Friday, December 08, 2006

Update on Sony, EA and Nintendo - The Internet Got It Right

Update on Sony, EA and Nintendo - The Internet Got It Right
Roger and Video Game Shopping
I thought you'd be interested to know that I did a little holiday shopping last night. I went into the Nintendo Store near Rockefeller Center to check out the wares. Yes, I am finally capitulating to the video game "thing," at least on some level, for my 9-year old son. I was on a mission to buy a shiny white DS Lite with some cool games he'd be psyched about. As I was standing near the cabinet looking at games for my son I saw it: the Wii. Four consoles were set up with people gaming away: one dude holding the controller behind his ear and bending his knees like he was at bat; two throwing some wicked curveballs at robo-batters; and another person knocking them down at the bowling alley. Wow! They were having a blast. I wanted to grab one of those controllers and step to the plate right then and there.
When I went to check out my friend Rob and I chatted up the cashier for some market intelligence. The conversation went like this:
Rob: Do you have any Wiis?
Cashier dude: No. They were all sold out first thing this morning.
Rob: How many did you have?
Cashier dude: 100.
Roger: When did you get those?
Cashier dude: This morning. We get 100 every morning. People start lining up at 1am to get them.
Roger: You're kidding me, right?
Cashier dude: No. And the Toys-r-Us in Times Square has the same situation. They get 100, people line up 3 hours before the store opens, and they're gone.
Roger: Thanks, man.
The Sony-Nintendo-EA Thesis Coming to Fruition - Wii Rock!
And so it goes. The Wii is a happening, plain and simple, and its fallout is being felt across the gaming landscape. I have written about Sony quite a bit in the past, and have also penned a post about EA, both of which ran on Wallstrip as well. The general take in my pieces is that Sony screwed up massively by mismanaging its supply chain as well as consumer expectations, particularly as it relates to the blue laser diodes required for both its PS3 and CD/DVD consoles and its ability to meet stated delivery targets. Further, I had articulated that EA was missing the boat by not placing more resources behind the Wii console, choosing to keep most of its bets along the PS2/PS3 and Microsoft Xbox 360 platforms. Well, what I had hypothesized about appears to being coming to fruition. And with more data behind my arguments now, I thought I'd provide my gamer and investment pals with a little update.
Sony PS3: Off to a bad start
The Science & Technology section of Playfuls.com had a good post chock-a-block with statistics for how the PS3 launched in Japan. And it isn't pretty.
Sales of the PlayStation 3 console during its first full week of availability in Japan were sharply lower than those during the two days immediately following its launch, according to estimates published this week.
We were in Osaka this morning to see the delivery of Nintendo's Wii to the world's greatest DS fans. Stores across Japan received a total of 400,000 Wii consoles. In Osaka, Japan's second city, 2,800 units were allocated to the Umeda branch of Yodobashi Camera alone, while Bic Camera in Nipponbashi received 650 systems. Both locations were sold out within an hour of opening.
In its first eight days of availability, Nintendo's Wii video game system sold through to more than 600,000 consumers in North America. According to Nintendo¹s calculations from just its own first-party software and accessory sales, Wii instantly has become a $190 million business for NOA.
During the seven days from Nov. 13 to Nov. 19, there were 43,378 of the consoles sold in Japan compared with 88,400 sold on Nov. 11 and Nov. 12, according to figures published by Enterbrain Inc. Friday. The company publishes local gaming magazine Famitsu and its figures are generally regarded in the industry as reliable.
The sharply lower number of consoles sold is likely due to tight supply of the machines. Sony Computer Entertainment Inc. has faced problems procuring blue-laser diodes for the PlayStation 3's Blu-ray Disc drive and was forced to cut-back on launch plans. It had originally planned to have 2 million consoles in Japanese, North American and European retailers for launch week but this was reduced to 500,000 units and the European launch was pushed back to March 2007.
As a result the consoles have been in high demand and fetching premium prices on Internet auction sites.
