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It wasn't long ago that one could look at the name "Forbes" and anticipate respectable, honest, and accurate business journalism. The company is well known for Forbes magazine, a bi-weekly publication that boasts circulation of over 900,000, and the online news site, Forbes.com. Forbes doesn't understand the video game industry. Many editors lack the capacity to interpret and articulate industry happenings but this simple fact has not stopped Forbes from trying to cover the $7.8 billion industry.

Troubles started in April of 2001 when Forbes.com published an article by Marcella Bernhard titled, Nintendo's Game May Be Over. The analysis of Nintendo's position in the industry and next-generation console war was ridden with half-truths, misstatements, conjecture, and prevalent bias. The author's certain conclusion that the GameCube is destined for third place was nothing more that poorly thought out conjecture. Among other memorable comments, "Nintendo is venturing into risky territory with GameCube, which will likely be mauled by the stylish PlayStation 2 and Xbox." Below you'll find GameCubicle's complete breakdown of the article's flaws.

The journalistic tragedy resumed this week when Forbes.com again published a scathing review of Nintendo's recent efforts titled, Nintendo's Holidaze. The painfully moronic article by Betsy Shiffman makes one incorrect claim after another, pausing only for interjection of personal views. Inaccurate claims that Nintendo is losing $180 per console sold and the author's questioning, "why the company is in the business in the first place," make this one of the worst examples industry analysis in history.

Given the demographics of Forbes readership, does such failure to accurately represent the truth indicate a breach in the publication's ethical responsibilities to the investing community? Publisher of Forbes, Larstin Publishing stated that "Independent documentation by the Wall Street Journal indicates that favorable mention in Forbes has sent companies stock prices soaring." What about a negative mention? What about when that negative mention is deeply flawed?

GameCubicle readers have suggested that the publication's reckless disregard for the truth could conceivably qualify as malice and subject the publication to a defamation claim from Nintendo. However, the articles seem to be more the product of ignorance than malice.

In case the point is not clear enough in the following article breakdown, members of the gaming press share these insights. Justin Nation of Planet GameCube describes the article as, "a muddled collection of facts and reasoning that defy logic." In a story titled Forbes Makes an Ass of Itself, an IGN editor writes of Forbes, "Business and technology pub Forbes prints the most awful breakdown of the next-gen console wars yet."

The company's reputation as a reliable news source and purveyor of educated business analysis is put into question. Skilled Forbes reporters including Amy Doan and Jeffrey Young have done the publication's video game industry coverage justice in the past. However, Forbes' failed attempts to correctly assess this industry forces us to query whether other industries have suffered similar misrepresentation.
An editorial such as the above cannot be taken at face value so below you'll find a detailed analysis of two recent Forbes articles. Decide for yourself...

  
Nintendo's Holidaze

Betsy Schiffman, Forbes.com, 09.27.01, 12:00 PM ET

NEW YORK - We should let Nintendo or Microsoft try explaining to kids across America exactly why they won't receive good videogames this Christmas. It will probably be a long and boring explanation filled with words like "manufacturing plant," "supply and demand" and a bunch of other terms too unpleasant for innocent children (and some grown men) to think about.

Since there may be a shortage of videogame consoles this holiday season, retail stores may have lots of empty videogame shelves to fill. Ideally, Nintendo should pounce on the opportunity and stock the shelves with its soon-to-be-released GameCube console. But no, the company recently said it won't be able to boost production in order to meet possibly increased U.S. demand.

Nintendo's scramble to get the hardware out the door raises the question of why the company is in the business in the first place. Hardware is a tough business to make a buck in. 

"Nintendo's scramble to get the hardware out the door raises the question of why the company is in the business in the first place." Nintendo's in the business because it created the business as we know it... the company is responsible for making the console industry what it is today. Nintendo stated months ago that the maximum number of systems they would be able to allocate for North America in 2001 was 1.1 million. 700,000 units at launch will result in a shortage and Forbes completely misses the point. Moreover, if a hardware launch shortage indicates anything, why was Sony's horribly undersupplied PlayStation 2 launch not questioned? Or the even Microsoft's readiness for the upcoming Xbox launch of just 300,000 consoles?


Wall Street analysts estimate it costs Nintendo about $380 to manufacture each GameCube console, which will sell retail for about $200. That means the company will lose about $180 on each unit sold. Even if Nintendo actually meets and sells the 1.1 million units expected to be sold in the U.S. by year-end, the GameCube will still be a money-losing product. Unfortunately, Nintendo is counting on GameCube to revive its profits. In May 2001, the company reported a decline in fiscal-year operating profit of more than 40%, and a 13% decline in revenue (although the company reported an increase in net profits due to a weak yen). The decline in operating profit was largely attributed to slow sales of its game console, Nintendo 64.

