Team 1 Company Analysis 1

Jackson Berry, Will Berman, Amanda Curtis, Jenny Zhang
Professor Belz
Case Studies in Innovation
March 3, 2016 NintenDON’T Nintendo captured many hearts and households in the late 1980s, and its legacy lives on through the games that made it the best­selling console of its time. Revolutionizing the world of video games, Nintendo survived the burst of the video game bubble through its storytelling across multiple game console platforms. Their products were conceived at the intersections of inexpensive hardware and unique, beloved storytelling in their games; this combination made their console a household staple. In an era of heartthrobs and fads, Nintendo rose above and surpassed a simple level of trendiness. The company defined gaming innovation: “to play
Nintendo” became synonymous with video gaming.
1983 saw the first recession in the video game industry in the form of the “Atari Shock,” after the market became too populated with so many different games and consoles. This caused an oversaturation of the console industry, which was already competing heavily with home computer games. Thus, the “Atari Shock” was a flooding of a market in which no player had a majority share, and the excess of third­party games resulted in decreased shelf space and decreased sales. People started believing video games were a fad, and amidst the chaos, the
Nintendo Entertainment System (NES) was born. Nintendo made purposeful branding decisions that defined their role in the industry for decades. They pivoted from a console company to an entertainment system company, focusing their vision on the experience of games as opposed to the medium. In order to do this Nintendo adopted a similar business strategy to Gillette. They began selling the consoles practically at cost ($100) in order to get the systems to as many users as possible. Nintendo then made their real money selling the game cartridges at a high margin
($25­$45). To aid this vision, they limited the number of third­party games that could be released on their platform, and Nintendo games were promoted with an “Official Nintendo Seal of
Quality”. This provided another revenue stream through licensing deals to software companies that wished to create products for the Nintendo platform. Nintendo also limited each company to producing only six new games a year. This not only increased Nintendo’s defensibility and counteracted the earlier market flooding but it gave the NES games a level of prestige. These smart business strategies allowed NES to regain consumer confidence and accelerate a tipping point; in the next few years, sales skyrocketed. In 1988 alone, Nintendo sold seven million consoles–more than any other consoles had sold in their first five years. By 1989 Nintendo controlled 75­80% of a $3.4 billion dollar video game market.
Nintendo kept its ears to the ground after their success with the NES, always looking for an opportunity to bring new experiences to new customers. Nintendo was the first to install multiplayer ports onto their consoles, the first to incorporate player avatars, the first to use motion controllers, and the first to create portable game devices. They were even the first to attempt a virtual reality (VR) console back in the 1990s, but it failed magnificently. Each of these innovations contributed largely to Nintendo’s success and the future of gaming. In more recent years, Nintendo has decreased in its output of innovation as it struggles to compete with

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other video game manufacturers. The company survives on its video game legacy and its nostalgia­evoking games of the ‘80s and ‘90s.
Exhibit 6 depicts a drastic spike in Nintendo’s value in 2006. This rapid growth can be credited almost entirely to one innovation: the Wii. Similar to Nintendo’s innovative business model of the ‘80s, the Wii managed to increase profitability by redefining the industry standard.
Nintendo started to realize that competing with other video game companies was going to become increasingly difficult. Nintendo created the Wii to circumvent this competition entirely.
Just like the Cirque de Soleil strategy of avoiding competition with traditional circuses and theater, Nintendo created a blue ocean in gaming by reducing costs and features (simpler graphics, etc.) while simultaneously adding value by making gaming a physical activity. Unlike their previous products predominantly targeted towards teenage boys, the Wii reached an entirely new, untapped market segment of gamers: families. Unfortunately, the added value of the Wii did not provide a sustainable business model and in 2007 Nintendo’s stock began to plummet to its previous value, calling for another round of innovation to drive profitability which is still yet to be seen. Nintendo has not given up, though. They recently invested in Niantic Labs, an augmented reality company, and have been working with them to develop a mobile AR version of their hit series Pokemon. They have also continued to build out their developer’s platform, hoping to incentivize the third­party developers they once shunned to sell games within their internal marketplace.
Because Nintendo both develops video games and creates video game consoles, its competitors include companies that also perform both tasks. Sony and Microsoft are competitors that create both games, consoles, and other electronics, but Nintendo also competes with companies that solely develop video games, such as Activision Blizzard and Capcom.
Sony’s income before taxes for the fiscal year ending March 31st, 2015 is
39,729,000,000 yen or approximately 361,995,444 USD (converted using average worth of the yen in 2015), compared to Nintendo’s income before taxes of 72,091,000,000 yen or
600,000,000 USD (Exhibits 3 and 4). Interestingly, Nintendo’s income before taxes is almost double that of Sony’s. Sony offers a wide range of electronics, from the ps4 to televisions, which should account for a larger income before taxes. However, this may be the very reason Nintendo is more successful: as a company rooted in its consoles, games, and “seal of quality,” it has become a brand trusted by consumers to create video games and only video games. While other companies like Sony offer breadth, Nintendo is the staple company for epic storytelling in gaming experiences. This reflects its initial innovation in its vision: Nintendo is a gaming experience company that has consolidated all of its resources into that one goal, and it is a goal its users believe in.
Microsoft’s income before taxes for the fiscal year ending June 1st, 2015 is
18,507,000,000 USD. On the other hand, Microsoft is more well known for Windows instead of
Xbox. This corporation focuses mostly on the computer industry, and its success there is reflected in its income before taxes. This different focus makes it difficult to directly compare
Microsoft and Nintendo. Nintendo is and always will be a video game company first while
Microsoft treats video games as a side project. Both Microsoft and Sony’s video game divisions have different names, Xbox and Playstation, while Nintendo uses the company’s name with all of its products. This core distinction makes it impossible to directly compare all three companies.
Another form of competition for Nintendo are companies that solely develop video games, and these include Activision Blizzard and Konami as leaders of the industry. Within this