Software sales for the PlayStation 3 have also gotten off to a slow start.
Sales have been lower than expected in part because a large number of early buyers were getting the console to resell for a profit online. Enterbrain estimated that in Japan, less software than hardware was sold at launch, while in the U.S. retailer Gamestop said an average of 1.5 games were sold with each console. In comparison the retailer reported average software sales for the Nintendo Wii were three titles per console.
Ok, but consider this. In the old days of video game launches one might have been able to recover from this less-than-stellar coming out party. But Sony's real competitor isn't Microsoft - it's Nintendo. Japan, Sony's home turf, is clearly game crazy, and problems with launching your marquee platform in your home market is not a good sign. According to Media Create, 81,639 PS3 systems were sold in the 24 hours of its introduction in Japan. Not bad, but this weekend the Wii entered prime time in Japan. And here are the early reports.
Nintendo Wii: Flying off the shelves
According to the gaming site Joystiq, the Wii launch went somewhat more smoothly than the PS3:
We were in Osaka this morning to see the delivery of Nintendo's Wii to the world's greatest DS fans. Stores across Japan received a total of 400,000 Wii consoles. In Osaka, Japan's second city, 2,800 units were allocated to the Umeda branch of Yodobashi Camera alone, while Bic Camera in Nipponbashi received 650 systems. Both locations were sold out within an hour of opening.
Compared with last month's farcical PS3 launch, there were notably fewer auctioneers-in-the-making at today's Wii debut. Most people we met were genuinely looking forward to playing games with their new purchase. (There are Wii lots on Yahoo! Auctions, but the going rate is only marginally higher than the retail price: typically Y30,000 (US$260) via auction, compared with Y25,000 (US$217) in stores.)
If these sales figures are true, and if one just focuses on the 24-hour post-launch period in Japan, the Wii outsold the PS3 by a 4-to-1 margin. Having supply on hand comes in handy sometimes, right? It helps to have your demand forecasting and supply provisioning in synch, right? Anyway, if you think these figures are impressive, consider that in the first week of the Wii's North American launch over 600,000 consoles were snapped up. From DailyTech:
Nintendo Wiis sold at the rate of nearly one Wii sold per second continuously since the Nov. 19 launch.
In its first eight days of availability, Nintendo's Wii video game system sold through to more than 600,000 consumers in North America. According to Nintendo’s calculations from just its own first-party software and accessory sales, Wii instantly has become a $190 million business for NOA.
"Even with sales already in excess of 600,000 units, demand continues to exceed supply, as it's clear this is one of the 'gotta-have' products for the holiday season," says Nintendo of America President Reggie Fils-Aime. "We've shipped retailers several times the amount of hardware the other company was able to deliver for its launch around the same time -- and we still sold out. Given the inclusive nature of Wii game play, we're seeing this new form of video gaming is already a huge hit with gamers and newcomers alike. It continues to be a phenomenal launch."
After hearing about the massive number of Wiis that Nintendo was stockpiling for launch, many figured that finding the new console would be a walk in the park, especially compared to securing a PlayStation 3. What many are finding (or rather, not finding) is that Wiis are in rather short supply relative to demand. Nintendo is shipping a much greater supply of its consoles than Sony is of theirs, but that is not changing the availability situation. Wiis are selling out just as quickly as PS3s as soon as they hit store shelves.
According to GameStop’s data, attach rate for the Wii is around three games per console – better than the retailer expected and about double of that on PS3. It should come to nobody's surprise that The Legend of Zelda: Twilight Princess was attached to more than 75 percent of all Wii consoles sold, achieving sales of more than 454,000.
