Wii

Nintendo’s new Wii video game console is now out-selling all other consoles combined. Why? Because Nintendo focused every aspect of the Wii’s design on growing the market.

To quote Nintendo’s President, Satoru Iwata, in designing the Wii, “We're not thinking about fighting Sony, but about how many people we can get to play games. The thing we're thinking about most is not portable systems, consoles, and so-forth, but that we want to get new people playing games.” [emphasis added]

To accomplish this objective, Nintendo couldn’t just do the same thing its competitors were doing. It had to do something really different – something that made video games fundamentally easier to learn and play – and offer it at a more-affordable price point. This is a classic example of blue ocean strategy, as others have noted.

Being “really different” is extremely beneficial to establishing new industry standards – as Bill Gates, the all-time world champion standard-setter, made clear long ago. The novelty, elegance, and simple power of Nintendo’s motion-sensing Wii controller have garnered impressive PR, with YouTube flooded by consumer-generated videos of the Wii remote in action.

Nintendo’s success in out-selling its competitors is amazing enough, but what’s even more impressive is that Nintendo makes a direct profit of $50 on each console it sells. Sony and Microsoft each lose money on their consoles, hoping to make it up through per-game license fees from third party game developers. But because Nintendo’s Wii console is outselling all of its competitors, it is also the most attractive platform for third-party game developers – so Nintendo will tend to make more money in licensing fees from these game developers, too.

Any way you slice it, Nintendo’s blue-ocean strategy of growing the market is trouncing its competition.

Meanwhile, the music products & lesson industries are, together, almost as large as the video game industry (2005 data). Thumtronics can do in the music products & lesson industries exactly what Nintendo has done in the video game industry – grow the market with products that are cheap, simple, and fun, and capture that growth with intellectual property.

The success of Nintendo is a ringing endorsement of Thumtronics’ strategy.

Blue Ocean Strategy

In their book Blue Ocean Strategy, Kim & Mauborgne describe typical marketplaces as “red oceans,” whose inhabitants rip each other apart in a frenzied struggle for market share, staining the ocean red with their blood.

They argue that the wise company (or investor) does not waste its resources in such a fruitless struggle, but instead seeks to implement “blue ocean strategies,” by simultaneously pursuing differentiation and low cost, with the goal of creating a totally new market space that is unstained by the blood of competition.

You’d think that investors would avoid emerging red oceans like the plague – but that does not appear to be the case. Here’s an example. Redbox is a joint venture between McDonald’s (yes, the burger joint) and Coinstar. Late in 2005, Coinstar invested $20 million in Redbox for slightly under half the company, giving Redbox a de facto post-money valuation of just under $40 million. For that kind of valuation, you’d think that Redbox must be growing into a pretty nice blue ocean, wouldn’t you?

But it’s not. Redbox is fighting tooth and claw for a share of the DVD rental & sales market. Its competitors – including NetFlix, Blockbuster, & Hollywood/Movie Gallery – are all slaughtering each other in a vicious struggle for market share. This market was worth about $35 billion in 2006 and is expected to grow to about $38 billion by 2009 (according to statistics I found in the Austin Statesman (Sunday July 15th, p. H1), in an article by Jennifer Mann of the Kansas City Star). That’s a growth rate of just 2.8%. In short, the video sale and rental industry is a “red ocean” of vicious, profitless competition.

Wise investors would not be pouring money into this “red ocean.” None of the various competitors has such a wide advantage in cost or differentiation that it can earn attractive margins over the long term. Red oceans are a sucker bet.

But surely blue ocean strategies are riskier than red ocean strategies? Quite the contrary. Blue ocean strategy is all about minimizing risk. Red oceans are the riskiest place a firm or investor can possibly be.

With that in mind, consider Thumtronics. The current music products & lesson industry is worth nearly as much as the DVD sales and rental industry – about $30 million – and growing faster, at 3.5%. Yet the blue-ocean market of non-musical consumers is even larger, with the potential for even faster growth. By targeting the mass market of non-musical consumers with a uniquely simple, cheap, and powerful new musical instrument & music-learning method, Thumtronics has the potential to establish an entirely new “blue ocean” market, far removed from the bloodstained waters of the musical instrument industry’s intense competition.

Thumtronics’ strategy is all about creating a deep blue ocean, because blue oceans are the only way to bet.