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In defense of Nintendo and the myth of console shortages

Chi Kong Lui's picture

If you attended a business 101 class on how to run a successful company, do you think professors would teach and encourage the following?

  • Refuse money from customers
  • Make potential customers angry
  • Do not meet the demand of customers

Yet for all the people who believe that Nintendo is intentionally withholding Wii consoles from the market to inflate demand, that's exactly what you are saying Nintendo is doing.

The point of business is to make money and it more or less boils down to a numbers game. Sell as many products as you can for the highest price the market will accept. From the perspective of a business owner/investor/stockholder, having media "buzz" and hype is gravy, but the idea that Nintendo would sacrifice substantial amounts of profit and market share in exchange for media "buzz" is foolish. Buzz is something that companies have no control over and has no measurable monetary value. Do you honestly believe Sony, Microsoft and Nintendo, who are looking to establish their platforms, would continually trade sales/market share for something that is intangible and something they can't control? Inflating demand is a strategy that works in the short-term, but to continue to do so is risky and not a sound long-term business strategy (especially with competitors who are looking to out sell you). I think that's a huge gamble and good companies like Nintendo don't gamble.

Nintendo did make a big mistake by not anticipating demand better, but the reality is that Nintendo, despite its vast cash reserves from years of making profitable game systems (console manufacturers usually lose money on the console and make the money back on software), is not a Sony or Microsoft-size company with near limitless resources. To launch a game console around the world is an astronomical expense and managing the manufacturing is extremely tricky. A major mistake for a company like Nintendo could be prove to be disastrous (remember Dreamcast anyone?).

With so much at stake, Nintendo is better off playing it safe than sorry when it comes to its manufacturing, but I don't think the executive board and investors of Nintendo are happy with the shortages. These are people that don't care about videogames or media buzz. They only care about market share and financial bottom-line and that is who Iwata and the chiefs of Nintendo have to answer to. It's for that reason that I firmly believe Nintendo is doing everything in its power to put more Wiis on store shelves.

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i think your logic is

i think your logic is essentially right but it still boggles my mind that despite an on-fire launch and high demand that they haven't been able to ramp up production now that it seems clear they have the green light to do so without fear of catastrophic loss.

i've been scouring the city for a Wii and only yesterday did i finally find one... the GameStop where i found it said they had received *one* in the last month, and the one i got was it. i just have a hard time believing that Nintendo isn't able to do more to meet demand and despite your argument, i still think there's a bit of market manipulation going on here.

It's not the size of the dog in the fight...

I detest the "Nintendo is a smaller company" argument.

For one, it's never presented with a shred of evidence, but always assumed. And it's specious. MS dwarfs Nintendo and Sony several times over, so it hardly seems justified to clump Sony and MS together. Thirdly, for all practical purposes, all it says is that Nintendo could survive a fiscal nuclear failure like Microsoft did with Xbox. Fourthly, Nintendo is the console maker which profits the most from it's consoles.

Finally, it paints an almost laughable picture of Nintendo, the most time-tested of videogame companies, being any kind of underdog. Nintendo, rest-assured, is a big dog more than capable of pulling big dog stunts. It takes a big dog to release a handheld with two-screens or a console with a remote (and call it "Wii") and certainly refutes the conservative demeanor which Chi paints.

Considering that the Wii is

Considering that the Wii is being shipped at a rate faster than either of its competitors the XBox 360 or PS3, I think it's safe to assume that Nintendo is doing a lot already to meet demand. I don't know of any other console that has shipped 6 million units worldwide total in just 4 months of existence... not even the great and mighty PS2 did that!

In the next Fiscal year they plan to ship 14 million units worldwide... which, I believe, is a yearly shipment target only exceeded by the PlayStation 2's own past shipment numbers (16 million to 20 million in a year I believe).

Assuming that demand remains insatiable, then we could very well see PS2-like shipment numbers in fiscal year '08 from Nintendo.

~Carmine "Cai" M. Red
Kairon@aol.com

A retail Perspective

I work at Toys R Us in Sterling, 30 miles outside of Washington DC. Every two weeks on a Sunday we have Wii's. Not just 10-12 or 20-30 units but usually around 60-80. Just last week we had about 83. These "Wii Sundays" have been going on since early January. I don't know what the inventory allocations are at other retail corporations but usually every Toys R Us gets more then 40 Wii's every two weeks depending on the population and traffic at each store. We always sell out instantly and always have lines. People are now realizing there is a pattern. We had about 100 people wait out in line around 7:45 last week. We normally open our doors at 10:00 but for these special Wii Sundays we come in early and open the doors around 8-8:30. Its not just kids, moms and dads who are buying these systems. We often have grandparents buying it for themselves. Every day we have at least 10 calls and a couple of people asking when we are getting the Wii's. We don't know when the demand is going to fade because no other video game system or for that matter any product has had such a high demand at toys r us. We do occasionally get people who complain but most if not all who wait in line for those special Wii Sundays usually end up happy or making a friend while waiting in line. From a retail perspective Nintendo is pushing out more systems then any other video game company in recent history. I just don't see how they can meet the demand.

I got a video about the whole launch here: www.seanschleifer.com

underdog

Nicato-

I understand what you're saying, but they ARE an underdog. Their position in the last console war (xbox, ps2, gamecube) sets them up as the underdog this time around. That fact that they make the most money on their consoles only shows why they are a smaller company. A larger company (sony and MS) has the funds to manufacture its console at a loss for later gain on software. Nintendo does not. Their products are solid, and thier costumer service is top notch (particularly in comparison with MS and Sony). These attributes also point to a smaller, "mom and pop" type corporation (if there is such a thing).

