Nintendo's comeback strategy: Whale hunting

Though it's faced with a sea of problems, it's fairly easy to pick out Nintendo's greatest woe. Sales of the Wii U are tough, certainly; moreover, the company's perfectionist approach to software, though a strength in many regards, limits its release schedule and angers console buyers. Its marketing veers wildly from the sublime to the ridiculous, with the company somehow simultaneously capable of speaking fluently and credibly to its customers through Nintendo Direct, yet also capable of cocking up the branding of its console launches twice in a row, in precisely the same way, leaving mainstream consumers confused and often unaware that new hardware had actually launched. Hemmed in by smartphones and tablets on one side and by more powerful consoles on the other, regarded with deep caution by third-party publishers, Nintendo's position today is as tough as it's ever been.

None of those things, however, is Nintendo's biggest challenge. In fact, Nintendo's biggest challenge in 2014 is the Wii; to be more precise, the company's toughest task this year, and next, will be escaping from the shadow of its greatest success. While the 3DS seems to have captured at least a sprinkling of the magic that fuelled the DS' triumph in the handheld market, the Wii U has thus far entirely failed to bottle any of the lightning that made the Wii into the world's best-selling console last generation. Even if the console turns a corner and becomes a respectable market contender over the coming year, the comparison with its older sibling isn't going to go away without a lot of work. The Wii's sales figures hang over the Wii U's performance like a dark raincloud.

"barring a miracle of some description (I'll grant that it's more likely that a miracle will emerge from Nintendo's development labs than from any other place in the games business), we can declare the Wii U a failure right now"

This isn't a unique situation. Sony might wince in sympathy, at least a little bit; PS3's botched launch looked all the worse because it came on the heels of PS2, the most successful home console of all time. In other industries and other markets, too, it's comparisons that drive sentiment. A profitable set of quarterly results can still undermine your company's valuation if you made bigger profits in the same quarter last year. A big opening weekend for a movie will be taken as a negative if the last movie's opening weekend was bigger. Markets largely demand growth, not sustainability, and we're all swept along in the sentiment that generates.

On that grounds, and barring a miracle of some description (I'll grant that it's more likely that a miracle will emerge from Nintendo's development labs than from any other place in the games business), we can declare the Wii U a failure right now. It's not going to match the sales of the Wii, a console that achieved a near-perfect alignment of software, functionality, price point and marketing, capturing a huge swathe of consumers who had simply never even thought about buying a console before. The likelihood of the Wii U re-engaging those consumers is remote. It's not even clear how many of them remain part of the market for games, on consoles at least.

Conventional wisdom would have Nintendo spending the next five years desperately chasing around after that market segment like a panicked herder of hyperactive cats. The Wii market was a gloriously flashy feather in the company's cap, an explosive period of growth that hurled Nintendo right back to the top of the industry (not that they'd ever actually stopped being the world's most successful publisher of videogames, mind), onto the front pages of newspapers and magazines, and into the unlikely and utterly unjustifiable position of being Japan's most valuable publicly-listed company. If the Wii U can be dragged into some kind of success, it will be a limp, dull kind of success compared to the Wii's glorious ascent. "Compared", see? Wii U will never really be measured on its own merits; that's not how business works.

It is, however, how Nintendo works - or so it seems. I don't doubt that there are plenty of people within the company racking their brains for a way to re-engage the Wii's lost tens of millions of consumers, but the company's strategic approach, wisely, isn't placing its biggest bets on such Hail Mary plays. Rather, the company's E3 display, in keeping with a theme that's been developing for several months, was pretty clear; in its hopes for a recover, Nintendo is focusing on its fans. Faced with tough times, the firm intends to circle its wagons and focus on the faithful.

"Nintendo realises that even if it can't match the sales of the Wii, if every Wii U owner has a shelf full of software and another shelf full of Amiibo toys, it will have an extremely profitable business on its hands"

There are plenty of clear examples of this; the heavy focus on Smash Brothers is a good start, but perhaps the most important message to come out of E3 was the surprisingly heavy focus on Amiibo figurines. The figurines aren't the company's most innovative move ever, preceded as they are by the likes of Skylanders and Disney Infinity figures, but they have some pretty major competitive advantages. First and foremost, they're figurines of some of the most iconic characters in videogames, which doesn't hurt one iota. Secondly, they're compatible across a range of games and even, with the slightly clunky addition of a reader device to the 3DS, across devices. There's a lot of potential for interesting game systems inherent in such a technology, and Nintendo, with its heavy focus on first-party development, is probably the only platform holder in a position to exploit that.

