[Update 5/14/2018: Whatever the reason may be, this is one of the website’s most popular articles. Knowing that, I want to clarify a couple things in this article. Like most people analyzing the Nintendo Switch, I believed the “jack of all trades” strategy was likely a recipe for underwhelming sales. I can certainly admit that I underestimated the market for a high power portable. That said, I think it’s clear that the Switch is indeed a high power portable, especially given some of the poor performance numbers in dock mode. When I wrote this article, I concluded with two things: (1) The Switch is the spiritual successor to the 3DS and (2) Nintendo needs consistent sales to have a winner, but they don’t need to beat PS4 and Xbox in numbers. At this time, I think it’s safe to say both are accurate statements. I strongly believe we will see Nintendo phase out the 3DS in favor of supporting The Switch, as the Switch is likely swallowing that market. This was my final statement concluding the article and it does appear to be exactly what happened:
A consistently selling system will attract both developers and consumers. This is especially true if the device is popular with a unique demographic that is passionate about it (and spends a lot of money in that ecosystem). Time will tell what type of consumer really buys into the Switch product line. I hope, for the sake of all of us who want to see Nintendo succeed, that the Switch sells well enough to prove Nintendo still has a place in the home console video game market.]
The Nintendo Switch will likely prove to be an amazing piece of technology. It’s more powerful than the WiiU but portable enough to support on-the-go gaming. Unfortunately, that it’s biggest problem.
Before I talk too much about where the Switch potentially fits in the current market, I should go over some basic principles when it comes to market strategies. There is a basic model of market strategy that is still a cornerstone of doing business today: Porter’s Generic Strategies (aka Porter’s Competitive Strategies, Porter’s Strategy Model).
Porter’s Generic Strategies looks like this:
Image Credit: quickmba.com
What does all this mean? You can read the in depth explanation over at quickmba but basically put, the matrix describes the four ways a business can approach the market in which to sell their product (or service). On the left side of the matrix there are two customer segment approaches: one approach sells to a broad market (aka everyone you can) and the other targets a narrow demographic (e.g. only senior citizens). The top of the matrix is split between the advantage of the product: the product is “cheap” (low cost, inexpensive, etc) or the product is unique in some way that customers want to buy it. It is important to note that a low cost product does not mean low quality. Quality products can still be low cost!
The most successful businesses (typically) only target a certain segment of the diagram. For example: Ferrari (the automobile maker) uses a Focus Strategy with Differentiation. They target a very narrow market segment (wealthy car enthusiasts) and their product is extremely unique. Some businesses choose to follow hybrid strategies that combines two segments but usually never more than two. The original Nintendo Wii is a prime example of product that was low cost and unique, but was aimed at a very broad customer base.
There is a location on this matrix that almost always spells the death knell of a product or service: the cross section in between every strategy (aka “right in the middle”). The exact middle is an extremely difficult strategy for any business, no matter how much experience they have in the market, to execute. Why? There are a lot of reasons but typically the product isn’t unique enough to attract customers and the cost isn’t attractive enough to warrant attention. Additionally, the product doesn’t have a clear market (or they can’t carve out a market). One of the best examples I can think of is the Microsoft Zune. Remember the Zune? The Zune wasn’t unique enough to warrant attention from consumers (essentially an iPod clone) and it was almost just as expensive. Microsoft made no attempt to carve out a specific market segment and was simply chasing the same market Apple had captured. How does all of this affect the Nintendo Switch? It comes down to Nintendo’s strategy (or lack thereof).
Based on what we know about the Switch today (and Nintendo’s own words from their investor Q&A), the Switch is currently positioned right in the middle of the strategy matrix. Here’s why:
The Cost Problem
Unlike previous Nintendo consoles, the Switch won’t be the cost leader among competitors. The shelf price for the Switch sits at $300.00 (US dollar) and it lacks a pack-in game. The standard Playstation 4 and Xbox One Slim are less expensive (and often include a pack-in game). The Switch sits at a cost disadvantage on day one. This weakness is compounded by the fact that both PS4 and Xbox One already have a large library of games covering many different genres. (I’ll cover graphical capabilities in the next section.) Now you might be thinking: “The Xbox One and PS4 released at $399 so it’s not a fair comparison.” That is true to a degree but unfortunately for Nintendo, the reality is consumers don’t care. They will look at the price right in front of them and make a decision based on that. The hard truth is that the Switch isn’t a cost leader. It is less expensive than the PS4 Pro (and the Scorpio) but more expensive than direct competitors. Consumers will see this cost difference, compare available games, and unless they have a compelling reason to buy a Switch, may opt for a PS4 or Xbox One Slim.
