Could Nintendo eventually be the next Nokia?

This past weekend, Reginald Fils-Aime (Head of Nintendo USA), was busily giving away the latest version of Nintendo’s Uber portable gaming machine, the 3DS, to throngs of fanatic shoppers at Times Squares’ local Best Buy Store. The much-hyped launch of the 3DS in the US, is Nintendo’s biggest console extravaganza since launching the Nintendo Wii back in 2006 and galvanized eager consumers to line up in the freezing cold to get their hands on the device for hours.

The console certainly has had a promising start. Over 200,000 units were sold in Japan the first week of launch and the company is seriously banking on this device to reverse its fortunes (which given its stock price it should – click here). The question is will it be enough?

Several weeks ago at GDC in San Francisco, Nintendo’s President, Satoru Iwata, spoke of the imminent launch of the 3DS and it’s ability to revolutionize gaming through its use of 3D, ability to run apps, take pictures in 3D, incorporation of Netflix and a host of other features. Bizarrely though, he completely minimized or ignored the threat of mobile gaming to the 3DS offering. Nintendo, he said, would never go down the route of mobile gaming as the experience would dilute and undermine the quality of the types of games Nintendo was trying to develop. Nintendo apparently has a difficult time recognizing mobile as a genuine gaming platform.

The strange thing about Nintendo’s denial of the rise of mobile gaming is that mobile gaming is doing to the handheld space exactly what Nintendo did to the console space with it’s Wii launch nearly 6 years ago. When Nintendo introduced the Wii it was lauded for its simplicity, design, fun factor and ability to do what no other console could really do: broaden the market beyond non gamers. Nintendo famously embraced what Insead professors Chan Kim and Renee Mauborgne dubbed “Blue Ocean Strategy” in a book by the same name. They choose to move away from the power, graphics and heavy-duty processor wars that had featured in the console industry and instead reinvent the industry by making a machine that was less powerful but more fun and more open to growing the gaming audience. The result was that the Wii became the best selling console of its time with over 34M installed units to date in the US alone.

With the 3DS Nintendo seems to be taking the opposite approach. The 3DS is its most powerful handheld gaming device yet with 2 266mhz Arm11 processors, dual stereoscopic cameras, 800x240 top pixel screen and full 3D graphics that don't even require 3D glasses to use. However, as a gamer and someone who’s worked in mobile games for the past 6 years I’ve got to question the logic of this direction.

First, consider the audience. As far as I understand, use of 3D is not recommended for people under the age of 6 and I would interpret that to mean it isn't ideal for 8-12 year olds much either. So the device will likely be targeted at 12-18 year olds or 18-24 olds. This is a similar demographic to those playing games on iPads, iPhones, iPods and increasingly on Android devices. Nintendo’s traditional gaming audience for their portable devices was much younger then this. Typically teens or young kids who might not even have access to mobile phones. The new strategy puts them much more squarely in competition against Apple and Google. In this respect they’re facing rivals who have both incredibly strong brands but also global reach and distribution as well as the marketing muscle of the carriers who push their devices. Granted these guys aren’t pushing solely gaming and their message can get diluted through multiple marketing campaigns by carriers all over the world but keep in mind that Verizon’s marketing launch of the initial Droid probably was on par with what Nintendo will spend to market the 3DS in the US.

Second, consider the value proposition. Yes the 3DS is cool and yes the games are awesome, but is the value proposition really enough for consumers? Is 3D really a good enough, sustainable point of difference to shell out an extra $250 plus $20+ per game when I can have pretty damn good experience on a mobile device – which I also happen to always carry with me and allows me to do 300,000+ other things as well (including voice calls for that matter) for $150-200 plus $1-$6 per game? As a gamer I just don’t see it and I’m not sure others will either.

Lastly, Nintendo doesn’t seem to realize that the entire paradigm for the console industry is changing. Console hardware has been typically updated every 5-7 years (the DS launched in 2004). In the meantime developers build games that try to eke out every drop of processing power from existing hardware until the next machine comes out. Mobile has changed all that. New, more powerful devices are coming out every 3-6 months and major improvements are happening yearly. This means developers are accessing a bigger and bigger market as smartphone penetration increases while also developing better and better games as devices improve. It also means that content is being developed at a rate that is far faster then it would be for a console ecosystem. One of the criteria gamers use when deciding on a device is the content available. How many games are there? How expensive are they and how easy are they to buy? Again, mobile gaming has dramatically changed the competitive picture for Nintendo here. Not only do I not have to leave my couch to get a new game, but also I don’t have to pay more the $5 (and that’s for an expensive game!) and I’ve got tons of new games literally at my fingertips every single week.

Is Nintendo sticking its head in the sand? Sounds a lot like a certain Finish handset manufacturer that as little as 5 years ago could do no harm and pretty much moved the handset market wherever it wanted to. We all know how that story has turned out so far…

App meter q2 2011 - Android tipped to be next phone 2-1 over iPhone

All the latest consumer data from GetJar on the world apps. What kind of apps are people downloading, how many are they using, when are they using them, what types of genres are the most popular and much much more...

