Of Hedgehogs and Plumbers: An Investigation of Marketing Strategies in the American Home Console Industry. By: Daniel DeMaiolo

Transcription

1 Of Hedgehogs and Plumbers: An Investigation of Marketing Strategies in the American Home Console Industry By: Daniel DeMaiolo Michael G. Pontikos ADVER 3711 Marketing Communications Research April 23, 2008

2 Daniel DeMaiolo Michael G. Pontikos ADVER April 2008 Of Hedgehogs and Plumbers: An Investigation of Marketing Strategies in the American Home Console Industry From rescuing damsels in distress locked away in castles, slaying foul monsters in mythic lands, zooming through loop-de-loops in bizarre environments to realistic simulations of everyday life, the American video game home console industry emerges vibrant as ever. Even more interesting is the ability of such tiny pixels and sound bits to capture American minds and wallets. Through examination of the origin of the industry and the subsequent targeting, pricing, and positioning strategies, a portrait of the lucrative home video game console industry emerges. Although many of the major home console manufacturers over the years share a similar goal of selling home consoles to consumers, most of the corporations began in a completely different industry long before the birth of the gaming business and the subsequent console wars. To illustrate, Nintendo Co., Ltd. initially manufactured playing cards in 1889 called Hanafuda [which were] tenderly hand crafted using the bark from the mulberry and mitsu-mata trees and later expanded to love hotels and instant rice (N-Sider Media, Nintendo ). In addition, Sega Corporation, formerly known as Honolulu-based Standard Games in 1940, began importing jukeboxes to supply American military bases in Japan [and] eventually expanded into amusement game imports [with the slogan] service and games from which their name is taken (Pollack, Sega ). In 1965, Sega merged with Rosen Enterprises which dealt in everything from instant photo booths to mechanical arcade games (Sega Corporation, Sega

3 DeMaiolo 2 History ). Even newer home console makers such as Sony Corporation and Microsoft Corporation began in the unrelated industries of transistor radios and computer operating systems respectively before entering the gaming market. Although many of the previously mentioned corporations were destined to enter the video game home console industry eventually, which generation of the seven home console wars they would enter would be decided in time. To create the First Generation, Ralph Baer in 1967 design[ed] the first video-game console that works on a standard television known as the Brown Box which would ultimately illustrate the origins of the Magnavox Odyssey (Time Magazine). After a successful First Generation which would also see Atari and Sears Corporation partner to release Pong for home consoles, the Second Generation s success continued from simple devices such as the Magnavox Odyssey that resulted in a booming home console industry; however, the glut of unlicensed games and new home systems lead to a major video-game industry crash in in which many of the gaming companies [went] bankrupt (Time Magazine). Inevitably the crash [of the Third Generation] was caused by too many derivative or poor-quality game cartridges from too many manufacturers (Miller, History ). During the Fourth Generation from , graphics improved as well as game quality; the Atari 7800 competed (and lost) to the Sega Master System and the Nintendo Entertainment System. Ultimately Nintendo sold more than 3 million NES units in its first two years of release; [and] it is estimated that, over its entire product life, more than 65 million NES consoles were sold worldwide, along with 500 million cartridges (Miller, History ). Generation Five of the console wars, , featured 16-bit processors, more detailed graphics, and more imaginative games (Miller, History ). Although new consoles such as NEC s TurboGrafx-16 tried to grab market share, Generation Five was dominated by a brutal

