Max IT: The console wars – A deeper look


Logo circa 2008

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Few would have envisioned that today’s USD 37.5 billion world video game industry, which PwC predicts will rise to USD48.9 billion in 2011 as stated in their 2007 Global Entertainment and Media Outlook report, would have Nintendo sitting comfortably on a huge pile of profit going into the year 2008.

One of the hottest items in the United States for the past two Christmas seasons in a row and at one point, outselling the much more powerful PS3 by as much as 6 to 1 in Japan (according to Tokyo gaming research company Enterbrain Inc), the Wii looks like continuing with its impressive sales trend.

In the meantime, Sony, the previous ‘king of the hill’, was stumbling from one PR disaster to another and outlandish statements by Sony supremos Ken Kutaragi, the ‘Father of the PlayStation’ and Phil Harrison, who at that time was president of Sony Computer Entertainment Worldwide Studios (see sidebar for some famous examples), didn’t help them gain the all-important street cred that they were trying to get.

Microsoft, ‘blessed’ with avoiding the same blunders Sony did, helped themselves to a nice chunk of the videogame industry pie through their early market entry strategy with the Xbox 360. However, a slew of production problems with early units which caused many machines to fail and display what became known as “the red ring of death”. Microsoft tried to cover the cracks by releasing press statements which indicated that the Xbox 360’s failure rates was within the consumer electronic industry average of 3% to 5% however, independent assessments found that the actual was far higher and seemed to breach the 10% mark. Finally, in July 2007, Microsoft issued a statement acknowledging the problems of the Xbox 360 and sought to rectify matters by giving a 3 year warranty extension on all Xbox 360s that experience the red ring of death.

The scenario looked so different when Sony announced to the eager attendees of the Electronic Entertainment Expo (E3) on 16 May 2005, that the Playstation 3 was officially going to be released in spring the next year. Touted as a “supercomputer for computer entertainment” by Ken Kutaragi, it also earned the Game Critics Best of E3 2005 Award for Best Hardware/Peripheral. As Sony raised the bar for performance in the hardware race (with Microsoft’s Xbox 360 just a little behind), Nintendo seemed to drop out of the race altogether with the release of the almost gimmicky Nintendo DS which touted its touch-screen, in built microphone, and dual screen capabilities as its main selling points. Sony on the other hand, was readying the launch of the PSP, which many speculated would crush Nintendo’s dominance in the handheld market.

Certainly, on the basis of the raw specifications of the two machines, Sony’s PSP came out tops in almost every performance measure available. Graphics, sound, storage capabilities, and the ability to play Playstation-quality games on the go, the PSP had everyhthing going for it. Phil Harrison was confident enough to say to trade magazine MCV, “The idea of a handheld rivalry with Nintendo is an irrelevance; those formats don’t appear in our planning. It’s not a fair comparison; not fair on them, I should stress. That sounds arrogant, maybe, but it’s the truth.” He also said, “With the DS, it’s fair to say that Nintendo stepped out of the technical race and went for a feature differentiation with the touch screen, […] I fear that it won’t have a lasting impact beyond that of a gimmick – the long-lasting appeal of the platform is at peril as a direct result of that.”

Phil Harrison then took another stab at Nintendo, “Nintendo knows its target audience, because it really has narrowed that down; and it’s pretty much defined by a boy or a girl’s ability to admire Pokemon.”

Many analysts joined in by predicting that the PSP would be the new leader of the handheld gaming market, a market that Nintendo has held a iron grip over since the launch of the GameBoy back in 1988. Analyst group SIG released a report in January 2006, predicting that US sales of the PSP would dwarf those of the DS in the next 5 years. According to the report, the PSP would have a 15 million lead over the DS in 2008.

Fast-forward to the present day and the reality is quite different (except in Malaysia where it is still more likely to see a PSP being fangled about by an adult as opposed to the DS). As of 31 December 2007, the Nintendo DS and the DS Lite combined have sold 64.79 million units. Sale figures for Sony’s PSP are more difficult to obtain as they had changed their standards of measurement. Nevertheless, VGChartz estimates that the PSP sold close to 27.4 million units so far while Sony’s official sales figures between April 2006 and December 2007 were 20.25 million units. Whichever unit of measurement you use, the DS been a tremendous success for Nintendo while the PSP has lagged far behind.

Indeed, the Nintendo DS may have proven to be the catalyst for the unprecedented success of the Wii (Previously known under its codename, ‘Revolution’). When the name was revealed, internet forums everywhere exploded, with many forumers condeming the choice of the name and others saw it as an opportunity to make crude jokes about the company and the name.

