Nintendo

Playing a different game

Oct 26th 2006 From The Economist print edition

Does Nintendo's radical new strategy represent the future of gaming?

IF TALK of synergistic processing elements, parallel floating-point shader pipelines, vector units and 1080p high-definition video sets your pulse racing, you are probably looking forward to the launch of the PlayStation 3 (PS3), Sony's new video-game console, which goes on sale in Japan and America next month. Most people find such technical trivia baffling, however. As a result, the videogames industry's relentless pursuit of ever more computing power and graphical detail might ultimately prove counterproductive. That is the view of Satoru Iwata (pictured), the president of Nintendo, the Japanese company that dominated video-gaming in the 1980s before being deposed by Sony. Its new console, called the Wii, is also launched next month. But it is a very different beast from the PS3, inspired by a radically different strategy. Video gaming is a cyclical industry in which new consoles are launched every five or six years. In the last cycle, which began in 2000, Sony's PlayStation 2 emerged as the clear victor, far outselling Microsoft's Xbox and Nintendo's GameCube. The next cycle will pitch Microsoft's Xbox 360, launched last year, against the PS3 and the Wii. With each cycle the power of the hardware increases, making possible better graphics and more complex games. But Mr Iwata believes the industry has reached a crossroads: by designing products for existing gamers and neglecting non-gamers, it undermines the prospects for future growth. There have even been signs in Japan that the market was starting to shrink. “We need something radical to change the situation,” says Mr Iwata. The main problem with modern games, he says, is that they require players to invest enormous amounts of time. As lifestyles have become busier, leaving less time for gaming, the industry has moved towards epic games which take dozens of hours to complete. This is leading some occasional gamers to stop playing and deterring non-gamers from giving it a try, says Mr Iwata. There are other factors too: novices are put off by the need to master complex controllers, festooned

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with buttons, triggers and joysticks. And not everyone wants to escape into a fantasy gaming world. “That attracts avid gamers,” he says, but can make it “difficult for people to become interested in games”. Nintendo set out to reach beyond existing gamers and expand the market. This would involve simpler games that could be played for a few minutes at a time and would appeal to non-gamers or casual gamers (who play simple games on the web but would not dream of buying a console). They would be based on new, easy-to-use controls. And they would rely on real-life rather than escapist scenarios. This was not an entirely new approach: dancing games that use cameras or dance mats as controllers have proved popular in recent years. But Nintendo began to design entire games consoles around such ideas. The testing-ground for Nintendo's new strategy was the DS, a handheld console launched in 2004. It has two screens, one of which is touch-sensitive and can be tapped or written on with fingernails or a stylus. This made possible games that did not rely on complicated combinations of buttons. “We didn't know, if the DS didn't make it, what kind of products would be needed,” says Mr Iwata. But in the event the DS was a smash hit and has sold more than 21m units worldwide. This month Nintendo raised its profit forecast for the current year because of unexpectedly strong sales of DS consoles and software. The most popular DS game is “Nintendogs”, in which the player takes dogs for walks, teaches them tricks and enters them in competitions. The dogs can be taught to respond to voice commands issued via the DS's built-in microphone and petted via the touch screen. “Nintendogs” has proved particularly popular with female players. Also successful are the “Brain Training” games, which consist of puzzles designed to keep the player's brain young and nimble. Unlike most games, which sell well for a few weeks before sales tail off, “Brain Training” sold consistently for months, and Nintendo's research found that 60% of sales in Japan were to new users who bought DS consoles specifically to play it. Just as “Nintendogs” appealed to female gamers, “Brain Training” has helped to bring gaming to an older audience. The Wii is an attempt to apply the lessons of the DS to a fixed console that plugs into the television. Its key innovation is its wand-like controller, which resembles a simplified TV remote-control rather than the usual button-strewn joypad. Motion detectors translate the movement of the wand into on-screen action,

