Posts in the extra reading series are just that: extra reading. They are further information on a key topic that might have interested you more than the others. At GCSE, they are information you don't need to know for your exam. At A-Level, they're there to broaden your
understanding of a topic you're interested in.
When companies make a new product or integrate, whether horizontally or vertically, they have to think about their ocean strategy.
In the ocean strategy, companies either plan to enter (and stay in) a blue ocean or enter and survive in a red ocean or turn it blue. These are metaphors for the level of competition they expect to encounter.
Red oceans are so-called as they are likened to oceans that are bloody and full of sharks (i.e. competition!)
Blue oceans, on the other hand, are calm, easy to navigate and free of competition.
The current gaming market makes an excellent illustration of these two approaches in action.
The red ocean: Sony vs Microsoft
Sony and Microsoft operate in a red ocean because they compete very intensely with one another - and they have done since the so-called Seventh Generation of games consoles (i.e. the Xbox 360 and PlayStation3). Their products are both very similar: disc-based, 4K-capable gaming consoles with online gameplay retailing at around £400-500 (depending on version). Even in terms of the hardware inside, there isn't (and don't let the impressive-sounding numbers opposite fool you) a massive amount to differentiate the two. Where they do stand apart is in their library of games and their ability to become cheaper or more powerful over time. The release of a game on one console not available on the other can cause an increase in sales. If one game alone is the reason why gamers buy a console, then that game has become what we call a what we call a 'killer app'. It's why Microsoft or Sony merging with a big game producer makes the other nervous, as that producer's games could, in theory, become exclusive to the new parent's console.
Sometimes, manufacturers find a way to make the console cheaper or more powerful and take the lead. It's worth pointing out that both Sony and Microsoft rarely make much money off of the consoles themselves, so tight is the competition. In some cases, consoles might even be sold as 'loss leaders' - that is, they're sold for less than what they cost to make.
Why? Because big money was never going to be made on the console. A console selling at £450 might only make its company a few pounds. A game disc or accessory, on the other hand, that cost pennies to make can be sold for many, many times this value. Money is also made selling software development kits to game companies, licensing companies to make accessories and charging players to subscribe to online services.
Red oceans can be great if the companies can maintain a roughly equal share of the market. By offering a tried and true product that's much like the others (think about Neale's genre theory for a moment) you're more-or-less guaranteeing success. It's even better for companies when there are three or more companies sharing the red ocean, as each company has to keep its attention in multiple directions.
The risk comes when that balance tips towards one company - and this can be all the more devastating when just two companies are in competition. It becomes a tug of war from which there is no recovery. We're seeing this right now between Microsoft and Sony, and for Microsoft, it's with Microsoft down to as little as 30% of the market worldwide. This drops to an even worse 20% in Europe and just 4% in Japan (although Sony has historically always dominated the Japanese market being a Japanese conglomerate). This is especially problematic later in a console generation when gamers have bought one (or both) of the consoles being offered and the market has reached saturation, with no new audiences to tempt. Microsoft either need to bring out the next generation of Xbox or seriously change the price or features of what we already have to get existing gamers to pay again. The other option, of course, is that aforementioned killer app. I've talked before on this blog about the proposed takeover of Activision by Microsoft, which at the time of writing (March 2022) still causes intense debate and a worry on Sony and Nintendo's part that Microsoft could secure a raft of exclusive games and bounce back. I stress, as always, that Microsoft denies that this is their strategy.
The blue ocean: Nintendo
Nintendo, on the other hand, exists in a blue ocean. It wasn't always that way. In the Fourth Generation (Super Nintendo and Sega Mega Drive) Nintendo and Sega existed in an utterly brutal red ocean whose advertising made direct attacks on the competitor's product! Now, though, Nintendo is in a blue ocean - and it's been there (in my view) since the Sixth Generation (PS2, Xbox, Gamecube, Dreamcast). With Sega ejected from the market after the failures of both the Dreamcast and the Saturn before it, Nintendo suddenly found itself equipped to fight a foe that no longer existed, but ill-equipped to fight the two newest players, Sony and Microsoft. It was an ocean it sailed far more comfortably in the Seventh Generation with the Wii. The Wii's complete difference from the PS3 and Xbox - not to mention a whole library of killer apps - mean the Wii remains a go-to case study for a successful blue ocean product. Nintendo has arguably made a whole strategy out of bundling must-have, exclusive titles with the consoles as well, with the Wii coming with Wii Sports and the Super Nintendo coming packaged with Super Mario All-Stars.
It's a success echoed today by the Switch, which again is so different to the PS5 and Xbox. It sells itself on unique features (motion control as a key gameplay mechanic, the ability to play handheld, the use of cartridges instead of discs) and family-friendly positioning. It also means that certain games work best of all on the Switch, leaving Nintendo with less or even no competition at all in certain genres and among certain audience groups. Consider that 50% of Switch gamers are women versus 45% of PS5 and Xbox owners and over 30% of Switch gamers are under 24 compared with ~25% of PS5 and Xbox gamers. Nintendo also does mascots and character series brilliantly: Mario, Zelda, Pokémon, Kirby and Metroid (some of the biggest series in gaming history) can only be played on Nintendo. Even the Rabbids and Sonic, mascots of the PlayStation and Sega respectively, now find their home is at Nintendo.
So blue is best, right?
No. Both approaches have their pros and cons.
Red ocean products guarantee income as long as the product remains successful, but fortunes can quickly change (or never show up at all!) Part of Microsoft's motivation behind the Activision deal is to catch up to Sony in key markets. When there are two competing products and no third or fourth, the balance can sometimes tip one way - forever.
Blue ocean products are safe from competition but represent a huge gamble. Think again about Neale's genre theory and how a product can run into problems if it's too different. Nintendo has enjoyed some huge successes by bringing out blue ocean products like the Wii or the Switch - but it's had plenty of failures along the way that were too early for the market or too different. R.O.B., Virtual Boy, 64DD are all Nintendo products I'll bet you've never heard of. Even the 2DS and WiiU are considered 'failures' compared to the successes of the Wii and Switch. There is one caveat to all this trial and failure - with no competition, there's time to learn from those mistakes and improve the next product.