Malstrom is at it again. Today he’s delivered us a series of new (and lengthy!) articles about gaming, Nintendo and the future of the industry as a whole. I think with the outrageous success currently being enjoyed by the Wii and its software (you know, the software that ignoramuses say doesn’t exist yet) this is an especially timely delivery.
On a personal note, the reason I enjoy these columns is two-fold. First, the style is unique. There are no other writers out there today in the gaming industry that can hold a candle to the style that Malstrom brings in his articles. They tell a story, create characters and include real life quotes from industry movers and shakers, and advance the conversation instead of miring it in stagnation. Kind of like the Wii and DS.
Secondly, they use words from the analysts and industry players themselves. Oftentimes Malstrom simply sits back and lets some of these clowns set the stage for him. In this light, the columns cannot be dismissed as fanboyism or marketing because they employ something rarely seen in the putrid, vitriolic message boards and forums of today: facts. For those reasons alone, these are a welcome addition to Infendo. I haven’t seen these columns outside of Infendo (aside from at the now-retired Wiikly.com), so for that I thank Mal for the pro bono contribution. I think I speak for Blake, David and the rest of Infendo when I say thanks a million for these articles. But I digress, as usual.
On that note, here’s one of Malstrom’s latest, A Rising Continent.
Which is preferable for The Industry, rising profitability and growth or deepening losses and stagnation?
â€œWhat!â€ people may exclaim. â€œHow 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 Industryâ€™s well-being?â€
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 â€œThe Wayâ€ 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: â€œThe console business is the razor and blades model. It is good to lose money on hardware and make it up on software.â€
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 â€˜razor and bladesâ€™ 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 â€˜razorâ€™ of consoles is the software, not the hardware.) Microsoft does not practice the â€˜razor and bladesâ€™ model either as their model appears to resemble the â€œlet us throw money at itâ€ 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!
â€They do not appear to take a whiff of history. But look at their nice charts and technological price forecasts!â€
Then we can confidently replace the analysts with basic Pentium computers.
â€Analysis is like most jobs: the worker exists only to apply the formula.â€
So it would seem. This â€˜razor and bladesâ€™ assumption appears to be the false premise that all the insane analysis of Sony winning and Nintendo coming way behind are based. Nintendo just couldnâ€™t compete, we heard over and over, yet Nintendo became unstoppable. How could such an analysis error been made? Investors deserve an answer.
â€The Wii was such an aberration.â€
â€In time, the market will return to our original forecasts.â€
â€No one could predict this.â€
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. â€œIt sounded like marketing then!â€ one might say. But none of this stopped the analysts and journalists from slobbering over the â€œHD Generationâ€ or barking over the number of processors and the Cell chip.
On the Industryâ€™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 â€œmainstreamâ€, 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 â€œNext-Generationâ€ would bring. Their master, Experience, guided their capital and enthusiasm. It would be a two console war as Nintendo didnâ€™t matter anymore. While Nintendoâ€™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, â€œNo one could have predicted the Wii and DS success. Not even Nintendo!â€ 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 15th 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. â€œGood God, Malstrom. Donâ€™t you think you are being carried away by the analogy? Have you become drunk with metaphors? Let us have more matter, less art.â€
â€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.â€
â€I await another wordy text of yours.â€
â€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 â€œanalystsâ€:
â€It is your words that reveal you are the fanboy,â€ says one group.
â€It is yours,â€ 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 â€˜intelligentâ€™), let us just listen to what Yamauchi and Iwata have said over the years. Instead of talking, we need to listen more.
A journalist asked, â€œThe Dreamcast has died, and Sega has exited the console market forever. How goes the future of The Industry?â€
“A number of companies will be eliminated,” says Yamauchi. “But Nintendo will survive.”
â€And how do you ensure that it does?â€
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)
â€Hey Mal,â€ interrupted the reader.