The GameCube does not cost $380 to manufacture; Nintendo is not losing $180 on each system sold. Though Nintendo has not specifically indicated a loss-per-unit number, most estimates are in the $5-$15 range... placing the total manufacturing cost per console around $200. "I think we've indicated that we expect to incur a small loss on the hardware initially...We expect that to turn profitable early next year." - Peter Main at Nintendo's Space World event in August, 2001. In a somewhat dated report by Merrill Lynch in June, 2001, it was estimated that the company would likely lose $20/system which is at the very high end of estimates though the number is almost certainly too high given Main's comments on a breakeven date.

By comparison, a number of analysts (including Merrill Lynch's Blodget) expect Microsoft to lose $125/system on manufacturing costs alone; Overall, the Xbox business could cost Microsoft $2B in losses without turning profitable until 2005 according to Blodget... where's that in the Forbes article?

Next, just on the theoretical that the system did cost $380 to manufacture (it doesn't), the author's math of a $180 loss per console would be wrong. Considering that the system wholesales for $192, the loss to Nintendo would be $190 at a minimum - but then again, the author wasn't interested in accuracy.


Hardware losses may be softened by lucrative software sales, including popular titles such as Donkey Kong 64, Pokemon Snap and Pokemon Stadium. If all the profits are made in software anyway, is there a reason Nintendo should continue pursuing console sales? It's not entirely certain the GameCube will sell like hotcakes anyway. 

Need an Answer? The author's misunderstanding of the industry is very apparent in her asking whether hardware operations are profitable. Profits from such operations come from console sales, accessories, and game licensing. Further, Nintendo's software minds benefit from a system they help design to meet all their needs... helping Nintendo to make such great games.


It was one thing for consumers to throw about $200 on a videogame console when the economy was booming, but given the current climate, a $200 purchase is a serious investment--even if that's a discount to competitors like Microsoft, which will sell its Xbox console for about $300.

Wasn't this article prompted by Nintendo's inability to increase supply for American retailers that were requesting additional consoles because of impressive demand - on September 25? The author trashes Nintendo for not supplying enough consoles to meet demand and now trashes them because the demand wont be there? It's not rational.


Sega successfully pulled out of hardware, leaving the heavy lifting to those foolhardy enough to persist, and in May, the company said it expects to pull an operating profit by March 2002, after several years of losses. It was lauded as one of Sega's smartest moves. Instead of requiring its fans to dish out several hundred dollars for the Dreamcast console required to play Sega games, the company went hardware agnostic and is producing games for previous rivals, including Nintendo and Sony, thus enlarging the size of its market and eliminating hardware losses.

Of course, Nintendo is in a very different place from Sega. But supposing an economic recession cuts into GameCube sales--which isn't an outlandish scenario--the company would be foolish not to eliminate such an expensive operation.

Illogical. "Sega successfully pulled out of hardware, leaving the heavy lifting to those foolhardy enough to persist." Who does the author suggest actually create game consoles? If nothing but losses come from gaming hardware, how has Nintendo survived? The specific issue of how the system would fare in an economic downturn was specifically addressed by Peter Main at Space World. Main commented that the industry's rapid expansion rate would likely continue through a downturn in world economies. Further, he commented that Nintendo's $199 GameCube would be at a greater advantage to $299 competitors in an economic downturn.

Sega exited the hardware industry because Dreamcast failed. The console failed because of Sega's tainted brand name generated by years of dropping hardware support mid-stream and not taking console/peripheral creation seriously (Sega CD, 32X, Saturn). The author then suggests, "[Nintendo] would be foolish not to eliminate such an expensive operation." Considering the system has launched in Japan and being stockpiled for launch in the United States, abandoning GameCube would leave Nintendo's brand name in the same position and the company permanently out of the hardware business... not to mention that the mere suggestion is flat out idiotic. 

  
Nintendo's Game May Be Over

Marcella Bernhard, Forbes.com, 04.02.01, 4:25 PM ET

NEW YORK - Kids may love Zelda and Mario, but that won't be enough to keep Nintendo out of last place in a three-way battle to dominate the $6.5 billion videogame market. Though Nintendo is sure to remain the videogame maker of choice for the elementary school set, Microsoft and Sony will split the spoils from the growing--and more lucrative--population of adult gamers.

Conjecture. States that Nintendo is destined for third place and games that are suitable for younger gamers will not drive sales enough to do anything about it. Hard data suggests otherwise. Nintendo's titles continually dominate in sales year after year - frequently setting records. A full half of NDP's game list, Top 20 Best Selling Games of 2000, were Nintendo titles. Many of Nintendo's exclusive franchises including those from second parties were also completely ignored in this statement.


The battle between Nintendo, Sony and Microsoft for this market will come to a head as each company begins to push new products this year. In June, Nintendo will unveil Game Boy Advance, an upgraded portable game player, and in May the company will push a new console called GameCube to take on the consoles from Sony and Microsoft. A production glitch hurt Sony's holiday sales of the PlayStation consoles last year, so expect the company to push for a big recovery this December. Microsoft, meanwhile, is pouring $500 million into the promotion of its Xbox console which is scheduled for release this fall.

