Analyst: 'Are Wii in for a Revolution or an Evolution?'

A new report from analyst group DFC Intelligence's David Cole looks at the impending release of Nintendo's Wii and wonders if the console will inspire an industry revolution - implying a slash and burn of existing infrastructure - or simply an evolution, inspiring higher levels of industry innovation. The full text of Cole's report, which was released on the analyst firm's official website, follows below: "Sometimes a name can mean a lot. In November, Nintendo launches its new hardware system, the Wii, pronounced “we,” as in you and I. Until last spring this system was known as the Revolution. There are many people that argue that Revolution was a much better name for the system. However, we disagree. Revolution implies an overthrow of the existing infrastructure. A successful revolution also generally requires an existing infrastructure that is severely broken, flawed or corrupt. The problem with the idea of a revolution in the video game industry is that sales have been at record levels over the past few years. Why would we want the existing infrastructure to be overthrown? Of course, the video game console market could use some new innovation, but that does not mean it needs to be completely trashed. The Wii is likely to be much more successful if it creates an evolutionary change in the game industry. There really is no need for a bloody revolution. From Nintendo’s perspective the need for a revolution is much clearer. Since the 8-bit NES/Famicom from the 1980s, every Nintendo console system has declined in sales, even as the overall market has grown. Nintendo has thrived on the portable market, but the company has put itself on the brink of becoming a non-player in console systems. Of course, the key distinguishing feature of the Wii is its motion sensitive controller that allows users to control games with body movement. So much emphasis has been put on the new control system that it often seems the controller is the platform. From DFC Intelligence’s perspective it would probably not be a good thing for Nintendo if the Wii is defined mainly by its controller. The risk is that consumers have fun with the Wii controller for a few months, but the fad passes and they move back to their tried-and-true game play methods on a competing system. We think that the Wii will probably be much more successful if the controller supplements existing game styles while adding some new innovations in gameplay. The best example for this is Nintendo’s own portable system, the DS. When it was first announced, the DS seemed like an odd duck with its two screens, a touch pad and stylus control. The idea of consumers controlling their portable system with a stylus seemed dubious. Now after two years it is clear that the DS touch screen can add a great deal to some games while still playing the old-school portable games. If a user does not want to use the stylus they always have the option to use the old control system. For the Wii to be successful on a wide scale level we feel it will have to follow the model of the DS. Having a new control mechanism is a great expansion, but clearly the controller can not become the be all and end all of the platform. Furthermore, it is important not to make too much of the controller. Game systems have always had all kinds of add-on accessory products that change the control system. Dance Dance Revolution (DDR), the EyeToy, microphone centered games and other devices have all been successful. DDR was a popular title, but how would the PlayStation 2 have fared if all games required the user to jump around on a control pad? The key for a hardware platform is offering flexibility for the multiple consumer types that enjoy games. Of course, it also helps to be focused on a game playing consumer. Surprisingly a big advantage of the Wii may be Nintendo’s narrow focus on expanding the game play experience. There has been a trend towards multipurpose machines that do it all: movies, music, web surfing, photos and more. The problem with that concept is that the PC can already do all those things. The trend among consumers is to buy a PC for multi-tasking and then buy specialty hardware devices for applications in which they have a more intense interest. If consumers are so interested in multi-purpose devices how has the market for dedicated game systems continually grown along with increasing home PC penetration? It is the same for the portable market. The Nintendo DS can go online, but the focus is on playing games, not web surfing or voice communications. This is why Nintendo’s portable market has continued to grow in the face of the rapidly increasing number of consumers with mobile phones that play games. The problem the mobile phone market faces when it comes to games is that the network, not the hardware, is the platform. Increasingly consumers use cell phones as their main means of voice communications. The primary consumer interaction is with the network service provider and the key concerns are reception, usage costs, coverage and other service issues. Hardware is an easily changeable, secondary consideration and one trend is towards phones that are almost invisible. Obviously that does not bode well for gaming which depends on a rich graphical display. If consumers are going to choose a device for both voice communications and games, it will always be the voice communication features that win out. Multipurpose devices are generally best for the low budget consumer that can’t afford the convenience of owning multiple devices. If you don’t care that much about playing games a cell phone works as a low budget alternative to a dedicated game system. However, savvy consumers now realize that good hardware is relatively cheap for the entertainment value it can provide. Consumers are buying and replacing hardware at such a rapid rate that it is causing an environmental issue at landfills. Compared with other consumer electronics devices, game systems are not only cheap, they can provide solid entertainment value for a good five years or so. These trends are probably good news for not only Nintendo, but also Microsoft and Sony. One area that could make the Xbox 360 and PlayStation 3 attractive to a significant consumer base is their evolution into the HD-era. However, this is probably most attractive for the graphical leap in games it will create, not the ability to play high-definition movies. For the graphically demanding video game consumer, the Wii simply may not be an option. Or at least it may not be the primary option. Another potential ace up Nintendo’s sleeve is the trend towards consumers that buy two or more console systems. This could be especially true of consumers that demand a high-end system. These are the consumers that are also likely to be interested in an innovative product like the Wii. Remember, among savvy consumers, hardware is cheap for the entertainment value it provides. Thus the Wii becomes the second car in the garage. It says a great deal that the Wii will launch bundled with a title called simply Wii Sports. In addition, sports game leader Electronic Arts has announced strong support for Wii sports games. This represents a pretty big change for Nintendo whose previous three console systems have widely been regarded as the last choice for sports game fans. Sports games are purchased with annual regularity by millions of consumers and thus this was a huge missing audience for Nintendo. Of course, having the best graphics is key in a sports title. However, we think the possibility of a new control scheme is likely to be very attractive for many buyers of sports games. This holiday season is likely to tell us very little about the long-term viability of the Wii. Will it be a quirky new controller fad or a solid hardware platform for the next five years? It will probably be at least a year after the Wii is on the market before we get true answers. The DS launched in 2004, but did not really come into its own until late 2005/2006. We can say that Nintendo has nowhere to go but up in the console market. We can also say that the Wii looks like it corrects many of the problems associated with the past two Nintendo systems. There is more diversity of software, online connectivity, backward compatibility, and most importantly more openness to third party publishers and developers. When you get to the crux of the matter, alienating third party companies has been the key cause of Nintendo’s console decline. The Wii must change that to be successful. The good news is from a pure economic standpoint, the Wii is actually looking like a fairly viable platform to companies not named Nintendo. Could it be possible that the Wii could be a success for not only Nintendo, but the industry as a whole? That would probably be the biggest story of all. Not a revolution exactly, but definitely a positive evolution." [Thanks again to DFC Intelligence analyst David Cole for his work reprinted here.]