Threat Level

Nintendo's Satoru Iwata isn't just one of the most successful executives in the games industry - or, indeed, in any industry, having steered his company from the brink of irrelevance to global market leadership in the space of a few short years. He's also a rather wonderful speaker whose event keynotes, even when they haven't been laden with the announcements craved by the press and gamers alike, have generally been full of warmth for the games business and its creative process, and wisdom regarding Nintendo's rise to power and future strategy.

As a rule, I find it hard to disagree with Iwata when he speaks - bluntly, it would take a fair bit of persuasion for me to want to drop my chips on a different square to a man on such an extraordinary winning streak. However, while his widely reported talk at GDC in San Francisco this week unquestionably called the present state of play in the games business accurately, it's tough to agree with his conclusions - or the stark warning they seemed to present.

A core theme of the talk was a theme which has been widely explored in many different places, including these columns, over the past couple of years - namely the downward price pressure faced by videogames as cheaper competition bubbles up from the bottom of the market, in the form of smartphone and online titles utilising everything from cheap price points to freemium or ad-supported models.

"The people who make business decisions on the mobile side are smart people, and the price points they've reached aren't arbitrary."

Iwata's concern is that where the existing retail games market is, in his view, somewhat over-saturated with titles - whereas the app store markets are "drowning", with tens of thousands of options available to consumers. The low prices of those titles reflect lower development budgets, he conceded, but he fretted that they still suggest very small revenue flows, painting a nightmare scenario of game developers being unable even to pay themselves wages with the money they make.

It's not a huge logical stretch that he's making, of course, but Iwata generalises too much. For a start, you couldn't tell it from the rhetoric, but he's talking about a threat to the business model Nintendo has adhered to in recent years, not a general threat to game development or the wider industry. For another thing, he laid the blame at absolutely the wrong door in his speech - accusing the proprietors of app stores of cultivating this kind of market in order to sell smartphones with no interest in game quality or revenue streams.

Of course, that's true in an absolute sense - Apple (and Google, and Nokia, and RIM, and Microsoft's mobile side, and everyone else running an application store) doesn't really care about games in the way that a massive software publisher like Nintendo does. However, neither has the company exactly had to push developers to lower price points. It created an open pricing model - developers themselves set the pricing, and they've almost universally settled low.

Why? Is it because, as Iwata's talk seems to suggest, they're all intent on running lemming-like off the edge of a cliff (not that lemmings actually do that, but you know what I mean), hurtling headlong into bankruptcy for the want of a decent cashflow spreadsheet? Is the smartphone gaming market really a financial disaster in the making, one whose repercussions threaten to engulf the rest of the industry? Iwata didn't put it in quite those terms, but that's the logical endpoint of the argument he was making.

However, that simply isn't the case. The people who make business decisions on the mobile side are smart people, and the price points they've reached aren't arbitrary - they're based on exactly the same projections regarding costs, unit sales and supplementary revenue streams that every other successful business in the world employs. It just happens that on a platform that's wonderful at generating large-scale sales of low-priced content and absolutely excels at post-purchase revenue through DLC, in-app purchasing or advertising, as well as having a low cost of development, the required price tag for profitability is low.