universal. http://gameboy.ign.com/articles/451/451840p1.html

9) Yamauchi’s last interview
http://findarticles.com/p/articles/mi_zd1up/is_200402/ai_ziff119142

10) Iwata says GameCube was not in competition to the PSX. http://www.n-sider.com/newsview.php?type=story&storyid=462

11) Iwata says online gaming model is broken. http://gameboy.ign.com/articles/492/492499p1.html

12) Iwata tells the world: “Innovate or die!” http://money.cnn.com/2004/05/20/commentary/game_over/column_gaming/index.htm

13) At E3 2004, Iwata says better hardware techs no longer matters to the Industry.

14) In 2004, the enigmatic ‘Revolution’ is hinted at saying it will create new gameplay. http://cube.ign.com/articles/522/522136p1.html

15) Iwata declares that DS will bring gamers back to the starting line. http://cube.ign.com/articles/530/530986p3.html

16) Iwata is saying they will press the reset button on The Industry. http://findarticles.com/p/articles/mi_zd1up/is_200401/ai_ziff116337

17) Iwata details Nintendo’s strategy and why Sony and Microsoft are going down the wrong road. http://www.gamespy.com/articles/505/505234p1.html

18) Iwata asks whether we are making games for ourselves instead of for others. GDC 2005.

19) The Wii hardware is revealed. E3 2005.

20) Iwata doesn’t trust those E3 2005 Sony trailers either. http://blogs.mercurynews.com/aei/2005/05/an_interview_wi.html

21) Nintendo cannot say much because they fear competitors will steal their ideas. http://www.gamesindustry.biz/content_page.php?aid=7683

22) Iwata says Nintendo does not want to take over the living room. http://www.megagames.com/news/html/console/next-generationbossestradeblows.shtml

23) Iwata turns Microsoft’s accusation of Nintendo going after a niche around… on Microsoft. http://seattlepi.nwsource.com/business/225097_e3iwata20.html

24) The Wii-mote is revealed to the world. http://crystaltips.typepad.com/wonderland/2005/09/omfg_revolution.html

25) Iwata is confident that the Wii-mote will sell so much it becomes standard by default. http://cube.ign.com/articles/636/636350p1.html

26) Even at the end of 2005, everyone still thought Nintendo would lose. Iwata says within 2006 and 2007, it will be clear who made the right choices. http://www.businessweek.com/technology/content/mar2005/tc20050314_2243_tc121.htm

27) The Revolution is going a completely different path than normal consoles. http://www.next-gen.biz/index.php?option=com_content&task=view&id=1825&Itemid=36

28) Revolution’s codenames were labeled because Iwata foresaw them as becoming the capital of interactive entertainment.  http://cube.ign.com/articles/594/594935p1.html

29) Iwata declares Nintendo will return to number one and says disruption will change The Industry as we know it. http://wii.ign.com/articles/698/698588p1.html

30) Wii Sports will have the same effect as Super Mario Brothers according to Iwata. http://biz.gamedaily.com/industry/feature/?id=12748

31) According to Iwata, selling video games to non-gamers is like selling macke-up to men. Also, hints at Wii being best selling machine ever. http://www.bloomberg.com/apps/news?pid=20601080&refer=asia&sid=a0kklJ1sNgDI

32) Iwata explains to investors why Nintendo cannot listen to its customers. http://gameboy.ign.com/articles/713/713678p1.html

33) Nintendo does not want to compete but still wants to win. http://www.theage.com.au/news/World/Wii-not-in-competition-with-rivals/2006/12/08/1165081130153.html

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