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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.
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| 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... |
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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.
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"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? |
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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.
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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. |
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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.
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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. |
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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.
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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.
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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.
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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.
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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. |
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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.
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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. |
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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.
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"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.
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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%? |
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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.
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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. |
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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.
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September
28, 2001 |
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Rick - Editor in
Chief, GameCubicle |
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