The Differentiation Problem
If you’ve been following along you might be thinking: “The Switch is a unique product, they don’t need to be the cost leader.” Even if you aren’t thinking that, we have to accept the Switch IS unique in its design (like the Wii and WiiU before it). Take a look at this quote directly from Nintendo’s investor Q&A:
- “As for me and Mr. Takeda, the developers of the younger generation at Nintendo would show us the hardware and software under development from time to time, and we gave them our advice. In doing so, I felt that our younger developers were correctly understanding the fact that Nintendo is a company which creates unique things and, once something unique is embraced by the public, there will be no competition in that market.”
It is clear that Nintendo is using product differentiation and isn’t as concerned about being the low cost leader in this generation. The issue, however, is customer perception. Nintendo has to convince potential customers that the Switch is different enough to warrant the price tag (and lack of graphical power). Take a look at the ESA video game demographics from 2016. A large number of consumers will view the Switch as a home console device only. The portability, motion controls, and enhanced rumble are all secondary characteristics. Why did the DS do so well as a portable device? It was designed from the ground up to be portable and convenient while being less expensive than the competitor. Why did the original Wii sell so well? Because at the time, motion controls were extremely unique. They both had core characteristics that made them stand out. Differentiation can be extremely effective when utilized correctly.
The Switch is essentially the WiiU gamepad but without the bulky base unit. It is an amazing piece of technology. Problem being, it lacks the pure portability of the 3DS and is weaker (graphically) than the original Xbox One. The Switch is being marketed as a home console that can travel for portable gaming. In order to be “kind-of portable” and still run modern HD graphics, Nintendo had to make design sacrifices across the product. It may not be a popular opinion, but I have serious reservations about how unique the Switch really is. I believe many consumers will only see it for its primary function: playing video games at home (and those one-of-a-kind Nintendo titles). Let me be clear about that: The Switch’s primary function is to play video games and that is exactly how consumers will see it. It is the same primary function as the Xbox One and PS4. Motion controls are not unique anymore. Soft portability doesn’t make it unique. Nintendo’s dream of people taking the Switch to a house party is silly at best. No one does that (often). Nintendo can’t afford another device, like the WiiU, that really only serves to be a platform for Nintendo games. The WiiU was, for all intents and purposes, a device that only served up Nintendo games and it sold very poorly as a result. Nintendo strongly believes that a jack-of-all-trades, master-of-none system was the right choice for the current market. I’m not sure it was.
The Target Market Problem
There is one more thing that strikes me about the Nintendo Switch: I can’t figure out who their target market is. If you read through the investor Q&A, Nintendo believes the Switch is another “video games for everyone” system. They talk at length about how motion controls will be good for kids/parents while games like The Legend of Zelda appeal to the established gamer. If you were to just ask Nintendo what segment they are in, in regards to Porter’s Strategies, I am confident they would say the broad market (product appeals to all consumers). There’s nothing wrong with that strategy but (crazy statement of the year incoming) I suspect that the broad market isn’t nearly as interested in Nintendo products as they used to be. Again, take a look at the ESA demographics report from 2016. Look at page 11, to be specific. Take note of the top selling games of 2015 (remember, the 2016 report using 2015 data). Most of the games on the list are graphically intense, large budget titles from major publishers. Interestingly enough, Nintendo did make the list and it happens to their most “hardcore” competitive title (SSB). There are only a few titles on that list that don’t fall into the category of AAA gaming (“triple A gaming”). The truth of the matter is the broad market is AAA gaming. Why else do major publishers consistently spend millions upon millions of dollars to capture a small portion of the market? Spoiler alert: it’s not a small portion of the market. Gaming is a massive market now but the broadest segment is still male, ranging from school age to middle age.
Nintendo’s market problem is simple: The Switch hardware can’t support the AAA games from third party developers/publishers so Nintendo is effectively cut out of that market. Nintendo believes they are marketing to a broad market but the data doesn’t really support that position. Unless there is a massive influx of third party developers/publishers embracing the Switch, Nintendo will never hit the broad market that they believe will buy their product. While Nintendo might not realize it (maybe internally they do), their market is actually the narrow segment.
I strongly believe Nintendo doesn’t know who (aka what market) is going to buy the Switch in the long term. Based on their interviews, and vague generalizations of prioritizing “fun” over power, they see the Switch as a spiritual successor to the Wii. The way I see it, the Switch is really the spiritual successor to the 3DS. I see a big conflict between how Nintendo views the Switch and how the western consumer will view it.
There could be a silver lining in all of this. Nintendo doesn’t need a massive sales victory to prove that they can still be successful in today’s market. They need a minor victory. They need the Switch to sell consistently over a long time period. It doesn’t have to be the best selling console in the market. It can afford to be third place. A consistently selling system will attract both developers and consumers. This is especially true if the device is popular with a unique demographic that is passionate about it (and spends a lot of money in that ecosystem). Time will tell what type of consumer really buys into the Switch product line. I hope, for the sake of all of us who want to see Nintendo succeed, that the Switch sells well enough to prove Nintendo still has a place in the home console video game market.