â€What! You speak so soon!? The second half of my farcical play has barely begun!â€
â€True, and I am very sorry for my outburst. But this antithesis shows only that Yamauchi and Iwata are idiots.â€
â€The Gamecube was a stinking failure even to the Nintendo 64! Yet, you quote these gentlemen?â€
â€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 Yamauchiâ€™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.â€
A sniveling journalist approached Iwata and asked, â€œStop making kiddie games! Why donâ€™t you make more mature realistic games?â€
Iwata replied: â€œIf 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.â€
â€Still, you should focus on more powerful and realistic games!â€
Iwata shook his head. â€œIn 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.â€ (2)
â€Aha! So this might explain why Western games have such problems breaking into Japanese market.â€
â€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.â€
The reader was all excited. â€œNow comes the year 2002 when the changes began to occur!â€
â€Right. Do you ever use binoculars?â€
â€That is a silly question! Of course, I have.â€
â€You do not use your fatherâ€™s binoculars, do you? Or your grandfathers?â€
â€Why would I? I use current binoculars that allows me to see further.â€
â€And when you are, say, bird watching, you do not stare in the binoculars all the time?â€
â€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?â€
â€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 canâ€™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 elseâ€™s vision, your parentâ€™s, your grandparentâ€™s, or â€œsocietyâ€ 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.â€
A journalist approached Yamauchi and declared Nintendo to be doomed. â€œMicrosoft will enter the console market. Microsoft is one of the wealthiest companies ever and has a history of trampling their competitors. Ask Netscape.â€
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 â€˜victory,â€™ 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.”
â€œDo you have any words for Nintendoâ€™s new management executives?â€
“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. â€œAccording to Nintendo, 4.5 million Gamecube units have been shipped since the consoleâ€™s launch. How many GameCubes will be sold?â€
Iwata answered, â€œOur projections suggest 50 million GameCube units will have been sold by March 2005.â€
â€And all it will do is play games? No DVD movies? No other non-game features?â€ The journalist asked.
â€Correct. Profits originate from the software so we must focus on making them more appealing.â€
The reader burst out laughing. â€œWhat an idiot this Iwata is! 50 million GameCubes? Hah! They didnâ€™t even get half of that by 2007!â€
â€Be soft, reader, and know that this prediction was made in line with the Super Nintendo market performance. Listen to what Iwata says next.â€
â€œWe 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.â€
The journalist turned toward the Royal Court of the Industry. â€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. â€œ
â€Stuffed with false facts!?â€ cried the reader. â€œHow dare they say the GameCube was the weakest console of the sixth generation!â€
â€As you can see, even when Nintendo delivers what the hardcore want in more power and graphics, the Industry will still refer to Nintendoâ€™s system as the â€˜weakestâ€™.â€
Iwata spoke up over the voices. â€œWe 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.â€ (4)
A journalist asked, â€œSo all of GameCube games will be small?â€
Iwata shook his head. â€œWhen 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.â€
â€This,â€ I whispered, â€œwould be something for Microsoft to learn.â€
Iwata continued. â€œThe 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, â€˜How many titles do I have out there?â€™ The real question is, â€˜How many titles do I have that people actually want to buy?â€™ 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.â€ 5)
The curtains fell down over the farcical play.
â€Why, that was short.â€
â€As a 360â€™s lifespan.â€
â€I take it you will use this occasion to deliver a sermon to the audience?â€
â€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.â€
â€To put what into context?â€
â€A collision of contexts began occurring. On one hand, the Industry, especially that of Western companies and analysts, said one thing over and over: â€˜The Game Industry is growing like never before! Gaming is becoming more and more mainstream!â€™ Meanwhile, Iwata says something very different. He will keep saying, over and over: â€˜The Game Industry is in crisis. Gaming must strive to become mainstream or it will die.â€™â€
â€Those are diametrically opposed contexts.â€
â€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.â€
â€Interesting. Even when Wii became a success, the Industry still refuses to challenge that old context.â€
â€And this is why they will lose in the Eighth Generation as well.â€
The Detroit Disease
â€Iwata, at GDC 2006, has compared Nintendoâ€™s strategy in relation to competitors to be like Pepsi, and its cola competitors. There may be a better analogy: Detroit.â€
â€The Car Industry?â€
â€American business is infected by what is called the â€˜Detroit Diseaseâ€™. 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 werenâ€™t even there. One of Americaâ€™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.â€
â€What matters, Malstrom, is the bottom line.â€
â€Yes, the bottom line! Never mind paying ordinary people good salaries. Letâ€™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.â€
â€Then how does Nintendo have such a high profit margin for its number of employees?â€
â€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 arenâ€™t seeing the company for what it is.â€
â€Explain the Detroit Disease.â€
â€Detroit Disease is the following:
-Belief that the market is immune to outsiders.
