The Battle for Second Place: Microsoft vs Nintendo

October 21, 2003

Next week DFC Intelligence will release the results of our most recent executive interviews.  Every year since 1997, DFC has interviewed leading figures in the game industry and published the results in our annual Executive Interview white paper.  For the 2003 report many topics were discussed in detail.  Hot issues included the general state of the industry, the costs of development and marketing, which companies are likely to do well, which companies are likely to struggle, the wireless and portable game market, online gaming, console systems going online and the state of the PC game market. 

Perhaps the most surprising issue that was raised in our interviews dealt with the hardware console race between Sony, Microsoft and Nintendo.  Of course, this is always a hot topic.  However, this year we were not expecting such strong responses.  Everyone knows Sony is number one and Microsoft and Nintendo are fighting for a distant second place.  True to form, almost everyone had good things to say about Sony and the PlayStation 2 platform.  What took us by surprise was the general attitude that Microsoft has overtaken Nintendo as the number two player in the marketplace.

Nintendo has always been a problematic company for third-party video game publishers.  The major complaint is that Nintendo platforms only make money for Nintendo, not anyone else.  Despite that, Nintendo has generally received a great deal of respect as a true industry leader.  This year it was different.  The majority of respondents had extremely harsh words for Nintendo.  The general consensus seemed to be that Nintendo lacked leadership and a clear strategy and was in danger of becoming a non-player in the video game hardware race.

The attitude towards Nintendo is somewhat surprising considering that the GameCube and Xbox are in a close race for second place.  With a major price advantage, the GameCube could easily outsell the Xbox this holiday season.  Nevertheless, in many respondents’ eyes, this may be too little, too late.  Nowadays, almost no one questioned whether Microsoft would be around for the long term.  Instead the main complaint about Microsoft was the fear that they may become too powerful, possibly becoming the next Nintendo.  In other words, the fear about Microsoft is that they will follow the Nintendo model and focus more on their own profits (as opposed to helping third party publishers make money).

Once again it should be made clear that Sony was far and away seen as the leading player.  Most interviewees felt that Microsoft still had a long way to go to be a true market leader.  However, in many people’s minds it seems Microsoft has already replaced Nintendo as the leading challenger to Sony’s dominance.  That was the biggest surprise.

The following quote perhaps best describes the general consensus of the respondents to our survey. 

“Sony continues to dominate and will do so until the PS3 launch.  Microsoft has done a credible job of establishing themselves as a player.  Nintendo has fallen off the radar and is risking becoming a non-factor.” 

Without any further editorial, the following quotes are some of the unedited comments regarding the Microsoft Xbox and Nintendo GameCube

What the Interviewees Said:  Microsoft Xbox
 

• Strengths: Strong technology, some good games finally starting to show up.  Weaknesses: Arrogant towards publishers, poor marketing, too cost-conscious.
• A weak second, but online may help.
• I think Microsoft is in this for the long haul.
• I am rather confident about Microsoft staying in this for the long haul.
• Microsoft will stick with Xbox for at least one more cycle. If Xbox 2 fails to deliver profits then there will be no Xbox 3. As a result, I expect to see Microsoft engineer for cost savings more than technological leadership.
• There is tremendous weakness for the Xbox in the Japanese market.  This will be a huge long-term challenge for Microsoft.
• The Xbox has continued to show good consumer demand in the U.S. and with the introduction of Xbox Live appears to be gaining momentum.   Microsoft ended the month of December 2002 with an installed base of about 4.6 million units.
• Xbox will turn in a strong second place, but well behind PlayStation2. Microsoft's fears over their costs wiping out any potential profits will continue their trend of being penny wise and pound foolish. Rather than spending to get exclusive content, lead the price wars or produce any compelling marketing messages, they will continue to fall back on pushing Xbox Live as their key differentiator to an audience that is largely uninterested in online and unable to discern the benefits of Xbox Live over Sony's online strategies.
• Microsoft has great technology but their emphasis has always been on Microsoft.  They need to do a little more to build third party relationships. They also need more emphasis on games.  They are not as bad as Nintendo, but they seem to be awfully influenced by Nintendo’s model.
• Microsoft is very committed to making the Xbox a success and so far has done a very good job marketing the Xbox.
• Will be a strong #2 in this generation.

