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N-Gage, an analysis of the business case
March 2003
Nokia's N-Gage wireless games device, first publicly unveiled in February 2003, represents the largest financial
(and reputational) gamble on the wireless games market by a mobile industry heavyweight yet. With N-Gage, Nokia is eschewing the mobile gaming market in order to concentrate on the more immediately lucrative
portable gaming market (see our mobile gaming thinkpiece for more information on the differences between the two), a market with which Nokia is completely unfamiliar. N-Gage is deliberately being positioned an impressive portable games device with mobile communications as an ancillary function, and not vice versa. Both the form-factor design and the overarching commercial strategy make this very clear. So, can Nokia achieve success within this market? The omens, unfortunately, do not look promising.
Like any games platform, N-Gage's success will be largely determined by the degree to which a consistent flow of
high quality original or exclusive games software can be secured. Nokia will not be able to achieve a critical mass of such software using internally created or funded product alone and will need to win the support
of third party games publishers. The importance of gaining the confidence of these publishers cannot be underestimated; it has been the principal reason for both console failures (e.g. Dreamcast, Saturn, 3DO,
Jaguar, Lynx) as well as console successes (PlayStation PlayStation2, MegaDrive, Game Boy). Nokia certainly has some interesting early adopter partners from the traditional games industry but they appear few in
number and one should question the depth of their commitment.
In this article we have tried to analyse why publishers might be reluctant to commit to N-Gage. We believe their
concerns centre around three principal areas: hardware price, installed base growth, and the proposed software publishing strategy.
Software sales on any platform are clearly limited by the size of the installed hardware user base so it is
essential for the platform owner to propagate the hardware as broadly and rapidly as possible in order to present software creators with a commercially viable market to target. A variety of factors will determine
how fast and wide this hardware base can be built up and whilst it is certainly true that good software creates hardware sales, pricing, wholesale, distribution and retail strategies all play
critical roles, in particular during the crucial launch phase.
We understand that the N-Gage hardware will cost between 200-300 Euros to produce (depending on retail package)
and this combined with the fact that Nokia does not intend to wholesale the hardware as a loss-leader, presents the company with some fundamental distribution and retail problems.
Nokia is used to having its handset hardware subsidised by mobile network operators who make their money back on
subscription contracts and network usage charges. Since Nokia's commitment is to delivering N-Gage games by flash memory card (the cost and time to transfer a typical N-Gage game – at around 8MB/64Mbits - over a
GSM/GPRS/3G network would be prohibitive) and given that, due to insurmountable latency problems, multiplayer "gaming" on GSM, GPRS and most early 3G networks will be limited to turn-based games and high score table
submissions, there appears to be little incentive for operators to subsidise the hardware beyond that of a normal handset. In fact, given that many operators may, understandably, anticipate lower network usage of
N-Gage versus a normal handset (it is a games device first and foremost), operators may prove unwilling to subsidise the hardware at all. This problem is compounded by the fact that mobile phone retailers often
derive a portion of their sales from subscription and network-usage based kick-backs from the operators. With subscription and phone usage playing second fiddle to playing memory card-based games, mobile phone
retailers may also be reluctant to promote a device that offers lower margin or upside potential.
This leaves Nokia with computer and video games retail as the principal sales channel and, unfortunately, this
prompts further hurdles.
Like games platform providers, retailers see hardware sales as the loss-leading or low margin carrot to draw
customers to its principal profit centre, software. By the time that N-Gage launches towards the end of 2003, the traditional games market will be well into the low cost/high sales volume - and most profitable -
phase of the cycle. Shelf space competition will be fierce and given the high opportunity cost of promoting the wrong product, retailers will look to promote the highest margin items and guaranteed sellers. Nokia
may well find it hard to provide either.
Whilst early-adopters might be willing to pay a high (cost-based) price for N-Gage, the bulk of the games market,
as Microsoft found out with Xbox in Europe, will not. Even if Nokia's wholesale price is at cost, the retail price, in the UK at least, will be at least 33% higher (VAT @ 17.5% and retail margin @ 15% or possibly
higher - to persuade games retailers to take such an unproven item). It is difficult to envisage N-Gage selling in volume at a price over £200, irrespective of the software available. We believe that lower value
will be ascribed by consumers to a portable device (especially vs. consoles which by the time N-Gage is launched will likely be priced at around £130) and unless it can offer some compelling network-based games
features, many will also discount the value of the ancillary phone functionality.