For a little context, if one assimilates the numbers above, it appears that Nintendo has sold at least 1 million units worldwide in less than 3 weeks. Wow! This represents 10% of the projected full-year shipments for Microsoft's Xbox 360. And Microsoft has had a year head start. Further, Nintendo's Reggie Fils-Aime says he is still on target to ship another million units by year-end in North America alone. From gamesindustry.biz:
Speaking to Reuters, Fils-Aime predicted that Nintendo will hit the target by early December, and go on to sell another million Wii units by the second week of January. He said that a life span of between four and six years for the console would be "just about right".
Fils-Aime also took the opportunity to echo comments made by other Nintendo execs regarding the profit potential of the Wii, compared to other consoles such as the PS3, which apparently cost more to produce than to buy.
"We think that's in part why the industry has become so insular - very expensive machines, machines that arguably do more than you need them to do," Fils-Aime said.
"We designed [Wii] from the get-go to be profitable, so it will be past this weekend and throughout its entire life. Because we're a gaming company, we have to be profitable in the gaming business. It's not like our competitors who can make profit in operating systems or TVs to offset their losses on the gaming side."
So what does this all mean for the Wii's demand profile into 2007? A lot. From Slashdot:
Nintendo of America president Reggie Fils-Aime hyped up the console launch, saying, 'Because of demand, we're urging shoppers not to get complacent. The level of demand we're seeing goes beyond the ordinary. Retailers are telling us a significant fraction of customers pre-ordering Wii are nontraditional gamers...' The company expects to ship 6 million Wii units globally by the end of March 2007, on par with Sony's worldwide shipment targets for PS3. Microsoft has sold 6 million Xbox 360 units to date since its launch in late November 2005, and hopes to sell 10 million by the end of the calendar year.
PS3 vs. Wii: Celebrity Death Match or is the opponent already dead?
So Sony has flexed its muscles and said "hey, we're gonna sell 6 million units by March." Nintendo has said the same thing but has actually demonstrated the market momentum (i.e., demand supported by supply - I might posit that market momentum = customer demand x product availability - are you listening, Sony?) to back up its projection. Do you believe Sony? Well... Let's check in on a little dialogue between Newsweek's N'Gai Croal and EA's Larry Probst dated November 29th and you make the call.
Croal: Here's my first question. PS3 is supply constrained and will likely remain so until early 2008. 360 demand is--
Probst: Whoa, whoa, whoa. Early 2008?
Croal: You don't think so?
Probst: I don't think they'll be supply constrained that long. You think all through 2007 they'll be supply constrained?
Croal: Well, looking back to the PS2 launch, Sony shipped a million units for the Japanese debut, most of which sold in the first 48 hours. But for the Japanese launch of PS3, they only shipped around 80,000 units, more than ten times fewer machines. So they're nowhere near meeting demand in Japan. In North America, Sony shipped just under 500,000 units for the PS2 launch, but only 200,000 units for the PS3 launch. So they don't have enough supply to meet demand here. Sony launched in Asia with less than 20,000 units. And early next year, they have to start stockpiling units for the European launch in March 2007--assuming that date doesn't slip. So we're looking at four territories where supply probably won't meet demand, and by the time Sony starts to catch up, it'll be holiday 2007, where the combination of big AAA games and gift-giving will increase demand even more.
Probst: So you're not believing their projection of 6 million units shipped by the end of March?
Croal: Even if they somehow get to that, will that be enough to satisfy the global demand?
Probst: I don't think that they would catch up in the first quarter of 2007, but at some point in calendar '07 I think they catch up to demand. I don't think it takes until the early part of 2008. It doesn't happen in early 2007, but it happens in that year.
Croal: But as long as PS3 remains supply constrained, and as long as Xbox 360 demand is falling short of Microsoft's projections, that leaves Nintendo's Wii as the only platform that has both high supply and high demand. Yet the bulk of EA's AAA titles are oriented towards the PS3 and the 360. How have you adjusted your development plans in light of where things stand right now?
Probst: We have two titles at launch for the Wii. We will have five or six in the market by the end of our fiscal year [March 31, 2007.] We have a number in the low to mid-teens planned for [the next] fiscal year. I think we're going to catch up pretty quickly in terms of a broader portfolio on that platform.