Gaming website, GameGuru quoted a Nintendo marketing person known only as Mike as saying, “we have received over 200,000 emails with complaints about the Wii, and the console name has been commonly associated with urine. We’ve been the target of many jokes, and we strongly believe that it’s a bad thing for the company reputation”.

While the source may not have been credible as Nintendo is famous for being ultra-tight with media comments, it did probably come close to illustrating how the actual situation was on the internet. Some gamers saw the new name as a sign that Nintendo was capulating to Sony & Microsoft and withdrawing from the console battle entirely. But few predicted (or perhaps they were too focused on the strength of the Sony PlayStation brand), that the Wii would go to break records all over the world thanks largely to a group of people that was previous unreachable – the non-gamer.

“They [Nintendo] have absolutely changed the industry,” says Julie Shumaker, VP-sales for in-game agency Double Fusion and former Electronic Arts national sales director. “They brought people who don’t consider themselves gamers into gaming. Data show people … still don’t consider themselves gamers — and they own a Wii. Sheer marketing brilliance.” (source: Advertising Age – “Nintendo is Ad Age’s Marketer of the Year”).

The unprecedented success of the Wii helped to turn Nintendo’s business around completely. Although remaining profitable, Nintendo’s market share was slowly being eaten up by Microsoft’s Xbox and Sony’s PlayStation 2. According Nintendo’s data, a glance at the total sales for each of their consoles shows a distinct decline in worldwide sales with each subsequent release. The last console before the Wii, the Gamecube didn’t even manage to come close to the much maligned N64 system in terms of worldwide sales.

Both the N64 and the GameCube represented large failures for Nintendo (the Virtual Boy fiasco notwithstanding). By the time the N64 was launched, Sony’s PlayStation had already been in the market for a full year and had captured gamers everywhere who, having grown up (and out of) ‘kiddie’ styled games, was looking for a more mature experience and Sony was only too happy to provide that.

Final Fantasy VII represented a major coupe for Sony, whose exclusive license with Square practically guaranteed millions of sales by legions of Final Fantasy fans looking to get their hands on the latest installment. Today, it is often rated as the best Final Fantasy game of all time (though it faces stiff competition from Final Fantasy IV and VI – both extremely popular entries to the series), and is often touted as one of the main reasons for the success of the PlayStation. Eager gamers who wanted to get their hands on this game needed to get a PlayStation since the experience was unavailable anywhere else. Grand Turismo was another exclusive title that had sales registers ringing. To date, it remains Sony’s highest selling game of all time for the PlayStation, selling 10.85 million units as of September 2007.

The Halo series, along with Microsoft’s other exclusive titles for the Xbox and the Xbox 360 may be the Final Fantasy VII of this generation for Microsoft. According to NPD’s September 2007 sales charts, Halo 3 sold 3.3 million units (interesting numbers there), roughly double the amount of the rest of the top ten games combined within a period of 12 days. A phenomenal launch success for Microsoft, it is credited for driving the sales of 527,000 Xbox 360s for that month, beating even the Wii in hardware sales.

In October 2007, Microsoft reported that their Entertainment and Devices Division – home to the Xbox 360 and the Zune had a USD 142 million loss during the first quarter of fiscal 2007. However, their fortunes were markedly different after Halo 3’s launch success with the division making USD 165 million, the first time the division has earned a profit since 2005. Other highly anticipated Xbox 360 and once-upon-a-time Sony exclusive games will probably help to drive Xbox 360 sales once more. Highly popular titles such as Assassin’s Creed, Devil May Cry, and Grand Theft Auto 4, were supposed to have been exclusive to the PS3 however, it is alleged that “slowness” by Kaz Hirai in finalizing the exclusivity deals was the main reason that titles like Assassin’s Credit and Grand Theft Auto 4 were ported over to the Xbox 360 as well.

Top 5 console exclusives (Note: Titles must not be available on the PC)
Xbox 360 PS3 Wii (non-Nintendo developed titles)
Halo 3 Metal Gear Solid 4 NiGHTS: Journey of dreams
Project Gotham Racing 4 Final Fantasy XIII Dragon Quest Swords
Mass Effect God of War III No More Heroes
Gears of War 2 Grand Turismo 5 Zack & Wiki: Quest for Barbados’s treasure
Beautiful Katamari Haze Pro Evolution Soccer 2008 (Wii edition)

The one-year head start gained by Microsoft thanks to their pioneer strategy seems to have helped to place Microsoft in a strong position to compete with Nintendo and Sony this year. However, one glaring weakness remains – the apparent inability of Microsoft to break the duopoly in Japan of Sony & Nintendo. In October 2004, Nikkei Business Express interviewed Peter Moore on some of Microsoft’s mistakes with the original Xbox in Japan and how the new Xbox will be different. Peter Moore outlined three key mistakes, citing that the Xbox was too large (Japanese gamers complained that it was too large and bulky), games were too focused on catering to a Western audience, and that it was released two years after the PS2.