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making possible tennis, fishing and sword-fighting games. (Some games use an add-on controller held in the other hand.) The Wii can also display news and weather information from the internet, organised alongside the games as a series of “channels”. Old games from Nintendo's back catalogue can be downloaded to draw in lapsed gamers. This is, admittedly, a harder sell than the DS, says Mr Iwata, since a portable console lends itself to word-of-mouth promotion. His hope is that existing gamers will act as ambassadors, encouraging friends and family to give the Wii a try. And by providing non-gaming functions such as news and weather too, the aim is to overcome non-gamers' aversion to consoles, so that eventually they might flick to the “games” channel and give something a try. The contrast with Sony is striking. It is pushing the PS3 as the most advanced console, with a powerful new processor chip and a high-definition “Blu-ray” optical drive. But its complexity has so far proved a liability rather than an asset, pushing up its price (to $500, compared with $249 for the Wii) and delaying its launch by several months. The PS3 will not appear in Europe until next March, and the console will be in very short supply for months. This week Sony said its profits in the latest quarter had been wiped out by PS3 problems and a massive recall of faulty batteries supplied to other computer-makers. This has dented Sony's reputation just as it is trying to emphasise its technical prowess. The industry had been preparing for a showdown between Sony, the current champion, and Microsoft, its deep-pocketed challenger. Nintendo was expected to be an also-ran, peddling its familiar game brands, such as Mario and Zelda, to children and die-hard fans. But its unusual new strategy means that Nintendo is now the company to watch. As it sets out to broaden the gaming population, Nintendo is not fighting against Sony and Microsoft, says Mr Iwata. Its real enemy is the indifference that many people still feel towards gaming. Of course, says Mr Iwata, he would be happy if Nintendo became the leading console-maker again as a result of its new approach. But a victory over Sony and Microsoft in a shrinking market, he says, would not be a victory at all.

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TCL-Thomson Electronics A

grim picture

Nov 2nd 2006 | HONG KONG AND SHENZHEN From The Economist print edition

Crashing prices make TV-set manufacture a horrible business to be in FOR many great old names in the electronics business, was a quiet assassin.

TCL

Founded in China in 1982 to make magnetic tape in response to the mainland's hunger for the music trickling in from Hong Kong and Taiwan, it became a huge force in the television-manufacturing industry, where its modestly priced, mid-tier product crushed established but less efficient Western competitors. Two years ago, in an iconic deal between a Chinese manufacturer and an overseas company with a well-known brand,
TCL

became the dominant partner in

a joint venture with Thomson Electronics of France. Thomson had bought its own place in the television market back in 1988 from General Electric, which had already decided that profits were more likely to come in future from producing programming that appeared on increasingly cheap and available televisions than from making the sets themselves. With little fanfare,
TTE

(short for

TCL-Thomson

Electronics) became the largest foresaw. In

television manufacturer in the world. But additional size, and household brand names, did not spare it from the harsh competitive pressure that
GE

its first year, the joint venture lost HK$599m ($77m), followed by another HK$1.5 billion in the first three quarters of this year. In sum, almost half of shareholders' equity quickly disappeared, and the value of exchange collapsed. While
TTE TTE's

shares on the Hong Kong stock

suffered all over the world, there were sharp differences between
TCL

regions. Profits slid just a bit in China, where

had a particularly strong

franchise, and in other poor countries, where bizarre and costly import restraints favour clever manufacturers who are willing to ship televisions disassembled to precisely the level required under the law. These are then pieced together and branded by local companies. In America, where both home market, disaster struck. year. On October 31st
TTE TCL

and Thomson operated,

the joint venture even came close to breaking even. But in Europe, Thomson's
TTE

lost €159m ($203m) on sales of €328m this

announced that most of the European operations in the joint

venture with Thomson would be shrunk, sold, closed, or returned, including a factory in Poland and an expensive distribution network. Even Thomson's brand name will be largely gone in two years time. producing
TV TTE

will instead concentrate on

sets to be sold by other companies, with none of the cost of support
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and distribution that a brand requires. Even better, supervision for this kind of business can be based in China. A big problem was that both buy
TCL

and Thomson focused on clunky old models made

using cathode-ray tubes. But the market has changed. Customers are rushing to
TV

sets with flat screens. The 2004 merger now looks as if it may have

diverted energy from the single critical issue of the moment: a technological inflection point. But even that does not completely explain roaring demand.
TTE's

troubles, since lots of flat-screen

panel manufacturers are not doing particularly well either, even in the face of
TTE

reckons that in Europe, only Sharp is profitable. Flat-screen

manufacturing facilities cost billions of dollars; in return for this investment, producers must watch the price of their product drop by as much as 10% a month, as competition is so rampant. With the rapid fall in the price of flat-screen panels, conventional
TTE

believes the key element

for success is not so much the technology—the panel—as the inventory. A
TV

set takes 90 days to make and send to America, by which time
TTE

the price will have fallen. the 20 days it takes the

wants to shorten that to less than 30 days, including

TVs

to cross the Pacific. Boats used to be seen as time-

wasting transport, but are now regarded as floating warehouses holding products while sales are arranged. “TTE has only one year to be really good,” says Aaron Tong, one of
TCL's

senior managers. “If we stumble, we will be gone forever.”