One of the biggest barriers to installed hardware base growth, however, will come from competitive pressures.
However much Nokia is trying to distance N-Gage from Nintendo's offerings, it will face direct and formidable mind-share and retail competition from the Game Boy Advance SP. With its revised form factor and the
increasingly adult-oriented GBA software line up, the GBA SP is being targeted at the same demographic that Nokia is aiming for and will be sold for under £90. We believe that in order to grab a meaningful
proportion of the portable games market, Nokia will need to sell N-Gage at a similar price point as well as having some exclusive, high quality software titles. With the competitive price point seemingly unlikely to
be achieved, can Nokia compensate with software quality?
Nokia's approach to securing guaranteed software sellers has correctly followed the video games platform textbook
so far: big name licences from third parties underpinned by first and second party product from internal and external development studios. Whilst Nokia has done well to secure this early commitment, it will need to
sell N-Gage in significant volume during the launch phase to maintain this publisher commitment and secure a consistent flow of high quality titles over the ensuing 12-18 months. Nokia is therefore caught in the
chicken and egg situation of needing third party publishers to grow the hardware base but needing a large hardware base to secure the third party publishers. Hardware, pricing, distribution and retail concerns
aside, publishers are also faced with a further issue, Nokia's software publishing model.
Due, to a great degree, to Nokia's decision to use physical media for its games software, its publishing model is
similar to Nintendo's for the Game Boy Advance in that it places potentially substantial inventory risk on the publisher due to the high manufacturing and royalty costs. This risk is exacerbated by the fact that
development for N-Gage with its higher hardware specification (than the GBA) and, in particular, its 3D functionality, will require bigger teams and be more costly. Other publisher concerns centre on the level of
development support and the potential for the N-Gage software market to become flooded with, if not simply undermined by, low quality N-Gage games due to the absence of any platform provider QA thresholds.
Whilst these issues alone may not preclude the development of N-Gage titles by the larger third party publishers,
they, alongside the perceived installed base risk, may prove a significant deterrent to companies developing and publishing original, differentiated titles that takes full advantage of the N-Gage hardware rather
than just Game Boy Advance and PDA ports. In the absence of a commercially viable model for publishers during the first 12-24 months (as the installed base grows to reach a size capable of supporting profitable
software sales), Nokia may therefore need to resort to providing extra financial incentives to publishers to generate this original product flow.
As Microsoft has found with Xbox, breaking into the games market, especially one that is dominated by an
incumbent player, is extremely difficult and invariably involves making, and learning from, one's mistakes. As it stands at present, it is hard to see third party publishers providing the level of support needed to
make a success of N-Gage. However, none of the obstacles presented above are insurmountable, they simply require strategy tweaks and, most importantly, they will require far greater financial commitment in the form
of hardware price subsidies, retail support and publisher incentives. Whether the Nokia board recognise this and will countenance such a commitment remains to be seen.
Addendum (August 2003)
Sony's announcement, in May 03, that it is to enter the portable games market
adds a further barrier to Nokia's ambitions. Although the Sony PSP (PlayStation Portable) is not due until the end of 2004, the decision by the most powerful company in the video games market to diversify its games
interests into Nintendo's market has made Nokia's task almost impossible. The PSP is expected to have the largest form factor of the dedicated portable games machines and will be the most technically advanced
incorporating a plethora of cutting-edge components and features. Pricing has yet to be announced but is likely to be, initially at least, high. The principal difference therefore between Sony and Nokia's prospects
comes down to third party publisher confidence and the expected flow of premium quality titles. As explained above, we believe that third party publisher support for Nokia is superficial and will not last, whilst
most large games publishers have already started to plan PSP product development and publishing, despite the scant information made available thus far by Sony. Put simply, Sony's success with the PlayStation brand
over the last 8 years gives third party publishers sufficient confidence that it will also be succesful within the portable games market. Furthermore, with GameCube stuttering, Nintendo will likely
increase its portable gaming commitment to protect its Game Boy market and with two gaming goliaths waging war, the first collateral damage may well be Nokia.
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