Unfortunately, it had a less than stellar beginning in Japan with perhaps one of the weakest system launches ever in the land of the rising sun. Looking at the launch lineup and comparing them with the tastes of the average Japanese gamer, it looks like Microsoft has not yet learned from its previous mistakes. First person shooters, sports games, and racing games dominated the launch lineup in Japan, hardly the kind of fair the Japanese gamers enjoy.

Vinnk, a writer for gaming news site 4 Color Rebellion, argued that “Had they launched with RPGs, simulation games, party games, gambling games and fighters, they might have done a whole lot better.”

The poor launch didn’t stop Microsoft from trying again with a different model, a stripped down version to be sold at a low price in an attempt to catch the more ‘casual gamer’, a market that Nintendo seems to have pretty much in their back pocket.

The ‘casual gamer’ market is widely recognized as the primary reason why Nintendo has 1-upped its competition. In stark contrast to Nintendo’s approach, Microsoft & Sony have both created and marketed their consoles to appeal to ‘hardcore gamer’ where processing power, graphical capability and technological prowess would be important factors in choosing a gaming system. Sony’s PS3 is a prime example of that philosophy. A massive powerhouse when it comes to processing power, Sony boasted of its polygon count and it’s ability to feature games at the fabled 1080p display resolution.

How then, with such impressive technology being displayed by both Sony & Microsoft, could Nintendo’s Wii with its decidedly last-gen technology and graphics become the new leader of the console wars? The numbers seem to support the notion that Nintendo, through the Wii, has expanded the video game industry. According to NPD, total videogame sales in USA sales were $10.5 billion in 2005, which rose to $12.5 billion in 2006 and to $13.3 billion this year. Software sales in February were up 47% year-on-year while hardware sales rose 19%, NPD said. What happened in the industry?

With Microsoft, part of their problems can be traced back to the what became known as the ‘Red Ring of Death’, the console equalivent of Window’s famous ‘blue screen of death’. After the Xbox 360 was launched, many articles reported relatively high failure rates, effectively turning many users fancy new machines into useless hunks of plastic. Microsoft’s initial response was defensive, stating that the failure rate was well within the consumer electronics industry norm of 3% to 5%. It was only in July 2007, that Microsoft acknowledged that there was a problem and did something about it by announcing a 3 year warranty extension for every console that experiences general hardware failure or the ‘Red Ring of Death’. By then though, the PR damage had been done with many bloggers and forumers spotlighting the issue and condeming Microsoft for not acknowledging the issue earlier.

In terms of PR damage however, few would have matched what Sony has done since the PS3 was announced. In December 2006, a guerilla marketing campaign was launched, where the site posed as fan made site by bloggers who desperately wanted a PSP. It didn’t take long for gamers to sense that something was not right. Some of the materials within the site were too slickly produced (and Sony brand-compliant) to have been done by just anyone. That campaign made it into GamesRadar’s top 7 PR disasters list.

Perplexing and even arrogant sounding statements made by high level Sony executives  also turned many people against them. Few people, hardcore or otherwise, were prepared to lay down USD 599 for a videogame system. Also, the early launch games failed to show the leap in graphics that many had expected of such a system aside from one or two exceptions. Indeed, Sony’s experience would be a good example of what bad PR can do to your company. Many gamers started to feel that Sony was getting arrogant and were just riding on the previous success of the PS2 – especially when Ken Kutaragi said,

“[the PS3 is] for consumers to think for themselves ‘I will work more hours to buy one’. We want people to feel they want it, irrespective of anything else”.

Then there was also the controversy regarding the PS3 controller, the SixAxis. It was motion sensing and wireless, and lacked the force feedback (rumble) function which had become an industry standard since Nintendo introduced the rumble pack for the N64. At first, Sony said that it was not possible to have rumble function in a wireless controller. However, the Wii’s wireless motion sensing controller (which Sony’s controller seems to imitate) also featured rumble.

