Amazon Gets Serious About Gaming

It should be news to none of our readers that Amazon has been a pioneer in evolving online retailing. What might be surprising is their proactive response to new methods of game distribution and extension into used game sales.

Most recently, Amazon has built relationships with Nintendo's WiiWare service and Microsoft's Xbox Live while also offering a casual game store and a used game service.

How recently you might ask? Amazon has unveiled these four separate initiatives in the last three months.

Amazon entered the traditional retail game space in 2006 and announced its first new change in February of 2009 with a casual PC game download service. Utilizing its massive scale, the service launched with 600 available titles and was a clear first effort for Amazon in the direct-download channel.

In early March the retailer unleashed an even more interesting initiative--a centralized used game program. In the past, Amazon had utilized its Marketplace to allow individual, smaller sellers to post and sell used games but the service was never fully coordinated by Amazon. The new system will offer Amazon store credit when users send in "good condition" used games which will then be sold by Amazon directly.

This move presents a potentially huge threat to used-game industry leader Gamestop and other smaller retailers. Although Gamestop abandoned their attempt at the mail-in used game business, Amazon aims to grab market share quickly by offering higher trade-in values and cheaper used prices. In addition, used games offer a substantially higher profit margin than new game sales--an industry characteristic that could substantially add to Amazon's bottom line. In my opinion, the success of this program must be measured according to net sales increase as simple cannibalization of new game sales will not achieve substantial revenue growth.

What came next for Amazon? In April the retailer hit consumers with a two-punch combo of Xbox Live and WiiWare downloads. These moves offer digital downloads for the Wii and Xbox 360 which presents an interesting departure from the traditional closed market for console downloads. The services add no exclusive content but contribute to a fully developed retail destination for gamers. With the exception of the Playstation 3 download market, Amazon has now built a retail hub that includes new and used game physical purchases alongside digital downloads.

Amazon achieved success in other media formats by offering a complete set of purchase options and, after a busy three months, they have built a similarly comprehensive retail source for gamers.
 

Playstation 3 Pricing Models: Has Versioning Gone Too Far?

Rumors Abound

"As we have stated previously, we do not have plans for a PS3 price drop, and any rumors to that effect are false and are the result of speculation."
--Al De Leon, Public Relations, Sony Computer Entertainment America

(Sigh.) With this announcement, gamers across the world let out one synchronized breath of disappointment. For the last several weeks buzz built all over the internets (it's a series of tubes) regarding the possibility of a PS3 price drop announcement. On May 31, De Leon's comment quelled the rumor and insinuated an entirely different Playstation announcement for April 1.






Launch Pricing and SKU Proliferation

The Playstation 3 launched in the United States on November 17, 2006 with two SKUs (stock keeping units): a 20GB model for $499 and a 60GB model with premium features for $599. At first, this appeared to an intelligent use of the versioning pricing model in order to maximize early adopter revenue.

Following a tepid reception from critics and consumers, Sony began to introduce a series of new product SKUs designed to take advantage of manufacturing improvements and to increase sales. These packages, differentiated in features and hard drive capacity, included:

• Launch (Nov. 2006): 20GB
• Launch (Nov. 2006): 60GB
• Aug. 2007: 80GB (version 1)
• Nov. 2007: 40GB
• Aug. 2008: 80GB (version 2)
• Nov. 2008: 160GB

Needless to say, the PS3 versioning environment is confusing and crowded. Only the 2008 models are still in production, priced at $399 and $499 respectively. Even after this post-launch discount, the PS3 is still priced far above its competitors with the Wii holding steady at $249 and a new Xbox 360 "Arcade" at only $199. Sony must quickly decide if it can sacrifice market share in the interest of profit margins--or if other factors may allow them to achieve both.