4 DeMaiolo 3 console war between beloved character Mario from Nintendo s Super Nintendo Entertainment System and Sonic the Hedgehog from the Sega Genesis System. Generation Six of the console wars from , characterized by high-powered microprocessors and dedicated graphics processors that enabled extremely realistic graphics and game play, introduced the first threedimensional characters and environments as well as a new competitor for Nintendo and Sega in the form of Sony s PlayStation (Miller, History ). In an interesting turn of events, the PlayStation unseated both Nintendo [64] and [the] Sega [Saturn] to become the leading home video game system which would go on to sell 50 million units worldwide (Miller, History ). Generation Seven of the console wars, , consisted of amazing graphics, improved game play, solid storylines, and record breaking sales in an established industry with competition from Sega s Dreamcast, Nintendo s Gamecube, Sony s PlayStation 2, and the introduction of the new Xbox by Microsoft. In terms of competition, Sega, due to financial woes, bowed out of the industry. In addition, Sony, in 2005, boasted 101 million PlayStation 2 units sold [while] Microsoft's Xbox was second with 24 million [and] Nintendo's Gamecube came third with 22 million (The New Zealand Herald, Nintendo ). Currently the Next-Generation home console war, characterized by high definition graphics and innovation, is being fought by Nintendo s Wii, Sony s PlayStation 3, and Microsoft s Xbox 360. Although it is much too early to declare a winner, it would seem as if Nintendo s Wii will emerge dominant followed by Microsoft s Xbox 360 and finally with Sony s PlayStation 3 losing all advantageous market share as projected by total numbers for 2007 (rounded up to the nearest 1,000) [that] show the Wii leading with 3,958,000 consoles sold, Xbox 360 in second place with 2,589,000, and the PS3 following in third with 1,294,000 (Quirk, Game ). Through a massive history of over seven generations of home console wars, it is clear that the video game industry is thriving in America.

5 DeMaiolo 4 After glimpsing into the past successes and failures of many home consoles throughout the industry s rich history of console wars, it becomes evident that a firm s marketing strategies related to targeting, pricing, and positioning determine survival in this cutthroat industry. In terms of targeting, one of the reasons home consoles failed in the beginning was because several companies spread their targets too thin. This is evident by corporations such as Atari partnering with Sears, a mass retailer, to distribute Pong for home consoles. Despite these major setbacks, the first real successful targeting occurred when Nintendo in 1989 and 1990 focused on children and a substantial part of the culture as a whole [that were] more influenced by interactive electronic media---in their simplest form, video games---than by television (Sheff 8). To confirm this, a study by Nielsen Media Research, showed that within a particular age group more kids were playing Nintendo than were watching the major children s TV network, Nickelodeon, at certain times on certain days of the week (Sheff 8). Following Nintendo s lead, in 1990, Sega aimed its products at a slightly older market than its main competitor, Nintendo (Sega Corporation, Sega History ). Specifically, American home consoles were targeted at consumers in Generation Y [which] includes the 72 million Americans born between 1977 and 1994 [that] exerts influence on music, sports, computers, [and] videogames (Kerin, Hartley, Berkowitz, and Rudelius 76). In particular more males have been targeted for home console sales as exhibited by evidence that there has been lower use of video games than computer and Internet games by women (Kerin, Hartley, Berkowitz, and Rudelius 80). Although males have been primarily targeted more, a study of eight hundred people by Market Data Corporation in the early 1990 s revealed that more girls between the ages of six and fourteen were becoming primary players, and their level of satisfaction was intensifying (Sheff 399). With rapidly diversifying consumer markets, companies such as

6 DeMaiolo 5 Nintendo realized segmentation was a key [and they] would have to market specific products to specific groups in order to maintain dominance with their market share (Sheff 399). Although targeting has been rather consistent over many generations of consoles, new trends in targeting range from Sony expanding its user base by developing PlayStation 2 video games for children under 13 years old and adding a built-in DVD player to appeal to older audiences, Microsoft s Xbox 360 targeting more hardcore, mature, and older gaming audiences, and Nintendo s Wii targeting everyone from the experienced male gamer, untested newcomer, and the elderly Baby Boomers (Kerin, Hartley, Berkowitz, and Rudelius 297). Without successful targeting, American home consoles would fail to even exist. After evaluating potential consumer targets, an effective pricing strategy must be implemented to even begin attracting attention. As the past has illustrated, if a corporation employs an unrealistic skimming strategy that establishes a price that is too high such as with the 3DO Interactive Multiplayer and PlayStation 3, which both sold for $699 each at one point, the system s sales can struggle and cause the product to rapidly shift from an introductory to a decline stage. In contrast, consoles such as Sega s Genesis, Nintendo s Wii, Microsoft s Xbox 360, and Sony s PlayStation 2 that have aimed in the $150-$399 range have all enjoyed much success. Although a penetration pricing strategy that involves lowering prices may result in increased sales and market share, such a practice doesn t always translate into profit. In fact, a tear-down analysis by market researcher isuppli of the high-end Xbox 360 found that the materials cost Microsoft $525 before assembly [while] the console sells at retail for $399, for a loss of $126 per unit (Horngren, Sundem, Stratton, Burgstahler, and Schatzberg 219). Similarly, the Nintendo DS had a penetration price likely at or below its cost, but the price of its video games (complimentary products) was set high enough to cover the loss and deliver a profit