Sony, in an apparent dig at Nintendo, retorted by stating that rumble was last-gen technology. The real reaon was probably because at that time Sony was embroiled in a lawsuit from Immersion, the creators of rumble technology. Sony’s inclusion of rumble into the new DualShock 3, after the lawsuit was settled, further confirmed those suspicions.

Nintendo, the new market leader, was not free from bad press either. When the Wii was launched, many media reports started appearing stating that despite the safety strap that comes with each controller, people were accidentally flinging their controllers into their TV sets and smashing their TVs. Nintendo’s response was that it indicated these people were really having fun playing however, they did take steps to correct the situation by releasing new straps as well as including a silicon casing for each controller. Before long, the situation was defused and TV’s everywhere were saved from the perils of Wii players with sweaty palms.

Looking towards the future, Sony is optimistic that the situation will turn around and some analysts such as Mike Goodman, an analyst with the Yankee Group, are still sure that the Wii will not sell well past the current short term. However, as it stands the future looks extremely rosy for Nintendo, with eight of Japan’s top ten selling games of 2007 being attributable to them according to Enterbrain. Furthermore, with Wii Fit scheduled to launch soon in the US and sales likely to match those in Japan where 0.25 million units were sold in the first week and passed 1 million sales in the first month, Nintendo seems well poised to continue with the next chapter of their success story.

Software unit sales for 2007 in Japan

  1. Wii Sports (Nintendo) – 1,911,520
  2. Monster Hunter Portable 2 (Capcom) – 1,489,898
  3. Wii Play (Nintendo) – 1,487,484
  4. Pokemon Mystery Dungeon (Nintendo) – 1,256,516
  5. Mario Party DS (Nintendo) – 1,232,644
  6. New Super Mario Bros. (Nintendo) – 1,176,939
  7. Pokémon Diamond/Pearl (Nintendo) – 1,094,389
  8. Mario Party 8 (Nintendo) – 1,053,934
  9. Dragon Quest IV (Square Enix) – 1,052,827
  10. More Brain Training (Nintendo) – 1,033,933

Sony seems to have corrected some of their mistakes of the past. In the US from October 2007 to November 2007, sales of the PS3 rose by some 285%. Sony CEO Howard Stringer claims that this was the result of a PS3 price cut and Nintendo’s apparent inability to manufacture enough units to meet demand.

The impending release of Sony’s PlayStation Home and Nintendo’s WiiWare, seems to signal the coming of what BusinessWeek described as ‘a new front in the console wars’. According to the article, ‘the downloads gaming market is opening up a new avenue of competition for console makers and giving indie game developers a shot at the spotlight’.

Nintendo’s Virtual Console service (where gamers can download classic games from systems such as the SNES, TurboGrafx, NeoGeo and Sega Genesis) has proven to be massively popular; registering over 10 million downloads as of December 2007 while Microsoft’s successful Xbox LIVEtm service boasts 10 million members. Both PlayStation Home and WiiWare look highly promising and might even prove successful in challenging Xbox LIVEtm for a slice of online console revenue.

It remains to be seen how this ‘new front of the console wars’ will affect the video game industry but it is clear that massive opportunities abound, not just for Sony, Microsoft, and Nintendo; but for the small time game developer who doesn’t have the USD 100 million game development budget that some of the studios have.

Microsoft statements:

John Rodman

” We don’t feel like the Wii customer and the Xbox customer are the same thing. We think that as soon as the Wii customer turns 14 they want something else.”

“Whatever format wins it is highly likely we will offer a solution. The only debate is if you want to watch Blu-ray movies and pay the extra money for that feature. We prefer to offer the consumer choice.” (Which now happens to be Blu-Ray).

Neil Thompson

We’re fully committed to HD DVD and have absolutely no plans to support other optical formats.” (What about now?)

Peter Moore

On the subject of system failures – “Ya know, things break”

Next generation games will combine unprecedented audio and visual experiences to create worlds that are beyond real and they’ll deliver storylines and gameplay so compelling that it will feel like living a lucid dream. The result is a state where you achieve the perfect mind-body equilibrium as you forget your physical surroundings and you become completely immersed in the game itself; this controller becomes an extension of your body, it becomes the gateway to the Zen of gaming.” (Peter Moore on crack – or something).

Nintendo statements:

Satoru Iwata

“Our customers do not want online games” (Though there may be a strong chance he was misquoted).

Hiroshi Yamauchi

“There are many people in the industry that know nothing about games. In particular, a large American company is trying to do engulf software houses with money, but I don’t believe that will go well. It looks like they’ll sell their game system next year, but we’ll see the answer to that the following year.” (Now whom could he have been referring to…?)