Diminishing Operating Losses

Manufacturing costs have been a major factor in Sony's inability to remain price competitive relative to its console gaming rivals. Next-genbiz.com released a November 2006 estimate that Sony's production costs stood at an amazingly high $805 for its 20GB unit and $840 for its 60GB unit. Many console manufacturers had historically implemented a loss leader strategy--recovering high operating costs with strong licensing fees--but none had ever gambled as boldly as Sony with the PS3. The graphics processor and Blu-ray drive (two major points of differentiation) were the primary source of high costs.

Starting as early as 2007, several reports surfaced suggesting lowering costs, culminating in a Sony announcement that the gaming division had regained profitability in Q3 2008. These announcements were a major factor in fueling the rumors surrounding a PS3 price drop coming into 2009.

The PS2 Panacea

The Playstation 2, by any account, is a massive commercial success. The resilient console continues to sell tens of thousands of units in the United States and Japan and has one of the largest game libraries in industry history. Looking to reposition the PS2 in its waning days, Sony announced on April 1, 2009 a price drop to only $99. This budget-friendly pricing scheme will maintain sales of the low-cost, high-margin unit which may be subsidizing the low-margin PS3 business.

The Future

Sony has to make a decision:

• Maintain margin and hope for further cost decreases
• or
• Cut the PS3 price in August to generate buzz and sales for the 2009 holiday season

In my opinion, Sony cannot give Microsoft and Nintendo another holiday season to gobble up the remaining next-generation console market share and must act swiftly. An August 2009 price cut would present consumers with a very attractive value proposition. Now is when we must all stop to remember that the PS3 is not just a gaming console--it is a fully capable multimedia machine with top-notch graphics and the high-definition Blu-ray disc drive. Once the PS2 has run its last race, Sony could also add backwards-compatibility back into the PS3, further increasing the value of the console and opening up new Sony customers to a critically-acclaimed back-catalog. At a marginally lower price and enhanced functionality, Sony could overtake Microsoft for dominance in the high-performance console wars.

Pitchmen: Behind the Booming Infomercial Business

Titles also considered for this post:

• Read one article....and we'll throw in another for free! (only pay processing)
• This articles contains over 100 words!
• This blog can make you a better job candidate in just 30 minutes a day!

All kidding aside, the infomercial business is booming--and the Discovery Channel has noticed. As a result, a new series, "Pitchmen", will debut on Wednesday night to give viewers a behind-the-scenes look at the famous personalities behind the TV products. Sales is rarely a part of the business school or MBA curriculum but Vince Offer and Billy Mays could easily serve as adjunct professors.

Vince (ShamWow) and Billy (Oxiclean, Bedazzler, Mighty Putty) have achieved celebrity-like status thanks to their over-the-top energy and bizarre products. Their status has grown alongside the infomercial platform. Thanks to ever-expanding platforms and channels for advertising, infomercials have moved away from their traditional 4 A.M. time slots on attention-starved channels such as Bravo, the Outdoor Channel, or the Hallmark Channel.

New 90-second spots for the Snuggie (comes with free booklight) and the Awesome Auger (free power drill) now hold viewers' attention midday on ESPNNEWS and other mid-level cable networks. Cable and satellite TV networks seem to understand the long tail of demand---but forgot about its implications on advertising capacity utilization.

The industry, meanwhile, is laughing all the way to the bank. Starting with Orange Glo, OxiClean, and Kaboom, an incomplete Wikipedia article suggests Mays has marketed well over fifty products. Even without a recognizable pitchman, the Snuggie has now sold over four million units in less than one year. Infomercials have led the way but many more industries may soon make the shift to long-form advertisements thanks to greater availability and decreased price.

For a fun look at a few classics check out the videos above-and also the product competition mash-up video below:

The Razor and Blade Business Model in Gaming

The Model

Strange things happen when you start studying marketing in, say, 2003 and continue to toil in academia until, say, 2009. The entire world can soon be broken into a series of models, acronyms, buzzwords, and lingo (which is incidentally a really fun game show). Business school and the MBA experience has only kicked this into high gear and prompted the realization that video game console peripherals are a perfect example of the famous "razor and blade" business model. This model is based on any business that sells a relatively inexpensive host item (the razor) which requires additional, continually revenue-generating items (the blades).