7 DeMaiolo 6 for the Nintendo product line (Kerin, Hartley, Berkowitz, and Rudelius 372). Throughout the generational console wars, corporations in this industry have started to find that although a skimming price strategy seems effective in generating hefty profits, penetration pricing and eventual price slashing have been the most effective strategies in introducing the product into a stable market. With an established target and price in mind, video game console marketers finally utilize a variety of tools to position the consoles in widely different ways. Given that a product life cycle for a typical home console moves from the introduction stage to maturity in five years, marketers in this industry are challenged with a brief amount of time to position their products (Kerin, Hartley, Berkowitz, and Rudelius 294). One method of positioning a new console is through a strong brand name, which according to Nintendo Co., Ltd. s SWOT Analysis, gives the company an edge over its competitors (Datamonitor). Similarly, positioning is directly affected by corporate strategy and image as illustrated during Generation Five when Nintendo, supremely sure of itself, tends not to introduce a new game machine until it has compelling software ready for it [while] Sega, being the underdog, has been more willing to rush out new hardware, even if only a little software is available (Pollack, Sega ). Image also allowed Sony, a leader in multimedia products, to easily integrate its successful PlayStation consoles into the market simply based on the credibility of the firm in related multimedia industries. From a competitive standpoint, brand names, although often effective in generating sales, have been reversed against companies with limited target markets such as Nintendo during Generation Five and have led to successful positioning for competitors like Sega. After seizing the opportunity by spending $10 million in advertising, Sega attacked Nintendo head-on [with a slogan of] Sega Genesis does what Nintendon t (Sheff, 353). Inevitably this offensive strategy helped

8 DeMaiolo 7 position the Genesis in a much more competitive position when Sega began to embody cool [as] younger kids and girls liked Nintendo, but the trendsetters in the video-game world, young teenage boys, were talking Genesis (Sheff, 354). By aiming at a slightly older market, Gilman G. Louie, chairman of Spectrum Holobyte, in a 1993 New York Times article noted, Sega has succeeded in positioning itself as the cooler machine. The MTV generation plays Sega and your little brother plays Nintendo (Pollack, Sega ). Comparatively speaking, even Sega s mascot, Sonic the Hedgehog, was positioned as a much cooler character than Nintendo s Mario. What seemed to work for Sega carried on throughout the other generational wars when both Sony and Microsoft grabbed valuable market share by targeting older audiences and conveying a message of coolness for more mature games. Only recently has Nintendo combated these shifts in the industry by increasing target markets to a much wider range with the Nintendo Wii. Another method that corporations have positioned their products is through public endorsements. Throughout the home console industry history, public endorsements have led to successful positioning as illustrated by Sega signing Joe Montana and Michael Jackson for Genesis games to maintain the cool image as well as an obvious Nintendo enlisting an endorsement by Nintendo Power for the SNES (Sheff). Similar to endorsements, sales promotions and promotional tie-ins also have helped position consoles. During recessionary periods in the American economy, the home video game console industry often found itself without many ways to introduce newer more expensive consoles until companies such as Nintendo began bundling games such as Super Mario World, an extremely coveted game based on the success of previous installments, like the prize in a box of Frosted Flakes (Sheff, 11). By including premiums or merchandise offered free of charge in the promotional strategy, companies encourage customers to return frequently or to use more of the product