There's nothing "small"

There's nothing "small" about Nintendo. Particularly in the video game market.

Sony has a market cap of $52B. That's the complete company, not just the video game portion. Nintendo, not a great deal smaller at $41B, and that's video games alone. And it's a far more profitable company, bringing in 3 times the return on equity that Sony does.

As far as video game resources go (and that what we're really talking about here), Nintendo has far more within its' grasp than the competition does, whether you're talking financial, expertise, or even just manufacturing. Even as far as raw cash goes, Nintendo is sitting on a lot more than Sony is. Of course when Sony has NO free cash on hand (and has actually managed to eat through about $3B in free cash in 2 years), that's not hard to beat.

Nintendo sells more game systems than Sony and Microsoft PUT TOGETHER. And though I've seen no exact numbers, with a higher attach rate per console, it utterly dwarves them in game sales.

As for the subject of the article itself -- it suffers from some faulty logic. A post-poned sale is NOT a lost sale. By not having consoles available Nintendo is NOT "giving up profit and marketshare". There's not a lot of people out there going "Damn, I can't get a Wii, lemme pick up that PS3 instead" and just never come back to pick up a Wii. THAT is a lost sale and that's not happening (in appreciable numbers anyhow). That might work to some extent between the 360 and the PS3, where if I couldn't get one after 6 months I might go pick up the other, but your average Wii buyer isn't looking to buy a PS3 right now.

There is however a very, very large cost to bring up short-term manufacturing capacity. And not only in direct financial cost but also in quality control. And there is also a very large cost to the free advertising that the Wii gets every time someone writes an article about the "shortage". Intangible or not, there is SIGNIFICANT value to be placed on that.

It would make little sense to ramp up production capacity that would increase my costs, decrease my quality control, significantly decrease my free media coverage, and that wouldn't make a measurable dent in my market penetration in the long-term. Because, in the long-term, people that want Wiis will get them and people who can't get them now don't have a like product to replace it with, therefore I'm in no hurry to put my product on the shelf at any significant additional costs.

I think your logic is a

I think your logic is a little black and white. While it does for the most part work like what you say, it does not in the case of all products (luxery goods is a prime example). A simple way to look at it is this, whats better, sell 1,000 units in 1 year and then no more, or 1500 units over 2 years and then no more. The simple answer is option 2 because not only do you sell more, over time you can produce them cheaper so your margins become greater. There is a downside of course and thats less consoles in the market place equals less games sales. On the plus side however is the fact that there is no direct competition to the Wii from other makers in the same pricerange presently. If there was then Nintendo would certinally do things a little different.

I have to say though that I feel the shortages are a litlte over exagerated, at least here in finland. I have been looking the situation with Wii shortages (even though I managed to find a Wii on 24/12/06 that was not pre ordered). Our local supermarket has had Wiis in stock and sitting on the shelves for the last two weeks waiting for people to buy.

I think Nintendo have them but are only giving limited ammounts to sellers to allow their stock to spread over a greater area, thus they are still selling them easily but are giving the illusion of limited stocks while the reality is more places are selling them than your average game outlet.

Raz

Just Business

Sigma wrote:

There is however a very, very large cost to bring up short-term manufacturing capacity. And not only in direct financial cost but also in quality control.

Bingo.

Conspiracy theories are spawned by a witch's brew of ignorance and impotence. Those people screaming that some cabalistic "market manipulation" on the part of Nintendo is responsible for the shortages, rather than a simple infrastructure shortfall, have plenty of both ignorance and impotence. Best business practices will always dictate the actions of a well-run company. Nintendo is simply reacting in the most logical and efficient manner available to them as a for-profit corporation.

The vast majority of people whining about "market manipulation" are probably far more interested in telling all their friends "I have a Wii" than they are in actually playing with the game. Social pressure is a vicious animal, and it makes people think, say and do stupid things.

Never fear; we'll all get a Wii eventually. We just may not be the first on our respective blocks. Get over it.

Don't be so naive...

you have clearly never been to the Nintendo World Store then, where they blatantly tell you "NO" they don't have any in stock, followed by no definitive answer as to when they will have more in (if ever)... only to begin bringing units out by the butt load not even five minutes later.

clearly their stock employees must be so efficient, that they're somehow able to unload trucks, tally quantities, and tranport all of these fresh units to the sales floor straight from the oven in record breaking time... all the while most floor staffers stand around jabbering on in the clothing section.

and this "magically" grand allotment just so happens to take place at least twice a day, for some bizarre reason, i might add.

Size of Nintendo

On the size of Nintendo...

Sigma brings some excellent data to the table (so have others). It would also be interesting to know how many employees and office locations/factories each company has as well.

Perhaps we should replace the word "large" with "diverse." Nintendo doesn't make operating systems, flat-panel TVs, applicances, etc. Nintendo, for the most part, has all of its eggs in one basket. Based on that, I think the perception of Nintendo's size is in some ways warranted.

On supply and demand...

I considered some of what Raz said in regards to luxury items, but I think most of that gets nullified by the need for console makers to get the biggiest installed as quickly as possible. Don't underestimate how important this is. Microsoft rushed out the 360 due largely for this reason. Most companies say its a marathon, which is true, but its also a sprint in that first mile and heavily influences where publishers invest their development.

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