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GamesIndustry.biz: Nintendo Difference

Why the patriarch of gaming will never follow SEGA's path.

Published as part of our sister-site GamesIndustry.biz' widely-read weekly newsletter, the GamesIndustry.biz Editorial is a weekly dissection of one of the issues weighing on the minds of the people at the top of the games business. It appears on Eurogamer a day after it goes out to GI.biz newsletter subscribers.

No company frustrates the soothsayers quite as much as Nintendo. Across the land, divining rods are being snapped, crystal balls are being smashed and tea leaves are being stamped on in fury - as the firm whose death has been predicted countless times reveals itself once again to be in rude good health and ready to take on the world.

I refer, of course, to the launch of the Wii in Europe, which saw the firm clocking up a record breaking 325,000 sales over the weekend; but even more astonishing, and more laudable, is the stunning success of the Nintendo DS in the same week. Over half a million units of the handheld were sold in Europe last week, and the installed base now tops 8.5 million units in this territory alone. If this is an indication of how the Wii's sales will go, then Nintendo's risky gamble with the motion sensing Wii-mote could actually turn out to be a stroke of genius, which hands dominance of the console space back to its one-time master.

As the Kyoto-based firm continues to confound the doom-mongers who have gleefully predicted its demise for the best part of a decade, it's worth pausing for a moment to think about the other common prediction which is associated with Nintendo - namely that the company will (or at least, should) abandon the hardware market entirely, and instead focus on bringing its unique range of IPs and franchises to other platforms. Going third-party - or "doing a SEGA", as industry slang would have it.

The most common argument for this strategy is that while Nintendo may be hugely profitable, the company's home consoles are in distant second or even third place behind those of the market leader - so in theory, by moving franchises like Mario and Zelda to the PlayStation and the Xbox, the firm would have a much larger target market, would sell more units, and would ultimately be much more successful. This is particularly relevant now, proponents of this model argue, because the astonishing cost of the new generation of consoles has forced Nintendo out of the arms race, leaving its games confined to an innovative but underpowered system.

On the face of it, it's a compelling argument - and it certainly worked for SEGA, which has turned around its fortunes since bailing out of the Dreamcast (aided, admittedly, by being acquired by wealthy Japanese gambling firm Sammy) and is now one of the most influential third-party publishers in the industry. Why shouldn't Nintendo follow SEGA's example, then, and leave the CPU and GPU arms race to the multinational giants with cash to burn?

The simple answer is because "The Nintendo Difference" isn't just a cunning marketing slogan; Nintendo genuinely is different. Its structure and business model are a radical departure from how every other company in the interactive entertainment industry works, and the comparisons between Nintendo and SEGA are merely skin deep. SEGA left hardware because it had no choice; the failure of the Dreamcast was a nail in the coffin, and the structure of its internal studios was perfect for transplanting into a third party publisher. Nintendo stays in hardware because it, too, has no choice in the matter.

Of course, on a very simple level, if Nintendo were to leave hardware then it would lose a major revenue stream, because the company notoriously designs and prices its consoles such that hardware is a profit-making enterprise. Making up for that lost revenue would also be tougher than it looks, because as a third-party publisher, Nintendo would be forced to pay a significant licence fee on each game it sold, so its profit margin from software would be reduced. As such, the company would have to vastly increase its software sales in order to make up both for reduced margins and for the loss of the hardware revenue stream - an incredibly daunting task, even for a firm with franchises like Mario and Zelda. Bear in mind that those franchises already sell millions of copies, and have an astonishingly high attach rate with Nintendo hardware. Even on a system with five times the installed base, achieving higher sales would be a challenge.

Even more important, though, is the change that would have to be made to Nintendo's entire culture, to its business and creative models, if it were to abandon the hardware market. Considering this fact offers an insight into the workings of one of the most fascinating companies in the videogames market - a firm which is quite unlike its competitors, with an approach that owes more to that of a toy company than to the videogame publishing model.

Nintendo's entire philosophy is focused on the platform - not on hardware or software as separate entities or businesses, but as the platform as a whole. Unlike Sony and Microsoft, where it's apparent that Chinese walls have been erected between the designers of the hardware and the creators of first-party software, Nintendo actually places its top software designers at the helm of hardware design. Consoles are designed to suit the game concepts which will run on them - a working model which is apparent in the design of both the Nintendo DS and the Wii, and which allows the company to create early first-party titles that really showcase the hardware.

This top-down approach, which creates consoles based on the games that will run on them, is the antithesis of Microsoft and Sony's approach, where the design comes from the bottom up - first creating a console and then worrying about what games will run on it. It gives Nintendo an enormous competitive advantage that wouldn't be evident if it were a third-party publisher, and allows its top first-party software to innovate and evolve in ways that would be impossible on another company's hardware. It's also the approach that has informed the decision to restrain the specifications of the Wii - and indeed the DS - to a manageable level, which allows development to take place faster and less expensively than on rival consoles.

These factors combine to make Nintendo into the company it is today - a company whose low development costs, tight integration between hardware and software and enormous profit margins allow it to take creative risks, drive forward innovation and promote the growth of the gaming market as a whole. Without Nintendo's unique business model and first-party status, games like Nintendogs, Brain Age, Animal Crossing and Wario Ware simply could not exist; they either rely heavily on the hardware which supports them, or are so far off the beaten track that creating them on a system with higher development costs and lower profit margins would be commercially untenable.

That's why Nintendo will remain in the hardware business - because its consoles are more than just a platform to run its software on. They are part of a platform strategy which defines the entire company's approach to the market, and which means Nintendo is more than just one of the world's leading videogame companies - it is also, and arguably more importantly, one of the world's leading toy companies, and remains a powerhouse of innovation and development which is a driving force for the entire games sector. "Doing a SEGA" is not on the cards for this firm, and probably never will be - especially not when it's still in the enviable position of being able to shift the better part of a million units in Europe in a single week.

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GamesIndustry International is the world's leading games industry website, incorporating GamesIndustry.biz and IndustryGamers.com.