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Larry at EA seems a little freaked, doesn't he? Well, read on to see what he does to ease EA's incipient pain.
EA: "Wii're playing catch up - I should have listed to Information Arbitrage"
Uh, and why exactly does Larry think EA is going to catch up quickly? BECAUSE THEY'RE GOING TO HAVE TO OR GET THEIR FACE RIPPED OFF, i.e., miss earnings and revenue targets off the back of their dependence on the PS2/PS3/Xbox 360 platforms. So in the absence of a sound organic strategy what do we do - buy someone, of course! Here's what EA announced on December 1st, as described in the Salt Lake Tribune:
Utah's EA Salt Lake is focused only on Wii
The Bountiful-based Headgate, which Cook founded in 1992, became part of video gaming giant Electronic Arts (EA) earlier this week. Immediately, Headgate's 60-member work force was assigned to designing games for Nintendo's new Wii platform.
"That will be our focus, exclusive to Wii development," Cook said Friday. "We're excited about this. Wii comes with a new controller that is wireless and senses orientation and path motions like nothing else out there.
"Nintendo has come up with an entirely new gaming experience," he added.
"For tennis, baseball or golf games, for instance, it really senses the actual swing. It's really catching on; now we will have to catch up."
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Well, you've got to give EA credit for doing something quickly to ameliorate a profound product gap that could sharply impact their future growth.
Sony's PS3 prospects: What to do now?
Bottom line: if they can't ramp up production and get some demonstrable traction by March, the whole platform could be in deep, deep trouble. A small installed user base, high game development costs and a runaway competitive hit by their arch-rival Nintendo could create a gap simply too wide to overcome. A little perspective on game development costs from VIDEOGAMESBLOGGER.COM:
Namco Bandai, who are Japan¹s second-biggest maker of video games, must sell at least half a million copies of a game for Sony¹s PS3 to make a profit on the title, said President Takeo Takasu.
Graphics for the high-definition games cost about 1 billion yen ($8.6 million) to create, more than double that for Nintendo¹s Wii titles, Takasu said in a Tokyo interview with Bloomberg from November 28. This explains why Bandai Namco are developing 30 games for Wii, but just 10 for PS3 and Xbox 360.
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Not enough supply coupled with the high costs of game development are literally pushing Japan's #2 video game maker into Nintendo's hands. This is not what I would call a favorable competitive landscape. And we have clear validation that all is not well at Sony's gaming division, based upon some news that came out on December 1st concerning a management shake-up:
Sony switches leaders in gaming division
Plagued by problems with the launch of its new PlayStation 3 console, Sony is shaking up the management of its games division.
The company announced Wednesday night that it is promoting Kaz Hirai, president and CEO of its Foster City-based North American PlayStation business, to president and chief operating officer of its entire games division. Hirai will take over the day-to-day operations of Sony's games business from Ken Kutaragi.
Kutaragi, a legendary figure within the games industry as the father of the original PlayStation, will oversee the longer-term, strategic development of the company's global games operations as chairman and group CEO of Sony Computer Entertainment (SCEI).
'Clearly this is a smack in the face for Kutaragi. In essence, he's been demoted to CEO, which in this case is largely a face-saving title for him,'
Said Van Baker, an analyst with research group Gartner in San Jose. 'Kaz is an operations guy. . . . This is a recognition of the fact that operations is their problem area right now.'
How do the local Japanese analysts interpret this brutal demotion?
From the Tokyo AP via SiliconValley.com:
But Masayuki Otani, analyst at Maruwa Securities Co., was a bit skeptical about the news, noting that the gaming markets are extremely different in the U.S. and Japan.
”Sony is such an old-fashioned company. Success in the U.S. doesn't necessarily mean success elsewhere,'' he said. “The appointments could also signal a gradual farewell -- 'thank you for the hard work' -- for Mr. Kutaragi.''
