From Underdogs to Nintendogs

In the high stakes battle for market dominance in the rapidly growing $37.5 billion video games industry, few gave Nintendo a fighting chance against Sony and Microsoft. Back in 2005 when Sony and Microsoft were unveiling the jaw-dropping technical specifications of the PlayStation 3 and the Xbox 360 respectively, Nintendo’s underpowered Wii left analysts and gamers alike scratching their heads. Fast forward to 2007 and according to the latest data from VG Chartz, a video game market research company, the Wii has cornered 42.4% of the global next-generation console market, ahead of the Xbox 360’s 40.5% and the PlayStation 3’s 17.1%. Their lead in the next-generation portable game market is even more dramatic, with the Nintendo DS enjoying 67.8% market share while the Sony PlayStation Portable trails at 32.2%.

The turnaround in Nintendo’s fortunes has not been missed by investors and at the close of market on 25 October 2007, Nintendo had a market capitalisation of Y9,407bn ($82.46bn), making it the third-most valuable company in Japan and dwarfing Sony’s Y5,200bn ($45.35bn) despite being a much smaller company.

The meteoric rise of the company is a lesson in visionary leadership and market innovation. After being consigned to irrelevance in the previous two rounds of the console wars, Satoru Iwata, Nintendo CEO, spearheaded a new strategy of expanding the gaming population. The premise was simple: enable everyone to enjoy games regardless of age, gender or gaming experience. They identified three paradigms that needed to be challenged which laid the foundation for their current success:

1. Video games are entertainment mainly enjoyed by children and young male adults; females and senior citizens hardly play.
2. Nintendo is for kids.
3. Great majority of software is short-lived; long-lived software is hard to make.

Defining a new target market of females and senior citizens was a bold departure from convention, where the smart money had always been on the core market of 18-35 year old males. However, it enabled them to eschew the complex and expensive hardware required by traditional gamers, making the Wii a bargain at $250 compared with $350 for the Xbox 360 ($480 for the Elite version) and $350 for the PlayStation 3 ($500 for the premium version). Similarly, the DS Lite retails for $130 while the PlayStation Portable costs $170. The reduced complexity of Nintendo’s hardware also makes game development easier, quicker and cheaper, giving their software a price advantage over the competition.

While the technical specifications of the hardware are relatively low, they have innovative designs which maximise the user experience. Wii’s groundbreaking controllers, ranging from the Nunchuk to the Balance Board, offer gamers more involving ways of interacting with the virtual world. The dual screen design of the DS similarly makes gameplay more engaging and stimulating.

Rather than rely on lifelike graphics and animation to wow gamers, Nintendo has focused on developing simple yet novel games that have a high replay value and appeal to a wider audience. Games such as Brain Training and Nintendogs on the DS have proven a big hit with senior citizens and young girls respectively, and the Wii Sports titles are extremely addictive for gamers of all ages and genders. Not surprisingly, 51% of Wii gamers and 53% of DS gamers are females, compared with 11% of PlayStation 3 gamers, according to a Financial Times report.

Given the runaway success of the Wii, it is inevitable that Sony and Microsoft will be fighting back. Their first response has been to reduce Nintendo’s price advantage, with both companies releasing lower priced versions of their consoles albeit with less storage capacity. In addition, they are developing a wider range of controllers and other accessories as well as a broader range of games to expand their core market. All three companies are also investing in an online games network to offer their respective customers games download and multiplayer services.

With Sony and Microsoft playing catch up, the challenge is for Nintendo to maintain their innovation momentum in hardware and software design, continually redrawing the landscape of the video games industry. If that is achieved, they are bound to remain the top dog for years to come.

Quickfire: The Non-Dom Dilemma

Alistair Darling's pre-budget report has stopped the music at non-domicile residents' tax party. Those residing - but not domiciled - in the UK for seven years or more are now faced with a flat rate of £30,000 per annum or alternatively, paying the additional tax that is due from their overseas income and capital gains. This could lead to three scenarios:

1. They grit their teeth and show Alistair the money, in which case nothing changes.
2. They decide the new tax regime makes their non-dom status pointless and so move to the UK permanently after considering other cost of living factors. In which case, demand for housing, transport, schools and other infrastructure increases, albeit minimally.
3. They decide the new tax regime makes their non-dom status pointless and so move out of the UK completely after considering other cost of living factors. In which case, firms have to fill the gaps and job opportunities open up for domiciles, albeit minimally.

Given the combination of factors that make the UK an attractive destination, I suspect both non-doms and Mr. Darling will be baring their teeth but only one will be a smile...