I have isolated the following peripherals according to their success in proposing an innovative marketing message and their ability to deliver on this proposition. Some have been revolutionary while some have been unmitigated disasters. The peripheral industry now generates over $600 million and would never have been possible without these successes and failures.

The Worst

Robotic Operating Buddy (R.O.B.)

One of the original pack-in accessories, R.O.B. has been widely recognized as a "Trojan Horse" allowing Nintendo to capture consumers' imaginations and driving purchase of their first console, the Nintendo Entertainment System (NES). However, supported by only two games (Gyromite and Stack-Up), R.O.B. was a complete functional failure. This Buddy only moves its arms left to right, up and down, and can be completely neglected in favor of the much simpler NES controller. This example specifically illustrates the importance of message and delivery in tandem--and the failure that can result from either component's absence.



Power Glove
Many industry observers credit Nintendo and the NES with saving the video gaming industry from total collapse in the early 1980's--deservedly so--but I would propose that the Power Glove had nothing to do with its success. Nintendo again garnered a great deal of attention thanks to an early example of product placement in The Wizard (available on Laserdisc) but could not deliver on overextended promises. As with R.O.B., the peripheral was more frustrating than useful and users commonly resorted to removing the glove and using the buttons in regular controller configuration. Some suspect this set the stage for the Wiimote--which I sincerely doubt--but it was nevertheless a failure in its own time.


Sega Activator

The Sega Activator is a train-wreck. This peripheral was again ahead of its time in attempting to implement motion control--keyword: attempting. Sega failed to deliver a clear value added message for the consumer or for its game developers, who only delivered three supported titles: Eternal Champions, Mortal Kombat, and Comix Zone.

Each of these "worst" examples have issues in common: poor marketing communication and almost nonexistent business-to-business promotion. As evidenced by the following examples, proper development and delivery of peripherals can lead to greater revenues, stronger brand loyalty, and better developed barriers to competitive entry.

The Best

Rumble Pak

Successful peripherals drive long-term revenue in a variety of ways--a feat the Rumble Pak accomplished by differentiating the Nintendo 64 (N64) in a crowded, competitive console environment. Released in 1997, this bulky accessory allowed games to send force feedback through the N64 controller and add a new sensation to intense gameplay events. The concept was so well received that it became an industry standard in only one hardware generation.

The Guitar Hero Guitars

Originally developed by Red Octane, a specialty controller design company, Guitar Hero has become a phenomenon. Without any capability for a massive initial marketing push, Red Octane and developer partner Harmonix pulled consumers in with word-of-mouth and favorable publicity and reviews. Major retailers began to have trouble keeping the item in stock and Red Octane was soon acquired by gaming powerhouse Activision. Since its inception, the Guitar Hero franchise has generated well over $1.6 billion with Guitar Hero III: Legends of Rock setting a record as the first title to generate over $1 billion in sales.

Wii Balance Board

The Wii Balance Board is an example of Nintendo's continued dominance of the modern console generation. This non-gaming peripheral is included as a pack-in with Wii Fit, a fitness "game" that includes exercise routines for aerobics, yoga, strength training, and cardiovascular health. Nintendo has also communicated its value to game developers which resulted in Wii Ski and the hilarious Rayman Raving Rabbids TV Party in which one game can be played while sitting on the Balance Board. The Wii Fit-Balance Board package also retails for a cash-cow $90 and has generated over $1 billion with over 2 million in unit sales. This package has also defied the industry sales model in that its sales have accelerated since its release.

The Wrap-up

Nintendo and Sega have been on both sides of the peripheral gamble and have experienced successes and failures in balance. Sega no longer competes in the console-accessory (see: razor-blade) market and has left the mantle to Nintendo. The Wii has been a runaway success but has also had its own questionable peripherals (see: Wii Zapper). The Balance Board is an incredible example of using accessories to generate demand in entirely untapped consumer segments while expanding the total consumer base.