9 DeMaiolo 8 (Kerin, Hartley, Berkowitz, and Rudelius 516). Bundling software with each console soon became a vital tool for positioning in the industry as illustrated by Sega s response in bundling Sonic the Hedgehog with each Genesis; moreover, such a move allowed for continued success as a test conducted by a market-research firm [indicated] seven out of ten kids preferred Sonic to Super Mario World (Sheff, 363). In terms of promotional tie-ins, well-known examples include Pepsi and Kool-Aid partnering with the SNES and Mountain Dew coupled with the Xbox 360 (Sheff). Finally, advertising campaigns serves as a vital portion of the console positioning strategy. During the Generation Five war between Sega and Nintendo, Nintendo stepped in with a marketing blitz [of] twenty-five million dollars [in] TV commercials for the September 1991 launch while Sega s television commercials, which vied for airtime with Nintendo s massive ad blitz, showed a kid resisting a pushy salesman s attempt to sell him the more expensive SNES; in addition, the ads featured the Sega advantage and depicted Super Mario World [as] timeworn compared to Sonic the Hedgehog (Sheff, ). At the time, Sega was quickly recognized by its fast-paced, in-your-face marketing and advertising campaigns, putting the company in the ranks of Nike and Levi s as favorite brands among America s youth (Sega Corporation, Sega History ). As Sega successfully illustrated, to remain competitive in this industry, a firm needs to employ several marketing campaigns that constantly remind consumers of the console s presence. Today, Nintendo continuously pushes the Wii through a Wii would like to play ad campaign that can be seen throughout the major television networks. Although advertisements for the home consoles can be seen virtually anywhere, history shows that ad blitzes in gaming magazines and television serve as two of the most effective mediums for communicating a new console. Collectively brand name, corporate image, target market, public endorsement, sales promotions, promotional

10 DeMaiolo 9 tie-ins, and advertising campaigns all comprise many tools in which marketers have previously used to position new consoles. Although the American home video game console industry is relatively new and will continue to evolve, any corporation considering entering the market should strongly analyze the history, appropriate target markets, relevant pricing strategy, and most effective positioning tools if any shred of success is to be achieved. After properly analyzing these facets of the various console wars, it becomes evident that this cutthroat industry isn t a game for all players. Without a continuous and thorough analysis, industry players may find themselves with a game over.

11 DeMaiolo 10 Works Cited Datamonitor. Nintendo Co., Ltd. SWOT Analysis Datamonitor Company. 31 March Horngren, Sundem, Stratton, Burgstahler, and Jeff Schatzberg. Introduction to Management Accounting. 14 th ed. New Jersey: Pearson, Kerin, Hartley, Berkowitz, and William Rudelius. Marketing. 8 th ed. New York: McGraw- Hill, Miller, Michael. A History of Home Video Game Consoles. InformIT. 1 April Pearson Education. 31 March N-Sider Media. Nintendo History Lesson. N-Sider Media. 31 March Pollack, Andrew. Sega Takes Aim at Disney World. 4 July The New York Times Online. 31 March &sec=&spon=&pagewanted=4 Sega Corporation. Sega History. Sega Corporation. 31 March Sheff, David. Game Over: How Nintendo Zapped an American Industry, Captured Your Dollars, and Enslaved Your Children. New York: Random House, Time Magazine. Video Game History. Time Magazine Online March

12 DeMaiolo 11 The New Zealand Hearld. Nintendo aims to get back in play. 23 June The New Zealand Hearld. LexisNexis Research Database. 31 March Quirk, Gregory A. Game Market Still up for Grabs. Electronic Engineering Times. 10 December LexisNexis Academic Complete. 31 March okiestate=0&rand= &bhcp=1