The New Yorker weighs in on Wii...

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The New Yorker weighs in on Wii...

Postby -Papa Gino » Mon Nov 27, 2006 9:15 pm

Not exactly the most thorough economic analysis, but not terribly off-base either. In my opinion.

IN PRAISE OF THIRD PLACE
by James Surowiecki
Issue of 2006-12-04
Posted 2006-11-27

Fifteen years ago, the video-game industry was ruled by one player, Nintendo. The company had machines in a third of American homes, and it was Japans most profitable electronics company. The title of a 1993 book summed up the situation: Game Over: How Nintendo Conquered the World. Then the Sony PlayStation arrived, and everything changed. Today, Sony is the dominant force, and its chief rival is not Nintendo but Microsoft, which makes the Xbox. Two weeks ago, the dbut of Sonys PlayStation 3 was greeted by crowds of hysterical consumers anxious to get their hands on the new console, billed as the most powerful gaming machine ever. When Nintendos new console, the oddly named Wii, appeared, a few days later, there were excellent reviews and expectations of good sales, but no more talk about world conquest. If Sony and Microsoft are the major-party nominees, Nintendo is more like a cool third-party candidate.

You might expect, then, that Nintendo would be struggling to stay afloat. After all, the prevailing wisdom is that companies need to be market leaders, or face disaster. This approach was famously institutionalized by Jack Welch, who, when he took over as C.E.O. of G.E., laid down a rule that he described as a central idea of his tenure: the company would quit any business in which it was not No. 1 or No. 2. The lesson that people took away from this was clearthird place is for losers. First prize is a Cadillac Eldorado, Alec Baldwins character says in the film Glengarry Glen Ross. Second prize is a set of steak knives. Third prize is youre fired. Nintendo, though, has not just survived out of the spotlight; it has thrived. It has five billion dollars in the bank from years of solid profits, and this past year, though it spent heavily on the launch of the Wii, it made close to a billion dollars in profit and saw its stock price rise by sixty-five per cent. Sonys game division, by contrast, barely eked out a profit and Microsofts reportedly lost money. Who knew bringing up the rear could be so lucrative?

Sony and Microsoft are desperate to be the biggest players in a market that, in their vision, will encompass not just video games but interactive entertainment generally. Thats why the PlayStation 3 and the Xbox 360 are all-in-one machines, which allow users not just to play video games but also to do things like watch high-definition DVDs and stream digital music. Sony and Microsofts quest to control the living room has locked them in a classic arms race; they have invested billions of dollars in an attempt to surpass each other technologically, building ever-bigger, ever-better, and ever-more-expensive machines.

Nintendo has dropped out of this race. The Wii has few bells and whistles and much less processing power than its competitors, and it features less impressive graphics. Its really well suited for just one thing: playing games. But this turns out to be an asset. The Wiis simplicity means that Nintendo can make money selling consoles, while Sony is reportedly losing more than two hundred and forty dollars on each PlayStation 3 it sellseven though they are selling for almost six hundred dollars. Similarly, because Nintendo is not trying to rule the entire industry, its been able to focus on its core competence, which is making entertaining, innovative games. For instance, the Wii features a motion sensor that allows you to, say, hit a tennis ball onscreen by swinging the controller like a tennis racquet. Nintendos handheld device, the DS, became astoundingly popular because of simple but brilliant games like Nintendogs, in which users raise virtual puppies. And because Nintendo sells many more of its own games than Sony and Microsoft do, its profit margins are higher, too. Arguably, Nintendo has thrived not despite its fall from the top but because of it.

Nintendos success is not an anomaly, either. The business landscape of the past couple of decades is replete with companies that have flourished as third wheels, and with companies that have struggled to make money despite being No. 1 in their industries. (Today, would you rather be Honda or G.M.?) And while its true that in many industries there is a correlation between market share and profitability, one doesnt necessarily lead to the other. A recent survey of the evidence on market share by J. Scott Armstrong and Kesten C. Green found that companies that adopt what they call competitor-oriented objectives actually end up hurting their own profitability. In other words, the more a company focusses on beating its competitors, rather than on the bottom line, the worse it is likely to do. And a study of the performance of twenty major American companies over four decades found that the ones putting more emphasis on market share than on profit ended up with lower returns on investment; of the six companies that defined their goal exclusively as market share, four eventually went out of business.