App meter q2 2011

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Sxsw app vs. web

My Apps vs. Web preso from SXSW 2011 on Slideshare

Sxsw app vs. web

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Android wins a battle, but the real war is just beginning

Not a week or two goes by without the folks at Google trumpeting some stat or other of Android’s unstoppable march towards complete and utter Mobile Domination.

This week we saw stats published from Comscore announcing that Android had taken the lead in smartphone market share in the US for the first time (click here).  From October 2010 to March of this year Android’s share jumped over 7% to a whopping 31.2%.  That’s gotta have a lot of engineers over in mountain view feeling pretty smug.  Cue applause

Yet the truth is that for all for all the hype, Android is still a long way from winning the war.  Although development on Android is at record heights as are submission of apps to Market, GetJar and others there are still some serious skeletons in the closet.

Of the last 20-30 developers I spoke with at GDC, MWC and other conferences over the past few weeks, only one was leading with Android for their development.  This is by no means symptomatic of the overall ecosystem of developers but they all had one thing in common: they complained about the inability to properly monetize Android as a platform and many voiced concern over discovery of their apps as well.

Monetization of apps in general continues to be significantly higher on iOS then on Android. Take a look at the comparison published by HIS Screendigest last month:

As you’ll notice, Apple still commands over 80% of app revenues last year and although that’s down more then 10% vs. 2009, Android Market’s revenues are no better then Ovi’s (or is that Microsoft Marketplace or Microsoft Ovi or whatever….).

What’s more concerning is looking at revenues per handset / user.  According to Digitimes, Android handset sales totalled 55 million units in 2010, which was jump of over 560% from 2009.  The delta in revenues on apps was over 800% but revenues per handset were only $1.85 per user vs. $37.9 per user on iPhone (assuming 47 million iPhones sold last year).  Now don’t forget that developers get only 70% of that revenue so on Android you can buy yourself a tall latté (no cream) while you can at least pay your water bill if you’re an iPhone developer.  So if you’re a VC funding that next great app start-up well…

Show me the money

The fundamental problem on Android remains the payment system (Checkout) and the lack of in-app billing.  Although Google has announced it will unveil IAB at Google IO in May they remain on mute about where it will be available, on which carriers and the economics of the deal.  Naturally, developers remain in suspense.  It’s been estimated that 47% of games revenue on IOS are now generated by IAB, which has come from next to nothing in the past year or so.  However, the key difference remains that on IOS IAB is still a 70% revenue share.  Most likely it won’t be this high on Android.  Why?  Because if Google offers IAB using carrier billing unless they are able to keep the same revenue shares they currently have with carriers (Google 10% / Carriers 20% estimated using Checkout) then the out payments (net payments after carriers take their share) could be significantly worse.  Take a look at out-payments provided by 3^rd party provider Fortumo for an idea:

So in this picture carriers take a whopping 60%+ before Google even sees a dime.  The alternative is to use Google Check-out (ie Credit Cards) for IAB transactions. This may improve out payments to developers but it will cause a drop off in conversions to purchase.  I spoke with a developer with apps on both the App Store and Android Market and he said that for the same app IOS had a 10x factor in revenues.  Check-out will only be used by some people (18+ for starters in the US) and outside the US credit cards see much lower usage on average.

Why is this important?  Early last year I published some research we did at GetJar showing that content was the number 3 most important factor in determining handset purchases among GetJar users.  More important then form factor, battery life, or screen resolution.  However, the key to great content is that at some point developers need to make money.  You can do a million activations a day but unless those are in the right markets where consumers have disposable income and payments are frictionless and reasonable then developers can’t make money and the reality is they have to pay rent, eat and buy clothes as well.

To date Google has resisted developer attempts to use alternative solutions to it’s own in-house billing solution (Check-out) despite it’s obvious flaws.  Although a number of solutions exist out there, many developers remain confused about whether they can or should use a non-Market billing solution for their apps.  Amidst this confusion they remain, like a flock of faithful devotees, waiting at the foot of the mountain for Google to deliver the perfect solution.  In truth, it will get better but there won’t be a deluge of money pouring out of the Android ecosystem anytime soon. 

Discouraging developers from using alternative billing methods though is like offering Diners Club at Walmart as the only way to pay for your groceries.  Vendors know consumers have other ways to pay but go hungry because Walmart won’t accept Visa or Mastercard.  It’s not good for consumers and not go for suppliers.

Android was originally conceived as an Open ecosystem and that was part of the reason developers, OEM’s and carriers embraced it.  Yet as its market share has increased it’s become more closed (let’s not even mention AT&T’s pre-historic stance on non Android Market app distribution). This isn’t a long-term approach to building a thriving ecosystem.  Google still has time to fix this and make sure those vendors don’t go hungry. They should look to partner more with others who can help them improve distribution and monetization and move away from the “not invented here syndrome”.  This race will be a long one and competitors like Microsoft have shown that with money, a good product and a strong ecosystem that rewards publishers (Xbox anyone?) the race is won by those who keep running and not those who sprint in the beginning.