Knowingly Undersold

If you're everyone's second console, you're in first place overall. When it first bubbled up through the industry's discourse, this oft-quoted logic seemed almost too simple - even a little naive, perhaps. A few years later, it looks for all the world like one of the most canny and prescient assessments of the present console battle.

From an ignominious third place finish with the GameCube, Nintendo has propelled itself back to the forefront of the home console market. The Wii is an immensely popular second console, found nestled next to a large percentage of Xbox 360s and PlayStation 3s. Moreover, it's also conquered new markets as a first console - replacing ageing PlayStation 2s in a large number of homes, and breaking into virgin territory in homes that have never owned a games machine.

While core gamers focus on what has essentially become a battle for second place between Sony and Microsoft, Nintendo goes from strength to strength. In August, the last month for which we have NPD figures, Nintendo sold just over half a million Wii consoles in the United States. The PS3 and Xbox 360 combined couldn't break the 400,000 mark.

Only by adding PS2 figures to that tally do you manage to beat the Wii's sales. The bottom line is that, excluding extremely cheap last-generation hardware (although admittedly not factoring-in the recent Xbox 360 price cuts), the Wii constitutes well over 50 per cent of the US home console market. In other parts of the world, that figure is even higher.

Nay-sayers - and those who have hitched their fortunes to the other current-gen machines - are proved wrong time and time again by Nintendo's success. The temptation to describe the Wii's success in the casual space as a fad has been dulled by month after month of immense sales. Concerns over third party support are gradually being eroded as publishers recognise that the huge installed base and lower costs of development assuage many of their fears over an unpredictable and potentially hostile market.

The question, however, is where Nintendo can go next with this success. The strategies that have made the Wii successful are tough to replicate, but not impossible - and Sony and Microsoft are gradually starting to make their own moves into this market. The keys to Nintendo's new kingdom are low-cost, low-profile, family-friendly, social gaming - complemented with easy, intuitive control interfaces, powerful and instantly recognisable character franchises, and a sharp perception of the demands of disparate consumer markets.

The Xbox 360 is now certainly in the low-cost bracket. Microsoft now undercuts the Wii - a strategy which could win it an entirely new audience this Christmas, although the likelihood of effectively "poaching" from the Wii consumer base is limited. Microsoft is also working hard on the social gaming market, with karaoke game Lips and its new, avatar-driven Dashboard being major steps in that direction. Sony has a huge head-start here, thanks to the popularity of games like Singstar and Buzz, and the hype around the forthcoming LittleBigPlanet, but its price point simply doesn't fit with the market those products should be reaching.

So, as strange as it feels to be describing Microsoft and Sony as snapping at Nintendo's heels, that's exactly what's happening. Among core gamers, the choices are relatively clear - few of them will go without a 360 or PS3, so the Wii exists in that "second console" space. New announcements this week, such as Sin & Punishment 2, Dynasty Warriors, Tales of... and various other "hardcore" titles for the Wii, will help to keep core gamers happy and cement that second console position. Here, the battle was over before it even started; Nintendo aimed at being the discreet white box that sits next to your large 360 or PS3, and succeeded.

The real battle is for the rest of Nintendo's market, and here the Kyoto-based firm still has the upper hand - for now. Casual consumers are unlikely to be in the market for a new console again in the years after buying a Wii, so its existing installed base is fairly solid. However, the continuing strong sales of Wii indicate that there's still a market here to compete for - and both Sony and Microsoft are keen to make it their own.

One obvious solution for Nintendo would be a price cut for the Wii console. It can certainly afford to do so. The firm's financials hint that the Wii has been a profit-making piece of hardware since day one, never sold as a loss leader - unlike its rivals' machines. With the immense volumes manufactured since then, and the rapid decline in the price of the system's components, production costs will have dropped significantly. Cash-rich Nintendo could easily drop the Wii's price point without taking a significant knock.

It won't. One reason alone is enough to justify leaving the price exactly where it is - namely that with Christmas approaching, there's no reason to believe that supply and demand of the Wii will be any more balanced this year than it was last year. While the console is in stock at most retailers today, this situation is unlikely to persist into November. Shortages may be less acute than last year, but Nintendo will almost certainly fail to meet demand for the Wii once again this Christmas. With more people willing to buy the system at its present price point than there are consoles for them to buy, it would be insane for Nintendo to drop its prices before supply once again outstrips demand in the New Year.

Another factor, however, militates against any significant price-chopping by Nintendo - and that's the firm's recent discovery of the power of model updates. Changing models during the lifespan of a piece of consumer electronics is nothing new, of course - think back to the PSone, or the slimline PS2 design. However, where Nintendo is more likely to look for inspiration is outside the games industry (mostly).

Apple, whose "disruptive" iPod music players had a remarkably similar effect on the digital music player industry as the Wii has had on the games industry, has become the master of model updates. Every autumn, the firm updates its range of iPod models - introducing new capacities, new colours, new features and, on some of its more mass-market models, entirely new case designs. Crucially, these feature updates allow Apple to gloss over the fact that its price points tend to stay broadly the same from year to year, evading the sharp downward trend of most consumer electronics sectors.

Nintendo's model isn't quite as design-focused as Apple's - indeed, much of its hardware is perhaps most charitably described as comfortably twee - but the business model is broadly the same. This week, the company announced a new Nintendo DS. With larger screens, a small camera, an SD card slot to take advantage of a new download service, and some new audio controls, the DSi is an incremental step over the DS Lite. It's also got just enough of the shine of a new product to allow Nintendo to maintain the DS range's price point.

Expect the same thing to happen with the Wii. Nintendo doesn't strike me as a company that's willing to play the console business price-drop game any more. Conventional industry wisdom would see a GBP 50 or more price drop for the Wii by mid-2009, to secure the console's position relative to the Xbox 360. I'm not sure I see that happening. While a small "credit crunch" price cut is likely - perhaps to GBP 150 - Nintendo's strategy is much more likely to involve a new Wii, with slightly different industrial design, some new colours, and a handful of new features, such as expanded internal storage. The price point, meanwhile, will remain broadly the same.

Gamers, of course, will be astonished at the gall of a company selling significantly outdated hardware at a higher price point than something like the Xbox 360 - and will complain of Nintendo trying to "fool" them with its new update. It doesn't matter - they'll still own a Wii console of some description, and will buy games aimed at them as they appear.

For Nintendo's purposes, the consumer electronics approach makes perfect sense - a revamped Wii will make a stir at retail, justify a major marketing push, intrigue new buyers and manage to create the same hype as a price cut, without actually cutting the price. After being part of the market for decades, the formidable price cut may be about to find itself defenestrated from one platform holder's toolkit.