Let's imagine though, as Nintendo no doubt hopes to, that Amiibo takes off. The figurines fly off shelves to Wii U and even some 3DS owners; the Wii U's market remains modest, albeit healthier than it is today, but Amiibo and the games supporting it create a pretty healthy retail ecosystem for themselves. That's an interesting possibility to imagine, because it actually represents an incredibly dramatic turnaround for Nintendo's business model.

In the previous generation, Nintendo engaged a wide audience of casual gamers. While the Wii's software sales were actually much more robust than many people give it credit for, there's no doubt that the engagement of many millions of Wii customers was shallow. The console was purchased for Wii Sports or Wii Fit, and apart from a couple of extra controllers and maybe a new game or two, that's largely the function it served. Lots of core gamers also bought Wii consoles, of course - if you didn't, you missed out on a handful of the best games of the generation, as is always the case with a Nintendo "second console". However, by and large the enormous installed base of the Wii came at the expense of shallow engagement.

Wii U's strategy, as it's now being laid out, is precisely the opposite. The console is going to have a limited installed base, at least by comparison with its forebear, so Nintendo is instead laying out products designed to encourage deep engagement by that installed base. Of course, growing the base remains a priority, and executing superbly on its release schedule will accomplish that to a greater or lesser extent. More than that, however, the firm has realised that if it is to make a success out of this generation in any way, it must do so by selling lots and lots of things to the audience that the Wii U actually has, rather than pining away for the audience the Wii once had.

Amiibo is a key plank in that strategy. Nintendo does extremely handsomely out of merchandising, but Amiibo takes this to the next level, combining its merchandising efforts with its software and hardware businesses in a truly integrated way. It will be hoping for a very high attach rate of Amiibo toys to consoles, and it has a pretty good chance of achieving exactly that, especially if the software functionality is actually worthwhile. In essence, Nintendo realises that even if it can't match the sales of the Wii, if every Wii U owner has a shelf full of software and another shelf full of Amiibo toys, it will have an extremely profitable business on its hands despite the enormous decline of its market size.

"Nintendo's approach is glorious in its simplicity and in the extent to which it leverages Nintendo's own strengths. Nintendo's a toy company; now it's going to drive revenues by selling toys"

What Nintendo is aiming for, arguably, is turning its players into whales. Console owners are all arguably whales to begin with anyway, since they spend hundreds of dollars on hardware and tens of dollars on every game they play. If Amiibo is successful, though, that number will climb even higher. All of the console platform holders are hoping for higher revenues per user in this generation; Sony, too, believes that PS4 can out-earn PS2 on the strength of bigger per-user numbers driven by a wider range of software and business models. Nintendo's approach, though, is glorious in its simplicity and in the extent to which it leverages Nintendo's own strengths. Nintendo's a toy company; now it's going to drive revenues by selling toys.

If you winced when I said "whales" in that last paragraph; don't. Whether you call them "whales" (granted, a horrible term given its roots in the deeply shady world of casino gaming) or Superfans or any other thing you like, players who spend a lot of money on the stuff they love are a core part of this industry. Nintendo knows its core fans and knows what they're willing to spend money on; Amiibo is laser-focused on that market. Microtransactions, DLC and in-game currency are one way of letting people spend lots of money on a game, but that's simply not a way that would work for Nintendo's core fans (no matter what the legions of "experts" suggesting that Nintendo should switch to iOS and Android development may think). Selling them toys, though? Nintendo fans will drop hundreds of dollars on a shelf full of toys and not only will they not regret the purchase, they'll consider it a point of pride.

I never really bought into the idea that Nintendo "deserted" its core fans during the Wii era; the reality was that the console still got a steady feed of excellent first- and second-party games. For those who felt like the firm's dalliances with the shallowly engaged casual market were a betrayal, though, recent announcements should put their minds at ease. Nintendo's all about deep engagement now; it's coming home to its core fans. Just make sure your wallet is ready.