Blogging

Going pro

Nov 16th 2006 | SAN FRANCISCO From The Economist print edition

More people are quitting their day jobs to blog for a living

ON HER blog, called Dooce, Heather Armstrong chronicles her life as a disenchanted Mormon in Salt Lake City, her former career as a high-flying web designer in Los Angeles, her pregnancy and postpartum depression, and so on. A year ago, her blog started generating enough advertising revenue to become the main source of income for her family. She is not alone. There are now just enough people like Ms Armstrong to signify a new trend: blogging as a small business. Until recently, there were two main kinds of blogs. Most of the 57m blogs in existence are personal diaries that happen to be online. These blogs have tiny audiences and make no effort to sell advertising. Services such as Google's

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AdSense, which places text advertisements on blogs and generates a few cents per mouse click, might bring in some spare change. But according to Pew, an American research organisation, only 7% of bloggers say their main motivation is to make money. The second main kind of blogs are, in effect, niche magazines that choose to publish in a blog format. These blogs are explicitly run as businesses, with paid staff doing the writing and sales departments selling advertising. The best example is Gawker Media, a stable of blogs that includes Gawker, a New York gossip site, and Gizmodo, a blog devoted to gadgets. Collectively its 14 blogs get 60m page views a month. Such blogs are “the most profitable media business today,” says Jason Calacanis, who runs Weblogs Inc, another stable of popular blogs that he sold to
AOL,

the web arm of Time Warner, a year ago. His sites,

including Engadget, another gadget blog, are “an eight-figure-a-year business” with negligible distribution costs compared with the huge printing and shipping bills of traditional magazines. Now, however, a third category is emerging: the mom-and-pop blog. “In the old days, we used to be called newsletter publishers,” says Om Malik, a technology writer who quit his job at Business 2.0 magazine in June to work full-time on his blog, GigaOm. He has hired two other writers, and his blog now attracts about 50,000 readers a day, generating “tens of thousands” in monthly revenues. Costs, including salaries, are around $20,000 a month. One big reason why his blog works as a small business, says Mr Malik, is that an ecosystem of support is appearing. Like Ms Armstrong, he farms out advertising sales and administration to a firm called
FM,

launched last year by John Battelle,

who once ran magazines such as Wired and the Industry Standard. In his old business of magazines, says Mr Battelle, the cost of acquiring an audience was “stupendous”—at Wired it was about $100 per subscriber. The cost of building a readership for a blog, by contrast, is nil. Once you have a lot of readers, however, the bandwidth costs become significant, and most medium-sized blogs cannot afford to hire the sales people needed to generate sufficient revenue. So 40% of the resulting revenues. For people like Ms Armstrong, who has about 1m visitors to her site a month, this makes blogging worthwhile. But it is not for everybody, she notes. She works
FM's

15

sales people negotiate with advertisers on behalf of blogs they represent, keeping

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about seven hours a day on her site, and continues to work while on holiday. Mr Malik concurs. “It's not easy,” he says. Building his audience has “taken me five years, and a lot of sleepless nights.”

Sony

Playing a long game

Nov 16th 2006 | LONDON, NEW YORK AND TOKYO From The Economist print edition

Can the PlayStation 3 revive the ailing electronics giant?
Get article background

THINGS have not been going well for Sony lately. Last month senior executives at the Japanese electronics giant issued an unprecedented apology after discovering that 9.6m laptop batteries, supplied to other computer-makers, were faulty and would have to be recalled at a cost of $436m. Sony's Blu-ray high-definition technology, launched this summer, has suffered from delays and component shortages, and is embroiled in a standards war with the rival
HD-DVD

format.

American regulators began investigating the company last month as part of an inquiry into allegations of price-fixing in the memory-chip market. And having long been the world's most valuable electronics firm by stockmarket value, Sony's market capitalisation has fallen to less than half that of Samsung, its South Korean rival. “They really need some good news,” says Paul Jackson of Forrester, a consultancy. So a lot is riding on the PlayStation 3 (PS3), the latest incarnation of Sony's industry-leading games console, which was launched with much fanfare in Japan on November 11th. In Akihabara, Tokyo's neon-lit electronics district, stores drafted in extra workers to cope with easily the biggest product launch of the year. At the Yurakucho flagship store of Bic Camera, one of Japan's largest electronics retailers, hundreds of gamers queued through a cold, damp night. Ken Kutaragi, who runs Sony's gaming division, was there to welcome them in the morning. At Yodobashi Camera in the southern city of Fukuoka, half of the 400 people queuing were Chinese immigrants with orders to snap up the store's assignment for resale online in China. Across Japan, the
PS3

had sold out by lunchtime.