-Belief that GDP growth drives auto sales, that â€˜growthâ€™ 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, â€˜the most important thing is the deal!â€™â€
I continued. â€œThe 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 â€˜dealâ€™ with customers, it was the â€˜relationshipâ€™ with customers.â€
The reader was wide-eyed. â€œThis fits Microsoft to a T. Have they become the General Motors to gaming?â€
â€Look at the contexts. In the last article of â€˜A Foolâ€™s Paradiseâ€™, 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, â€˜Look at the rising revenue! This means gaming is growing!â€™ This matches the Detroit way of thinking.â€
The reader added, â€œAnd they believe the â€˜dealâ€™ is more important than the â€˜relationshipâ€™. 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!â€
â€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 â€˜Detroit Diseaseâ€™.â€
The reader said, â€The belief of immunity from outsiders is interesting. Casual gaming was always around. Nintendo didnâ€™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.â€
I nodded. â€œDisrupt or be disrupted. Nintendo got there first. When Detroit began failing to the Japanese, they came up with all sorts of excuses such as â€œdeathtrapâ€ used cars (whose only real threat was to prices of new cars), fashion quirks in California, excise taxes, Japanese conspiracy, and so on.â€
â€And this happened to the game industry!â€ the reader said. â€œThey came up with all sorts of excuses. They blamed used games. They said Wii was a â€˜fadâ€™. They then said Wii had no real games, only casual non-games.â€
â€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 Detroitâ€™s head when they made those health care pension plans.â€
â€This mirrors the game industry as well! No one held a gun to the Industryâ€™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.â€
â€Right! Now, how can you tell whether an analyst or message board analyst has been infected by the Detroit disease?â€
â€I donâ€™t know. How?â€
-Believe sales are primarily price driven. (â€˜When PS3 and Xbox 360 have their price cuts, it is over for the Wii!â€™)
-Believe that the deal (â€˜Look at that bundle with coupons! What a great deal!â€™) is everything.
-Believe success is only measured in shininess and shoes, not the happiness or joy the products bring to this Earth. (â€˜Who cares if Wii Sports is something that families enjoy doing together!? I donâ€™t want to hear about that!â€™)â€
Even though the curtains were down, a big muscled man came screaming on stage barking out orders.
â€Who is that?â€ the reader asked.
â€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.â€
The Macho Manager approached the employees, gave an â€˜inspirationalâ€™ speech, and then sat back to do nothing while everyone else worked.
â€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 isnâ€™t any, they generate some. They are in constant turf wars, not unlike bull seals competing for beach space and females.â€
Another Macho Manager appeared. One said to the other, â€œDude! Youâ€™re going down! We will win this war!â€ â€œNo! We will!â€
â€See how they spend most of their time posturing, roaring, bickering, and trying to grab territory? How this helps their organization is beyond me.â€
The reader was genuinely curious. â€œWhy do you bring up these macho managers?â€
The Macho Managers had begun running around in circles screaming like monkeys.
â€If Detroit Disease pervades, the â€˜machoâ€™ 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.â€
â€Did someone shoot you up with estrogen, Malstrom? How dare you criticize machoism!â€
â€Machoism isnâ€™t manliness. The fuel of machoism is fear. Take the contexts of â€˜A Foolâ€™s Paradiseâ€™. We now have a perversion with macho journalists, macho publishers, and macho analysts. I say away with them!â€
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. â€œLet us throw all of them in. Too much Detroit Disease for my sake.â€ All the analysts were thrown in to the pit. I pulled the lever and the trapdoor closed.
The reader looked expectantly at me. â€œCan we get on with the farcical play?â€
Grabbing some popcorn, I jumped back to my seat as the lights appeared and the curtain rose.
UPDATE By Jack@2:14 EST: Part 2 of this article can be found here. It encompasses 2003-the present and includes all of Malstrom’s references and source material.