• Microsoft continues to heavily promote Xbox Live with game’s like Return to Castle Wolfenstein: Tides of War and its own upcoming Halo 2. They are successfully making Xbox Live a premiere online gaming network. 

• Still got headroom technically.  Xbox Live implementation and mod-chip blocking has proved very pro-active.  However they need to have their Xbox 2 ready to ship either before or with the PlayStation 3 to prevent history from repeating itself.
   

What the Interviewees Said:  Nintendo GameCube
 

• Strengths: Nintendo brand and franchises.  Weaknesses: No "killer" games yet, confusing target audience, falling behind others.
• Coming in third, Nintendo seems helpless to decide WHAT to do..??...
• Nintendo possibly will not stay in the hardware business.
• Nintendo does not have a clear vision and leadership.  Without the ability to clearly explain their vision they are destined for stormy weather.
• I think, and hope, Nintendo will stay around in the hardware business.
• As of December 31, 2002, the GameCube had an installed base of about 3.6 million units, slightly below our expectation.
• Although sales of the GameCube are lower than initially expected, we believe that it is too early to assume that Nintendo will not stay in the hardware business.
• GameCube will be pushed into a smaller and smaller niche as third party publishers abandon the platform in droves (save for quick, cheap ports) and Nintendo's own games fail to live up to the ever-increasing expectations of its customers.
• There seems to be a belief that Nintendo has not really followed the changing dynamics of the marketplace.
• There's no question that (Nintendo) SHOULD exit the hardware business, but corporate arrogance, combined with the cautionary tale that Sega's difficult transition to pure software publisher provides, may cause them to ignore reason.  I really don’t know if Nintendo will stay in the hardware business.
• Nintendo is swimming in a sea of hardware inventory.
• Nintendo still has reasonable appeal in the Japanese market.
• Nintendo focused on their “colorful” market and kept it well stocked with Mario and Zelda games, however Microsoft and Sony are pushing them into a corner.  Nintendo seem to be embracing third-party development more and that should bring more interest outside Japan to their hardware.
• Will continue to do well, but I foresee a similar trend as with the N64.  Less and less third-party support, fewer really smashing games, no online focus in this generation, and quite frankly they don’t have to since it’s ample time to catch up from the next round if they are good enough at making the next one right.  A worldwide #3.  Connectivity between GBA and GameCube is not such a great thing for older players. 
• As a consumer and a gamer someone needs to explain to me how having synergy between the GBA and GameCube enhances the gaming experience.
• Nintendo seems to be going down the N64 road again with a slow decline (e.g. being thrown out of retail, having less and less third party support etc.)   

The new DFC Intelligence report, The Executive Interview Series 2003 will be available at the end of October.  Qualified, registered media can receive a free copy by sending email to info@dfcint.com with the subject line DFC EIS 2003.  Click here to see a table of contents for the new report.  For more info go to www.dfcint.com or call DFC Intelligence at 858-780-9680.
 

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DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry. 

A sample of recent reports on the video game and PC game market include::

Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Released April 2003, this 500+ page report contains complete forecasts for all individual console and portable game platforms by region (Asia, Europe/PAL, U.S.) through 2007.  Also included are PC game forecasts and historical sales figures.  The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as new portable game systems.

Market Leaders in the Video Game and Interactive Entertainment Industry This 600+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 15-40 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company. 

The Online Game Market This 475 page report contains a comprehensive analysis of the online gaming market.  Includes current sales trends, market forecast, and in-depth company profiles.

Other DFC reports include The Business of Video and Computer Games, The State of Game Technology, The Video Game and PC Game Consumer and The Executive Interview Series.

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