“[People who play RPGs are] depressed gamers who like to sit alone in their dark rooms and play slow games,” (he also said games like Final Fantasy are silly and boring)

“I have been saying this for some time, but customers are not interested in grand games with higher-quality graphics and sound and epic stories. Only people who do not know the videogame business would advocate the release of next-generation machines when people are not interested in cutting-edge technologies.” (Though with the phenomenal success of the Wii, he may just have been proven right all along.)

I saved the best for last – Sony statements:

Ken Kutaragi

“The PS3 is not a game machine. We never once called it a game machine. I’m not going to reveal [the PS3’s] price today. I’m going to only say that it’ll be expensive. I’m aware that with all these technologies, the PS3 can’t be offered at a price that’s targeted towards households.” (er… right…)

“Its [the US499 to USD599 price of the PS3] probably too cheap”.

“I believe we made the most beautiful thing in the world. Nobody would criticize a renowned architect’s blueprint that the position of a gate is wrong. It’s the same as that.”

“This time [with the Xbox 360], Microsoft has stated clearly that it is going after PlayStation. However, they’re going not after the PlayStation 3, but the PlayStation 2. They were looking at 2, and that’s why Xbox 360 became like that.”

“The Xbox 360 is more of an Xbox 1.5 than a next generation console”.

“With the PS3, our intentions have been to create a machine with supercomputer calculation capabilities for home entertainment.”

“[PS3 is] for consumers to think to themselves ‘I will work more hours to buy one’. We want people to feel that they want it, irrespective of anything else.” (I don’t think I want ANY entertainment system THAT badly).

And the clincher – “”You can communicate to a new cybercity. This will be the ideal home server. Did you see the movie ‘The Matrix’? Same interface. Same concept. Starting from next year, you can jack into ‘The Matrix’!” (So with the PS3 I’ll effectively be choosing the blue pill?)

Phil Harrison

“Nobody will ever use 100% of the PS3”

“The PlayStation 3 is a computer. We do not need the PC.”

“I believe that the Sixaxis controller offers game designers far more opportunity for future innovation than rumble ever did. Now, rumble I think was the last generation feature; it’s not the next-generation feature. I think motion sensitivity is.” (Not long after, Sony quietly introduced rumble into the Sixaxis controller).

Speaking of MS’ multiple SKU’s, before Sony went the same route: “I think it just confuses the audience,” says Harrison. “They don’t know which one to buy, developers don’t know which one to create for, and retailers don’t know which one to stock. So I think we wouldn’t take that strategy. We wouldn’t create confusion.”

“Nintendo knows its target audience, because it has really narrowed that down; and it’s pretty much defined by a boy or girl’s ability to admire Pokemon.”

While explaining why there were PS3 systems on store shelves “Talk to the people who run GameStop, talk to the people who run BestBuy, and they’ll tell you that the demand is unprecedented and that they give us kudos for managing to keep a very sophisticated supply chain moving.” (er..yeah.. right.. you mean it really wasn’t the price tag?)

[The] PlayStation 3 launch has been, objectively by any measure, more successful than PlayStation 1, PlayStation 2 or other competing system out previously.

And the clincher (On what the biggest challenge faced by the video game industry) – “I fervently believe that the biggest challenge we face is that our industry is referred to as ‘video games,’ and games are supposed to be fun. Games should deal with fear, should deal with comedy and with death. They should deal with peril, with drug offenses. (I thought games = entertainment = fun?)

Kaz Hirai

“The next generation starts with us”.

“With the PlayStation 3, we are keeping to our belief that we have the true next-generation console. It’s all about the games. We all know that. It’s about delivering compelling entertainment to the consumer once again. “ (It’s all about the games – sounds a lot like what Reggie has been saying for Nintendo all this while).

“There have always been other entertainment options. Certainly YouTube and iPods are other entertainment options we are now competing with.”

Jack Tretton (probably has the best quotes)

“If you can find a PS3 anywhere in North America that’s been on shelves for more than five minutes, I’ll give you 1200 bucks for it.” (In the same interview, EGM said, “But we called 18 random retailers, including Best Buy and EB Games, and half of them had PS3s in stock … some had as many as 20 in the store.” – Jack never paid out the money.)

“I think the PS3 is the Surf ‘n Turf, the PS2 is your favorite burger restaurant… [Wii] is a lollipop, and I’m too old for lollipops. And the [Xbox 360] I get sick from once in a while because the cook isn’t always reliable.”

Published in June 2008 as a feature article in Max IT magazine (http://www.maxit-online.net/).

By Johnathan Sia

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