Similar scenes were expected at its American launch on November 17th. On Tuesday there were already over 100 people camping outside Sony's New York store.

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Not so fast
Sony needs the
PS3

to succeed for three reasons: to maintain its lucrative

dominance of the games industry; to seed the market for Blu-ray and establish Sony in the emerging market for internet video downloads; and to demonstrate that the turnaround being led by Howard Stringer, who took over as chief executive in 2005, is working and that Sony's gaming, electronics and content divisions really can work together. Despite the enthusiasm of the buyers, success in each of these areas is far from assured. In gaming, Sony faces far stronger competition than it did when it launched the PlayStation 2 in 2000. The
PS2 PS3's

early

went on to sell over 100m units, giving Sony 70%

of the market. But gaming is a cyclical business, and success in one round does not guarantee success in the next. Microsoft has already sold over 6m of its Xbox 360 consoles, launched a year ago, and expects to have sold 10m by the end of 2006. Nintendo, Sony's other rival, will launch its new console, the Wii, on November 19th, and expects to sell 4m units by the end of the year. Manufacturing problems delayed the
PS3's

launch from May and meant that only

93,000 consoles were available for the Japanese launch. Sony hopes to sell 2m by the end of the year, but even if it does so, it will start the race in third place. Availability is one weakness; pricing is another. The
PS3

is available in two

configurations, costing $500 and $600 in America, and ¥50,000 ($425) and ¥60,000 ($510) in Japan. That is far more than rival consoles (the Xbox 360 starts at $300 and the Wii costs $250) and is due to the inclusion of a Blu-ray optical drive in every
PS3.

Sony will lose money on each

PS3

sold for the first couple of years until higher

volumes and design improvements reduce costs. But it will make money by taking a cut of every game sold. Worryingly, however, less than one game was sold per
PS3

in Japan this week, which suggests that some buyers regard the
PS3,

PS3

as a subsidised Blu-ray player—which it is. Dedicated Blu-ray players start at around $750. The in short, will not be the moneyspinner that the
PS2

was for

quite some time, and it seems unlikely to achieve the market share of its predecessors (see chart). The
PS3

is also meant to ensure that Blu-ray triumphs over
DVD

HD-DVD

as the highPS3s

definition successor to the

video format. The idea is that millions of

bought by gamers will seed the market for Blu-ray, providing it with critical mass

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and ensuring that Hollywood studios, which are reluctant to back two rival standards, plump for Blu-ray over
HD-DVD.

But instead of riding the

PS3

as a Trojan

horse, Blu-ray has instead hobbled it by increasing its price and delaying its introduction. The battle between Blu-ray and
HD-DVD

may even prove irrelevant,

as internet downloads become the medium of choice for high-definition video. Both Sony and Microsoft plan to sell high-definition video downloads via their consoles. Finally, the
PS3

is a litmus test for Sir Howard's turnaround effort, one of the aims

of which is to get Sony's various divisions to co-operate more fully. (A spat between its electronics and content units left the field open for Apple's iPod.) The company insists that despite recent problems such as the battery recall, the turnaround is going well behind the scenes. Sony has improved margins in its electronics business and reduced headcount by 10,000 ahead of schedule. It is also on track with factory closures, asset disposals and winnowing its product line-up to focus on “champions” such as Cyber-shot digital cameras, Bravia televisions and, of course, the Sony of the need to change. Yet it will be some time before it is possible to tell whether the
PS3 PS3.

Sir Howard even suggested this week that the

battery fiasco had helped by making it easier for him to convince doubters within

can rescue

Sony. Beneath the short-term troubles, the company is playing a long game. “This is not a battle that's just about this Christmas,” says Rob Wiesenthal, the finance chief of Sony's American division. Sony is betting that the
PS3's

advanced

technology will sustain the company for a decade by extending the PlayStation franchise beyond gaming. So a few teething problems in the early days are nothing to worry about; besides, the first appeared. But having achieved 70% market share last time around, Sony is certain to lose ground this time. The only question is how much.
PS2

was also criticised for being expensive,

over-engineered and unreliable when it

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