The point is that business is not a sporting event. Victory for one company doesnt mean defeat for everyone else. Markets today are so bigthe global video-game market is now close to thirty billion dollarsthat companies can profit even when theyre not on top, as long as they arent desperately trying to get there. The key is to play to your strengths while recognizing your limitations. Nintendo knew that it could not compete with Microsoft and Sony in the quest to build the ultimate home-entertainment device. So it decided, with the Wii, to play a different game entirely. Some pundits are now speculating, ironically, that the simplicity of the Wii may make it a huge hit. Nintendo wouldnt complain if that happened. But, in the meantime, third prize is looking a lot better than steak knives.

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Re: The New Yorker weighs in on Wii...

Postby VectorAWX3 » Mon Nov 27, 2006 10:20 pm

Gene, that's interesting and all, but next time, you should just LINK to the article rather than copying it wholesale. Copyright infringement and all that, you know?
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Re: The New Yorker weighs in on Wii...

Postby Bauhaus » Mon Nov 27, 2006 11:13 pm

He attributes the article (but still, links are good too.)
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Re: The New Yorker weighs in on Wii...

Postby Amazonwarlord » Tue Nov 28, 2006 7:44 am

yup, sitation I think is fine to avoid legal problems. And Gene has done this so often I find it funny you point it out now Nidal.
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Re: The New Yorker weighs in on Wii...

Postby VectorAWX3 » Tue Nov 28, 2006 9:08 am

Just bored at work.

Thing is that sites which post these articles make $$ off of hits. That sets their advertising rates. By copying the whole article (or enough of it that I don't care to read more) that keeps me from clicking on their site (hell, a link wasn't even provided). That lowers their hit count, and takes away from their bottom line unnecessarily. (it costs us nothing to post the link) So why should we do that? It's of no benefit to us, and it's a detriment to them. And their kids need braces too.

Nobody complains and nobody gets hurt if you post a blurb or cut and paste a couple of sentences and then post a link. There's no reason for us not to post the right way.

Gene's been a repeat offender of posting like this, which is why I pointed it out.
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Re: The New Yorker weighs in on Wii...

Postby -Jarrett » Tue Nov 28, 2006 9:32 am

Gene, keep it up. If their kids eat that's less for the rest of us
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Re: The New Yorker weighs in on Wii...

Postby -Papa Gino » Tue Nov 28, 2006 9:53 am

Right, Nidal, because the New Yorker makes most of its money off website advertising. Good job.

The reason I did not post a link is because it's a freely available article on their front page. I had assumed that those people who wanted to go to the source were smart enough to simply type in www.newyorker.com and click on the second headline in the big bold letters from the top. Clearly, that was expecting a tad too much:

www.newyorker.com/talk/co...surowiecki

And don't even get me started on the "copyright" nonsense. Publicly available information. It's a concept. Learn it.

Yeah, I'm bitter tonight.
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Re: The New Yorker weighs in on Wii...

Postby -Papa Gino » Tue Nov 28, 2006 10:11 am

Addendum.

Yeah, it wouldn't have killed me to post a link. That said, I typically cite sources that do not live and die by online ad revenues - news wires, newspaper websites, etc.

So no, the people on this board are not idiots for suggesting or expecting that I link the thing. I stand by all my other statements though.
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Re: The New Yorker weighs in on Wii...

Postby VectorAWX3 » Tue Nov 28, 2006 10:28 am

Walmart doesn't live and die by your paying for a pack of gum, but I don't think you'd be shoplifting that, would you?

(I'll ignore most of your extremely rude post on the grounds that... I don't know... but I'll give it to you. Dont let it happen again or you'll be subjected to my extensive four-letter vocabulary. I'm trying to remain civil, you see?)
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Re: The New Yorker weighs in on Wii...

Postby Amazonwarlord » Tue Nov 28, 2006 5:57 pm

Quote:
Gene, keep it up. If their kids eat that's less for the rest of us.


:rollin
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