INNOVATORS' INSIGHTS ISSUE

Fierce battles are brewing in some critical consumer electronics categories. Microsoft will soon launch its “Zune” player to compete against Apple’s line of iPods in the portable digital media player space. Nintendo hopes its “Wii” gaming console will bring back the company’s gaming glory days. Our sense is that Nintendo’s innovative approach to reach “non-gamers” gives it a much higher chance of success.

Both Microsoft and Nintendo have their work cut out for them. Apple’s iPod product line dominates the digital media player market: Most estimates have its market share at close to 75 percent. While Nintendo has long been a player in the video gaming market, it has steadily fallen behind Sony’s PlayStation product line and Microsoft’s Xbox product line.

Both companies are trying to capture new consumers by emphasizing a different set of features than the market leaders. The Zune player, which Toshiba Corp. will manufacture, will have the ability to wirelessly connect with other Zunes, allowing users to share music with each other. The player also will have an FM tuner, another feature not offered by Apple.

Microsoft plans to launch an online marketplace where users can purchase songs (like Apple’s iTunes service) or pay a monthly subscription fee (like the popular Rhapsody service). Finally, users can turn the device on its side to enhance their viewing of video clips.

While Microsoft hasn’t announced the device’s price, most industry watchers expect the premium features to carry a premium price tag.

Nintendo is taking a more radical approach by attempting to change the very way that people play games. Instead of cramming as much graphic capability as possible into its system, Nintendo has focused its effort on creating an innovative controller that makes game play simple. A user can control a game by waving the wireless controller instead of moving a joystick or furiously mashing buttons. Playing a tennis game? Swing the controller like a racket and your racket on the screen will swing too.

When a new company is coming into an established market or an also-ran is hoping to leapfrog market leaders, the best chance of success comes from following a disruptive strategy. In particular, companies can carve out attractive positions by growing a market (rather than just trying to grab a piece of the existing market) by making it simpler, easier, or more affordable for more people to consume.

The disruptive literature calls this “competing against nonconsumption.” This approach is powerful because it allows an entrant to stake out a position in a market while minimizing the chances of a devastating competitive response. After all, if the entrant reaches customers the market leader wasn’t serving, the market leader feels no pain.

Many of history’s classic disruptive innovators succeeded by removing a critical constraint on consumption, thereby blowing open a formerly limited market. Classic constraints include skills (people who lack the ability to “do it themselves”), money (existing solutions are too expensive), access (solutions may be difficult to use or obtain when people want them), and time.
 

enerally, when assessing a company’s chance of following a compete-against-nonconsumption strategy, look to see whether there is in fact a large group of potential customers who might want to consume but are locked out of the market.

Importantly, not all people who don’t consume represent a disruptive opportunity. There certainly are consumers who have not purchased an iPod or a related music device, for example. Many of those consumers in fact probably are unlikely to be attracted to any portable media player. Why? Listening to music or watching video on the go just might not be that important to them.

This highlights a trap facing companies seeking to compete against nonconsumption. Sometimes people choose not to consume because solving a particular problem or doing a certain “job” just isn’t a priority to them, or they have found perfectly adequate solutions to a problem. Confusing disinterest with constrained consumption can lead a company to chase the wrong target.

There surely are consumers who haven’t purchased iPods or similar devices because they perceive them to be too expensive or too complicated. However, it seems very unlikely that Microsoft’s product removes a critical constraint for either of those potential groups of consumers. In fact, Microsoft’s product is most likely to appeal to the most demanding consumers of portable music players. 

A company that competes against existing consumption has to have a product that is better than what people are already consuming to get people to switch, and it has to cope with the almost inevitable competitive response.

That’s not to say that Microsoft can’t stake out a position in the market. After all, up until a few years ago Microsoft had no presence in the gaming market. It has forced its way into that market, but it has cost billions of dollars to do so. Success in the portable media space might require similar investment.

If Microsoft surprises industry watchers with a product priced sharply lower than existing offerings, it could have a better chance of attracting nonconsumers. However, unless Microsoft has an unknown production advantage, that low price would be an artificial discount to buy market share.

While Microsoft seemingly has the cash to follow a buy-market-share approach, a strategy based on billions of dollars of losses to crack into new markets simply isn’t sustainable.

Nintendo’s strategy, on the other hand, has all the hallmarks of disruptive innovation. Sony and Microsoft have focused on cramming as much graphic capability into their next-generation players as possible. Microsoft launched its Xbox 360 earlier this year, with its sophisticated capabilities delighting millions of hard-core gamers. Sony’s next-generation PlayStation 3 has suffered from numerous delays as it tries to work out the kinks of its next-generation product. It plans to finally launch its product in November at a relatively high price of $499.

What has been the result of the graphics arms race? Sharply better visuals—and sharply more complicated games. In classic disruptive style, efforts to appeal to the most demanding customers have led companies to “overshoot” the needs of other customer groups.

Given this circumstance, Nintendo’s attempt to dramatically simplify game play to reach non-gamers seems right on. Its $250 price tag also makes it the cheapest console on the market.

It’s also clear that Nintendo is consciously trying to compete against nonconsumption. At a news conference, Nintendo President Satoru Iwata said, “Our goal is to increase the number of game players in every household. We want to create reasons for different members of the family to turn on the Wii every day.”

Are there reasons to believe that the complexity of console game play inhibits consumption? The most played games on the Internet are not graphically intense games. Rather, they are simple games that can be played on sites like Yahoo!. Pogo.com, a casual gaming site owned by Electronic Arts, has more than a million subscribers paying up to $6 a month to use the service. Many of these casual gamers are female. Most console players are male. All of these signs suggest that there indeed could be a constrained market.

Companies often pin their hopes of success on reaching people who currently don’t consume a particular product. Those that win remove constraints that truly bottle up consumption. If Nintendo’s Wii can appeal to people interested in simple, casual gaming, it could be well positioned for disruptive success.

For more information:

“Microsoft Unveils Zune, but Not Price,” by Robert A. Guth. The Wall Street Journal. 15 September 2006.

“Nintendo to Charge Lower Price For Latest Videogame Console,” by Yukari Iwatani Kane. The Wall Street Journal. 15 September 2006.
http://www.redherring.com/Article.aspx?a=18343&hed=Q%26amp%3BA%3A+Pogo.com is an interesting interview with the heads of Pogo.com.

“Do-It-Yourself Disruption,” Innovators’ Insight #24, November 1, 2004, discusses the benefits of a growth strategy based on bringing consumption to the masses.

“Who Are the Best Customers for Our Products?” Chapter 3 of The Innovator’s Solution: Creating and Sustaining Successful Growth, by Clayton M. Christensen and Michael E. Raynor. Harvard Business School Press, 2003.