From Kotaku.com:
Yuta Sakurai, an analyst at Nomura Holdings, Inc. has a gloomy outlook on Sony's hardware future.
" The appointment of Hirai could be the start of a shift from hardware to software. I cannot now imagine a PlayStation 4."
From GigaOM:
"The Father of the Playstation" and the "Gutenberg of Video Games", Ken Kutaragi, has just been nudged from his position as president of Sony Computer Entertainment Inc. (SCEI), hereby replaced by Kaz Hirai of SCEI¹s US wing.
In one of those lovably surreal corporate moves, Kutaragi is actually being promoted, while losing day-to-day control over Playstation development.
And what do the bloggers think? Some comments on Joyqtiq's post related to Sony gaming's reshuffle:
2. Yep this is the big business equivalent of firing Ken from his current position. They can't just outright get rid of him 100%, as that would admit that he was doing a bad job, which would then reflect poorly on all of their big talk. They have to save face.
Basically, they've turned Ken into a high level consultant.
Posted at 10:50AM on Nov 30th 2006 by joey
6. This is Big news. For a japanese company to move a guy like Ken off the direct leadership team of the playstation is bad news for Ken. It can only be seen as a negative reflection inside sony on the launch of the PS3 and PSP. Might be a positive for sony and gamers to get some fresh leadership for the Playstation brand.
Posted at 11:06AM on Nov 30th 2006 by Dragon Warrior
10. #2 Hit the Nail on the head. Big Companies can't just outright fire their executives because it will send the common investor into a sell-off.
They'll leave him in his new position for a while and then give him severance with a news post saying he is leaving to "Spend more time with his family" or to "Pursue a new opportunity". Sony will never admit anyone did anything wrong, because that would imply the company made bad business decisions.
Posted at 11:09AM on Nov 30th 2006 by clo1_2000
19. Shuffling management so soon after launch is a sign. I think the recent publication that some vendors were waiting on Sony's direction so they could offer their titles exclusively to the PS3, but fell through when they didn't hear back from Sony in time, certainly hasn't helped matters. And now we're hearing about some vendors taking a wait and see approach and that sales have to be 500,000 to make a profit. If true, these are troubling revelations.
Posted at 11:47AM on Nov 30th 2006 by Robotic House Plant
Sony's in trouble, man. And it ain't just the PS3. This company is psychology broken. Morale absoutely sucks, which isn't really the environment you are are looking for to rapidly and decisively address a competitive threat. Check out this post on Gizmodo describing how a Sony executive actually said that the Wii is more fun than the PS3:
Even though he wasn't speaking for the entire Sony organization, did we just hear Sony Australia & New Zealand general manager Nic Foster say that the competing Nintendo Wii is more fun than Sony's PS3 gaming console? Well, just about:
"Wii is a core gaming device. It's a more fun, intuitive sort of product to pick up, where the PS3 is a broader entertainment solution; so you can have your fun, enjoyable gaming ... but then you have a whole suite of other applications ... such as Blu-ray media playback, the ability to access your music, access your photos and the interoperability with the PlayStation Portable."
Oops. What sounds like more fun, a "core gaming device" that's "intuitive" and costs $250, or a "broader entertainment solution" that'll clip you for $600? You decide.
Yikes. Not a comment to build morale, huh?
Conclusion
The internet conversation has been an incredibly good predictor of the actual outcomes for Nintendo, EA and Sony. While the game is certainly not over, it is pretty amazing to consider how directionally correct all of these online experts and users have been. While Wall Street analysts often have some good insights, they can't possibly replicate the global community brain shared by those who can tap into it efficiently. And this gets to the post I authored a few days ago about next generation search. But I'll keep you posted on the Sony-Nintendo-EA situation. It is sure to be a wild ride.
ADDENDUM
Check this out from Bloomberg this evening - Sony PlayStation 3 U.S. Sales Fall Short of Target (Update3). A little late to the party guys, aren't we?