I was alerted to a recent article on the CIO site, penned by Thomas Wailgum that declares the heyday of Nintendo’s success with the Wii is over.  The article notes that Nintendo’s manufacturing and supply chain entities have always risen to the challenge to make the Wii console the number one selling gaming console for multiple years.  Wailgum makes a new argument that while the Wii may have had its light in the sun, the story is dramatically different for the upcoming holiday period.

There are a number of evidence points cited.  Sales of the Wii have already plunged 43 percent from April through September of this year, and Nintendo executives have now downplayed expectations for the remainder of the company’s fiscal year. Two other arguments brought forth in the article note that Nintendo has delivered just a few hit videogames thus far in 2009, and hardware competitors Microsoft (Xbox 360) and Sony (PS3) have cut prices on their consoles. Another question raised is whether the Wii has reached saturation, and outlived its product lifecycle.

My reaction to the article was why just cite Nintendo?

The current problem of declining volumes is not just a Nintendo problem.

Product lifecycle planning for the consumer electronics industry, while always a challenge, does follow some predictable patterns.  Products when first introduced are at the peak of profitability potential, as consumers go to extraordinary efforts to be the first to experience the new features of the product.  This product hype cycle is the “sweet spot” for any consumer electronics producer, and the best example of a company who takes maximum advantage of this strategy is Apple. As the product matures, sales growth is driven by either price or new and different features.  Apple hardly ever approaches the peak of a holiday buying season without some new hardware model introduced, or associated hot new service or music offering primed for introduction.

Gaming consoles, along with video software games, follow pretty much the same patterns.  Game consoles, like MP3 music players, are not just about the sales of hardware, but more importantly, sales of linked products like games, which have far higher profit margins.  Nintendo was the first to recognize this, and launched a strategy to also develop and market its own video games, like the popular Wii Sports series, in order to leverage both strategies. Microsoft and Sony have however, not previously chosen to develop their own video game applications.

The industry however may be approaching structural change.  Another key evidence point came from the announcement this week from Electronic Arts, the second largest video game producer.  This company announced a $391 million loss and an upcoming cutback of 1500 jobs. The primary reason cited was a market shift noting that consumers are shifting their preferences to playing casual games on web sites such as Facebook or MySpace vs. owned gaming consoles.

As the industry approaches the new holiday season, Nintendo’s competitors Microsoft and Sony have already cut prices on their consoles.  In my view, Nintendo’s problem, as the market leader, is to match price reduction in the concept of value. In other words, it’s time for Nintendo to decide whether it wants to remain the predominate console provider, or video games developer.  The open question is whether it can do both.

In either case, Nintendo’s supply chain and product marketing teams must continue to play a key role in supporting the overall execution of the product strategy.  If consumers continue to cut-back, demand and inventory planning skills will prove critical.  If Nintendo shifts product strategy, supporting teams must be ready to execute in a timely manner.

The new industry winners will be those that anticipate consumer’s changing preferences and needs in gaming. Citing just Nintendo as a potential loser for the upcoming holiday season is not appropriate.  The problem is much broader, and lies among all the industry players, not just Nintendo.

What’s your view?  Have gaming consoles reached the decline point in product lifecycle?

Bob Ferrari

When I chose the name of this blog, I had in my mind a strong belief that for many manufacturing, retail, and other service firms, the capabilities of supply chain do matter, especially on the impacts to the business bottom line.  Glancing at a series of June ending earnings results from various corporations, as well as current media stories, we find continual positive and not so positive reinforcement.  Let’s explore a couple of season highlights.