In the face of the Microsoft marketing machine and Sony's PlayStation*, the most popular game console ever made, Nintendo's options are limited.

Nintendo's got kid appeal with the lock that Game Boy has on the $1.5 billion portable game market. But Nintendo risks confusing customers with its influx of new products. Fans are sure to flock to the portable Game Boy Advance, but the new product will hurt sales of the old Game Boy.

Irrational Statement. "The [Game Boy Advance] will hurt sales of the old Game Boy." Of course it will but the statement implies that this is an unexpected negative side effect. Nintendo will phase out the older system complements of the GBA's backwards compatibility. The new handheld has the potential to greatly expand the size of the handheld market and improve Nintendo's bottom line. This is not considered and the introduction of GBA is described as a negative for Nintendo.


And Nintendo is venturing into risky territory with GameCube, which will likely be mauled by the stylish PlayStation 2 and Xbox. The games developed for** Sony and Microsoft have more sophisticated graphics and themes, and appeal to a growing market of late-teen and adult videogame players.

Conjecture. There is absolutely no evidence to indicate that Nintendo will "likely be mauled by the stylish PlayStation 2 and Xbox." Nintendo has been in the business for quite some time and created many successful systems in its time including NES, SNES, N64, and Game Boy. What's Microsoft track record in console gaming? ...not mentioned. Further, what does the outward appearance of a console have to do with sales? The author's judgment of which console is more "stylish" is personal opinion.

Incorrect. "Sony and Microsoft have more sophisticated graphics and themes." At the time of this report, Nintendo had not demonstrated the console's games to the public and many developers were reporting that GameCube was more powerful than Sony's PS2. Additionally, given the hands off approach Nintendo is taking with content regulation, there's no evidence to suggest that "sophisticated" game themes would not appear on GameCube. Nintendo's own second parties are developing mature titles including Eternal Darkness and Rogue Leader. The author's broad generalization are flatly incorrect. 


"Nintendo is a quiet, stealthy company with very high-quality products and a very shrewd business sense. But they are not going to be the 80% market leader anymore," says Andy Eddy, an editor for ieMagazine, formerly known as Game Week.

Indicates Nothing. Caught up in the negative tone of the article, readers may take this as an indication of declining success for Nintendo from a reputable gaming publication. Nintendo's GameCube won't achieve the percentage penetration of the NES. Does that mean anything? No. Could they be a 51% market leader? 60%? 70%?


Few are taking bets, however, on whether Sony or Microsoft will win a one-on-one fight. Sony lost some of its valuable lead in its fall 2000 PlayStation 2 release when a chip shortage forced the company to cut U.S. shipments of the machine in half--500,000 units instead of one million--for the 2000 holiday season. That goof caused Sony to slash its 2001 profit outlook in its videogame business unit to $42 million, from $80 million.

"Microsoft really has the technology on their side," says Schelley Olhava, an analyst at market research firm IDC in Mountain View, Calif. Microsoft's Bill Gates started the public relations blitz last week, announcing that Sega will develop 11 games for Xbox. Few were surprised by the news; after all, Sega's making software for Nintendo and Sony as well.

Software can make or break any videogame system and, up until now, the hyped-up Xbox didn't seem to have any impressive games in the works. Now it does. Sega, the company responsible for the popular Sonic the Hedgehog character, will develop likely Xbox hits such as the driving game, "Sega GT2;" the adventure game, "Panzer Dragoon;" and the action game, "Gunvalkyrie." Though Microsoft is proudly showing off its Xbox hardware, it's the software that really makes all the difference in determining how popular a system is and how much it sells.
 

Innuendo. Now the next generation console war will consist of a "one-on-one fight" between Sony and Microsoft? The author correctly states that "software can make or break any videogame system" but was seemingly unaware of Nintendo's intense advantage in this very area... the GameCube is a "gaming" console and will feature an unrivaled assortment of exclusive games in addition to impressive third party support.


Gates also announced plans to develop a high-speed DSL (digital subscriber line) gaming network with Japan's NTT Communications, giving Xbox users the ability to play against competitors online. Sony's PlayStation 2 also offers this feature, but users have to buy a separate adapter for their consoles and jump through a few other technical hoops. Xbox requires no additional parts for online play.

But as Microsoft knows all too well, in the world of technology it isn't always the superior product that corners the market.

* An earlier version of this story incorrectly stated that PlayStation 2 was the most popular.

** An earlier version mistakenly referred to games as consoles.

 

September 28, 2001

Rick - Editor in Chief, GameCubicle


GameCubicle.com is an independent site and is in no way associated with Nintendo Co. Ltd. or NOA
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