Third party manufacturers now also see increasing value and have begun to create innovative solutions such as the Nerf-N-Strike blaster, a traditional Nerf gun that can also hold a Wiimote and comes packaged with a simple video game. The future for Nintendo and its partners is in radical peripheral innovation. In order to achieve the highest level of success and adoption, Nintendo, Sony, and Microsoft must develop new peripheral experiences and effectively communicate the value of these new tools.
 

Mascots, Avatars, and Escapism

You and Mii

Modern gaming systems have brought new innovation in graphics, game physics, downloadable content, and most interestingly, avatars. Microsoft, Sony, and Nintendo each have different names for their virtual representations but each suggests a major shift in industry strategy. This contrast becomes instantly obvious when comparing the transition from industry-produced mascots to user-created avatars.

As an MBA candidate, I often lose myself in a sea of the latest business school trends. Only a return to a world before "synergy", "web 2.0", or "value-added" can remind me of the true power of the theory behind the lingo. I would suggest that mascots were the original avatars and that they were the first marketing tools used to develop social networks---long before "social networks" would win a game of buzzword bingo.

The Mascot as a Universal Avatar

Nintendo did not create the gaming industry but can be credited with saving it from near collapse in the early 1980's--all thanks to a plumber. This character, originally known as Jumpman, may be more widely known by his other name, Mario:


Mario became the definition of the everyman and evolved into a shared entertainment experience for millions. "Community", the holy grail of social marketing, is based on exactly that--a series of shared experiences. Mario, in his infinite simplicity, is a universal avatar. He is the virtual representation of very individual at home holding an original Nintendo Entertainment System controller.

Sega Gets Blue, Edgy

Just as Mario was getting comfortable with his third epic, Sega launched its own everyman. Sega had competed with Nintendo during the 8-Bit console wars but its Sega Master System achieved only marginal success in America. In order to catch up to the new industry giant, Sega achieved first-mover advantage with its 16-Bit Sega Genesis and included a pack-in game, Sonic the Hedgehog. Sonic was an advertiser's dream.




Compared to Mario, Sonic was faster, edgier, more colorful, and indisputably cooler by early 1990's taste. Sonic introduces the first characteristic of modern avatars: over-the-top escapism. Mario was universal in a way that Sonic was not. The shared experience--the avatar effect--was retained, however, thanks to phenomenal advertising and overall marketing strategy.

The Everyman's Friends

Both Mario and Sonic drove millions of units in game sales and each was soon given their own set of friends--Mario had his brother Luigi while Sonic had Tails. This again is an important transition in marketers' understanding of the importance of user identification with specific characters. Sonic's cast of friends seemed to stretch ad infinitum while Nintendo focused on developing Mario's cast with more depth. At some point, a gamer could guess a color and an animal and probably find a Sonic character to match their preference.

Mass Customization or "I Am the Everyman"

The newest generation consoles accelerated the devolution of the mascot and introduced mass customization to the industry. If mascots are drivers of shared universal experiences, modern mascots are individual customized experiences. Struggling to choose a character for tennis, bowling, racing? Choose yourself.

Marketing has crossed a line in the sand by ceding control of the experience to individuals (and enjoyed great commercial success) but has sacrificed escapism along the way. Universal characters are now background set pieces to the game engine in many cases and only serve as "legacy brands" driving sales.

Marketing a Modern Shared Experience

Now, after a long day at the business school cranking out spreadsheets or using my left hand to hold up my right for participation, I escape into a game of bowling only to watch my virtual self agonize over a 7-10 split. Would it be easier to watch Mario or Sonic fail? Perhaps, but in the meantime game developers and marketers must balance the attractiveness of avatars with the demonstrated value of universal experiences and escapism.

Sonic Game History

Mario Game History