Wednesday, December 13, 2006

3rd Place Winners

In a recent New Yorker article titled "In Praise of Third Place", oft-praised-in-this-blog writer James Surowiecki profiles the financial success of Nintendo compared to the higher-selling but less profitable games units of Microsoft and Sony. By focusing on units that are really good at playing games - as opposed to the be-all-end-all XBox and Playstation units - Nintendo has made a great business out of third place. Meanwhile, its competitors slug it out for market share leadership, losing money on every unit sold (and no, you don't make that up in volume).

In thinking about mergers, there is often a bias for scale. While it's a fair assumption within certain parameters, there is a point beyond which scale doesn't offer meaningful cost structure reductions - and which can lead you into a bottom-line-punishing race for to preserve a market-leading position. This is why the synergies assumed in large merger financial analysis need to be carefully evaluated, and the strategic questions of whether a larger scope is truly desirable fully vetted.

Back to Nintendo vs. XBox/Playstation: A lot of my Redmond neighbors work at Microsoft, including several in the Xbox group. They ALL want the Nintendo Wii.

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