MARCH 5, 2013 • As we discussed recently in Can Sony & Nintendo Recover? one of the great ironies of 2012 was that Sony and Nintendo were not able to take advantage of strong consumer excitement over digital devices. Hardware is clearly not a commodity and this should be good news for game hardware manufacturers that specialize in providing unique, proprietary systems. Unfortunately, we are seeing a new level of competition in consumer electronics and many established players are struggling to compete in this so called new order. DFC Intelligence has identified seven potential major players in this new order: Amazon, Apple, Google, Microsoft, Nintendo, Samsung and Sony as the companies with the most at stake. We thought it would be interesting to take a look at how they each stack up.
Of course, we expect many people will take issue with the idea that hardware is not a commodity. Companies like Royal Philips Electronics, Nokia and Dell were once giants that have struggled as consumers flock to lower cost “commodity” products in their respective categories. In January 2013, Philips, a major innovator of consumer electronics technology, announced it was completely leaving the consumer electronics business to focus on lighting and healthcare products. Last month Dell took the extraordinary step of looking to go private in an effort to better prepare against declines in the core consumer PC business. Nevertheless, we would argue that the problem that these companies faced is that they were caught in the middle between low-cost producers on one end and high-end hardware on the other end. In other words, they were the master of none.
Both Apple and Nintendo have had a long line of success creating proprietary mobile products that consumers crave. They both understood that, even in a digital age, consumers need to interface with hardware and thus they want something physical that is sleek and exciting. Meanwhile, video game systems have, of course, always been proprietary and sold based on their features with consumers tending to pick their favorite company. Furthermore, many of the biggest products in the recent years of the video game industry have incorporated a very physical element: think not just the Wiimote, Xbox Kinect or PlayStation Move, but also Guitar Hero, Skylanders, Wii Fit, and many others. Disney Interactive had wanted to get out of the high risk console video game business but is now rethinking its plans with Disney Infinity. Disney is finding the attraction of combining physical with digital is just too hard to resist.
Video game consoles and Apple products are great examples of hardware that attracts a huge consumer following because they are not a commodity. Samsung and Amazon have recently had success with sexy hardware such as the Samsung Galaxy S III and the Amazon Kindle Fire. Mobile products are clearly no longer a commodity but that is just a start. The next big battleground is likely to be for the living room and control of entertainment services to the household. The battle for the video game and mobile dollar is just a precursor to what is a larger war to control consumer discretionary spending.
The companies that gain control of consumers in the living room will tap into a major growth market. This is a global business but unlike in mobile, the fight for control of the living room will take place in the leading console video game markets, of course lead by the U.S. Of DFC’s seven big players four are U.S. companies while the others (Sony and Nintendo from Japan and Samsung from Korea) have a strong presence in the U.S. and Europe. The battle for the living room is likely to be a mess and it isn’t winner take all. Market share is likely to be fragmented.
Of course, Apple established the tablet category and made huge improvements in smartphones as consumer entertainment devices. AppleTV will likely be Apple’s major attempt to replicate iTunes for the living room and Apple does have the advantage of a large consumer base locked into iTunes. Nevertheless, in the battle for the living room, Apple is behind and the competition is on the lookout. Overall, Apple is the most powerful player, but they definitely are a company that can be challenged. Recent declines in Apple stock price show how much pressure Apple is under to do everything perfectly.
The accompanying charts look at the competitive landscape of the seven major players. It should be noted that there are many other potential players for the living room battle. Valve is looking to connect its Steam Box to the television set for its 50+ million users. Startup Ouya made waves when they raised $8 million for their set-top video game console. Other companies like Razer and NVIDIA have their own potential market entries. Nevertheless, we picked our seven companies because they have both a proven track record in hardware and the ability to deliver a complete entertainment ecosystem to consumers.
The idea of an ecosystem is key to the battle for the living room. The success of Apple and the video game hardware manufacturers has been largely due to their ability to deliver proprietary hardware that will only play software and services that they, the system manufacturer, controls. There is a great deal of talk about open versus proprietary, or closed, systems. At the end of the day it seems that as much as consumers demand open systems for general business and productivity they tend to like closed systems for entertainment. You want to be able to email or call people across any device or system, but when it comes to playing a game or watching a movie consumers mainly want it to work on their hardware. That is what a successful proprietary ecosystem does very well, help ensure services actually work. Of course, closed systems also provide a great business model for hardware manufacturers that control the system.
Our analysis looks at where each of the major companies stand on our major criteria used to evaluate the potential to compete for delivering entertainment services to the living room. We would note that all these companies are both in bed and competing with each other.
Amazon, for example, markets its own tablet along with those of its competitors. Samsung not only markets its Windows tablet to compete with Microsoft’s Surface tablets, but also its Android tablets in competition with Google’s Android tablets. In other words, this is complicated market and it could be several companies working together that creates the most successful formula. Right now things are just getting started.