Of a positive note:

Siliconvalley.com reported highlights of a fiscal first quarter 34 percent profit increase from Nintendo, the maker of the Wii gaming console. (user account required)  As an analyst, I often cited the contrasts of consumer electronics and gaming players in terms of supply chain decisions and capability.  Cases in point: Sony continuously delayed its initial launch of the Playstation 3 console because of engineering and production ramp-up delays and Microsoft, while having a fairly competitive product, experienced quality problems with its Xbox 360 consoles.  Nintendo on the other hand introduced Wii on target in market launch and price point. The result has been over 5.2 million Wii consoles shipped in the quarter and a cumulative 29.6 million consoles shipped to date. Playstation 3 on the other hand had cumulative shipments to date of just 14.4 million, half theWii amount, with no so stellar results from Sony.  Nintendo clearly understood the recurring revenue stakes of being first to market and volume leader.

Kraft Foods Inc. reported blowout second quarter 2008 results exceeding financial analyst projections.  While across the board price increases were implemented to offset significantly higher input costs, the results noted an operating income increase of .8 percentage points in Q2 as a result of overhead cost leverage, as well as strong revenue growth. The earnings press release also notes approximately $150 million in gains from certain commodity hedging activities. We featured a previous post outlining Kraft’s supply chain challenges along with its investment in supply chain analytical capabilities.

Southwest Airlines reported second quarter 2008 earnings of $121 million, fairly positive financial results in light of all of the overall negative earnings among the U.S. based airline players.  Fuel and labor are the two biggest expense items for the airline industry, and in spite of unprecedented high fuel prices, Southwest continues to successfully hedge its average fuel costs as a competitive advantage.  While Southwest experienced fuel cost increases of 35.2 percent, it still managed to hedge an average of $2.19 per gallon.   Wouldn’t we all like to have the ability to fill our cars today at that price!  Southwest further states that it has derivative contracts for approximately 80% of upcoming third and fourth quarter estimated fuel consumption needs. Third quarter hedging is at an average crude-equivalent price of $61 per barrel, or the range of $2.50 per gallon, while fourth quarter hedging is at $58 per barrel.  There is also a mention of hedging contracts extending out to 2012.  We should all be that good at hedging.

 On the not so positive note:

Michael Krigsman’s CNET blog, IT Project Failures, had a post which indicated that clothing manufacturer Levi Strauss experienced significant order fulfillment problems during one week of the second quarter, attributed to a  North America implementation of SAP ERP.  The interruption is speculated to have caused shipping problems, and combined with other economic issues, caused the company’s net income to drop a whopping 98% relative to the same quarter in 2007.  Kingman cites the company’s SEC filing which, in a nutshell, indicates that the ERP implementation uncovered the need for the company to correct its internal control systems  A former auditor interpreted the SEC filing to indicate a potential problem area of inventory reporting.

American Airlines is now dealing with a current negative customer public relations backlash, as a result of a failure of its baggage handling system at New York’s JFK airport.  A news item on Bloomberg this morning indicates that American has repaired the system, but is still working to deliver hundreds of stranded bags to customers.  The carrier’s 67 JFK departures were delayed anywhere from 30 minutes to 2 hours during this snafu.  Oh, and American was gracious enough to waive its $15 baggage handling fee. Perhaps some passengers will get their bags before their trip ends!  Readers may recall an incident in April where British Airways had to literally shut its new London Heathrow facility due to a major glitch in the baggage handling system.  Two senior managers were ousted as a result of the incident.

And finally, I highlight another Bloomberg News item that indicated that apparel retailer J Crew Group Inc. apologized to its customers because the J Crew web site wasn’t accessible, hindering the ability to receive Internet and phone orders from its customers.  A statement from the company’s CEO states in part: “We’ve made some mistakes (too many in our mind). Please bear with us as we work through these issues.”  This author applauds J Crew management for its open communications to its customers, but this type of incident does tend to point to forthcoming upstream problems as the supply network attempts to respond to a potential imbalance of orders.

The summation of just a few news items taken from various media and Web 2.0 sources clearly reinforces the theme of supply chain matters.

If you have other stories to share for reader education, please send them in comments below, or email me directly at bob.ferrari@theferrarigroup.com.

Bob Ferrari