Picking winners in tough times – part 2

As with books, it would seem that video games are also proving quite income inelastic. This report from the Economist notes that “Games sales in America in October totalled $697m, 35% more than a year earlier”. There is some logic there. Like books, games are experience goods that substitute well for more transitory, ephemeral experiences like the consumption of ‘nights out’, fine dining, or (as the article notes) vacations. As consumers count the pennies and become more frugal, a game that might be still providing entertainment in a month’s time does seem much more cost effective.

Interestingly, the article raises the prospect that any recessionary effect might be lagged. This is a rather strange argument. The example they give (EA) is just one firm in the industry, and one that has copped a lot of criticism in the past year for not delivering enough quality products to market, and for taking on higher and higher cost projects when other, more nimble competitors have been experimenting with cheaper formats (such as games for the Wii and the iPhone) or games with hardware tie-ins (like Rock Band). It would still seem that gaming is a recession-proof growth industry.

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Revenge of the Rock Band

Much has been written over the years about bargaining power issues within the music business. Record labels have consistently been portrayed as exercising an unhealthy level of control over the livelihood of their signed artists. The rock pantheon is littered with tales of bands and songwriters ripped off by the greedy “man behind the desk with the cuban cigars” (as Tim Rogers would put it).

With the big labels’ declining control of recorded music (due to filesharing etc), emerging artists have deemed them less relevant. Artists have some scope to got it alone using myspace and direct contracting with distributors.

It looks like the emergence of the various successful video games built around playing along to your favourite tunes – i.e. Guitar Hero, Rock Band (and their various sequels) – have pushed the power balance further away from the big record labels and towards the musicians themselves.

As this article discusses, the game producers are most interested in dealing with the artists, and the record labels appear to be holding little sway in getting their artists’ tracks on the games. Also, it would appear that most of the bigger royalty streams here (use of image, bandname, and the publishing of what is, in effect, a cover rather than the original recording) reside outside of most artists’ contracts with their record label (i.e. it is the artists and their publishers who are getting much of the cash from this).

So, record labels can only sit around and hope that a band’s presence within the Rock Band playlist might significantly boost record sales. The labels have very little bargaining power with the games companies. As an analyst says in the article:

“There are literally probably 2 million songs out there, and fewer than a 1,000 were used in these two games combined in these last two years…If Warner wants to say we’ll take our 20 percent of the market and go away, a lot of bands are going to leave the label if they think they can get better exposure by being on these games.”

This is another instance where a whole link in the Value Chain has been disrupted by technology and shifting consumer behaviours. The record labels underestimated the impact of digital download technology on their sales. And now they look to have missed the boat on potent promotional tool which they should have had in their arsenal. Watch this space for artists taking back even more control in the future…

Too much Wii in this Blue Ocean?

I am certainly not alone in relishing my user experience with a Nintendo Wii. Nor am I the first person to think about the Wii strategy as clearly Blue Ocean.

For those of you who haven’t encountered this concept, Blue Ocean Strategy is the idea, as espoused by two INSEAD academics and consultants, that firms will reap much greater rewards from seeking out a competitive space where they encounter few or no competitors. Doing so requires firms to identify non-customers who are ignored by current competitors in the red-ocean market space (it is red because of the “blood in the water”), and then offering them new and unexpected sources of value.

The Wii strategy fits this definition on several fronts. It targeted non-gamers, such as females, families and all of us folks who sneered at hardcore gamers. The Nintendo president has described the firm as “swimming in a clear sea teeming with women, pensioners and repentant couch potatoes” . It broke the nexus between console innovation and chip technology. It made gaming more of a collective, social, family endeavour. It did not pursue the console as a loss leader (i.e. didn’t adopt the razor model – ‘charge a little for the handles but a lot for the blades’). The firm reportedly makes a nice profit on the consoles (unlike Sony and Microsoft who drop >$100 on each pricey console they sell but hope to make it back on games sales to their frequently purchasing customers).

This analysis highlights the extent to which Nintendo’s new value proposition is built around fun (and the elimination of costly elements that the new customer segments weren’t after anyway, such as the ability to play movies or experience hyper-real graphics). There is further discussion of the Blue Ocean arguments here.

Most of these discussions have ignored the other key (non-Blue Ocean) strategic advantage that Nintendo have – that they control a greater proportion of their Value Chain than their rivals. Nintendo do much of their game development in-house, and thus reap greater returns from the decision of consumers to choose the Nintendo format over others. As Forbes has noted, the biggest sellers for the Wii are Nintendo’s own products, and not having to pay license fees (plus the simpler technology involved) has kept game prices down (and thus sales up).

Of course, this also means Nintendo bear the risk of any new game failing. For example, there is considerable doubt in the market about the Wii Music offering. The general criticism is that it doesn’t match up to our typical expectations of a game – it is too educational, with no clear winner/loser. But isn’t that what Blue Oceans are all about?