Team 1 Company Analysis 3

industry of multimedia graphics software, Nintendo fares modestly: it no longer reigns in the industry it once rejuvenated. According to Exhibit 7, the industry has an average gross margin percentage of 7.1%. While Nintendo takes in 6.7% of its sales as gross margin profit, competitor companies such as Activision Blizzard and Konami have gross margin percentages of 28.4% and
11.7% respectively (Exhibit 5). Its low percentage can be attributed to its higher cost of production as well as its failure to create an innovative console recently. Another example of this is embodied in its current ratio: as a measure of financial viability in the short­term, a healthy company would ideally have a score of slightly above 2. Both Activision Blizzard and Konami have current ratios of 2.66 and 2.19 respectively, demonstrating ability to meet obligations while also taking financial risks to innovate on their products. However, Nintendo holds a current ratio of 6.75, as shown in the Exhibit 8 balance sheet, revealing a high quantity of assets and not enough liabilities. The Nintendo empire may have assets that are not all potentially necessary, and its stagnancy as a company today can be attributed to its status as a conglomerate lacking recent innovation.
Thus, Nintendo is in a slump. Their new product, the Wii U, is failing; their visionary leader passed away; their stocks are consistently falling; and they have dropped to a total valuation of around one­fifth their peak worth. Now, in 2016, the company is facing a pivotal juncture in their existence: in order to stay afloat they must find a way to stay competitive.
Fortunately–and unfortunately–for Nintendo, this is not their first time facing such a crisis.
Nintendo faced comparable downturns before the releases of the GameBoy, the DS, and the Wii, and came out better than ever after each product’s release. Nintendo seems to be attempting a similar brand revival this year with the announcement of a new console called the “Nintendo
NX”. In order to replicate the previous successes of the Gameboy and the Wii, Nintendo will need to open up another new market of gamers with the NX, while also keeping their legacy customers happy. How Nintendo will do this is unknown, as details on the new console have yet to be released. It is realistic, however, to assume that they will recreate their legendary classics in order to keep current fans – that is how they have done it time and time again. Speculators point to the possibility of the new Nintendo console being a contender in the burgeoning virtual reality arena as Nintendo’s direct competitors in the console market (Xbox and PlayStation) have both already thrown their hats into that ring. In order to stay relevant, Nintendo will have to innovate their platform; however, it may not be best for them to compete directly in VR with the now larger Xbox and PlayStation platforms. VR is not the only gaming­related technology on the rise, and Nintendo has taken note of that. Nintendo’s recent investment in Augmented Reality company Niantic Labs may show that they plan to go in a different direction than their competitors. Nintendo has also seen a fall in major game development companies targeting their platform. In 2016 they must find a way to draw not only more customers, but also more developers to their platform. Nintendo’s portfolio is now of the past: the company must now continue its trek forward. Whatever path Nintendo chooses to take in the next year will be a crucial and possibly even terminal one for the storied company.

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Exhibit 1: Nintendo performance per share 2011­2015 (Source: Financial Times)

Exhibit 2: Nintendo revenue and net income (Source: Financial Times)

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Exhibit 3: Nintendo Income Statement (Source: Nintendo)

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Exhibit 4: Sony Income Statement (Source: Sony)

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Exhibit 5: Activision Blizzard Income Statement (Source: Activision Blizzard)

Exhibit 6: Nintendo 10 Year Performance (Source: Yahoo)

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Exhibit 7: Multimedia & Graphics Software Industry Statistics (Source: Yahoo)

Exhibit 8: Nintendo Key Financial Statistics (Source: Yahoo)